The UK is staring into the Brexit abyss

The UK is staring into the Brexit abyss
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In the wake of the June 2016 Brexit referendum, uncertainty about the United Kingdom’s future economic relationship with Europe has cost the U.K. economy dearly.

Sadly, things are not likely to improve for the U.K. economy after March 29, when it is scheduled to leave Europe with or without a Brexit deal. Indeed, in the event of a no-deal Brexit, things could get considerably worse for the U.K. economy.

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Since the Brexit referendum, the U.K.’s economic performance has deteriorated. It has done so as the U.K.’s future access to the European single market, which buys around 50 percent of the U.K.’s exports, has come into serious question.

Largely as a result of waning investor confidence, the U.K. has gone from being the fastest-growing economy among the advanced industrialized countries before the referendum to the slowest-growing economy after the referendum.

Next week, the U.K. parliament will again vote on the Brexit deal that Prime Minister Theresa May negotiated with the U.K.’s European partners. Under that deal, the U.K. would remain in a customs union with Europe indefinitely until the vexing question of the Irish border issue is settled.

However, what would happen after the customs union transitory arrangement ended will remain unresolved. Would the U.K. opt for a hard Brexit, along the lines of the Canada-EU trade arrangement? Or would it opt for a soft Brexit, along the lines of Norway’s European Agreement, with close regulatory alignment with Brussels and membership to the single market?

Last month, May’s Brexit deal was rejected by the largest parliamentary majority in living memory. However, by having delayed a second vote on her deal to a mere two weeks before the March 29 deadline, May is hoping that next week she will be able to secure parliamentary approval for her deal.

She is basing her hope on the fact that she is now effectively giving parliamentarians the choice between her flawed Brexit deal and the chaos that would likely follow from the U.K. crashing out of Europe without a deal.

May’s threat of the abyss for the U.K. economy in the event of a no-deal Brexit would appear to be credible. Most impartial observers, including the Bank of England and the International Monetary Fund, believe that in the event of a no-deal Brexit, the U.K. economy could contract by 6 percent.

Supply chains would be disrupted and companies would relocate from the U.K. to the continent in order to maintain continued access to the single market.

Hopefully, with the threat of a no-deal Brexit as the alternative, May’s deal will be approved next week. However, even were that to occur, the issue of the end-point to which the U.K. is headed in terms of its final European economic relationship will still be left unresolved.

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In the same way as the possibility of a hard-Brexit has weighed heavily on the U.K. economy over the past two years, one must expect that the continued possibility of such a result will weigh heavily on the U.K. economy in the period immediately ahead.

This would seem to be particularly the case considering how divisive U.K. politics have become as a result of sharp disagreements over Brexit.

All of this is not good news for the U.K.’s long-run economic outlook. U.S. policymakers might want to take note that this is also not good news for the rest of the European economy.

At a time that the European economy is already stuttering, with Italy in recession and the German economy on the cusp of a recession, the last thing that Europe now needs is a sclerotic U.K. economy.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.