With hopes of an EU-UK trade deal diminishing, both sides are actively preparing for a “no-deal” Brexit. While the deal is on the forefront of British lawmakers’ agendas, the EU’s attention is now focused on producing a COVID-19 recovery package.

Colin Chapman will be presenting at a webinar hosted by AIIA National Office on 17 June 2020. Register here. 

Just halfway through the one-year transition following Britain’s exit from the European Union, Boris Johnson’s government has served formal notice on Brussels that it will not seek an extension beyond December 31. This is despite strong appeals from business groups, trades unions, and the opposition Labour Party who believe an extension is essential to avoid a further deterioration of the UK economy and higher unemployment.

Four months of negotiations to hammer out the terms of a new trade agreement, conducted by video link between London and Brussels, have so far produced only deadlock and recrimination. The EU’s chief negotiator Michel Barnier complained that there had been a lack of progress, and that Johnson’s negotiators had been seeking to distance themselves from commitments made by the prime minister in the withdrawal agreement at the end of last year.

Johnson declines to voice the term “no-deal Brexit.” He prefers to talk of an “Australia-type deal.” There is, of course, no such thing, but it sounds better to the majority who do not follow complex trade matters. The reality is that Canberra is still in protracted negotiations for its own deal with the EU. In the meantime, it operates under World Trade Organisation terms with tariffs and other limitations – namely, “no deal.”

Precisely what “no deal” means for Britain when the transition period ends on December 31 is a matter of debate, but there is little doubt that all scenarios are grim. They certainly do not point to the “golden future” that the ever- optimistic Johnson promised his voters after they elected him with an 80-seat majority last October. The British government will hope that the impact on citizens’ well-being will be masked by the even bigger hit caused by the COVID-19 epidemic. The UK’s death rate is second only to the United States.

The Office for National Statistics said the UK economy lost 25.1 percent of its size in the three months between February and April, a drop three-and-a-half times larger than the 6.8 percent peak-to-trough decline in the 2008 Global Financial Crisis. Chancellor Rishi Sunak has flagged a worse-case scenario of government debt rising to £300 billion. Surprisingly, this shocker appears to have left most Brits with a feeling of que será será – whatever will be, will be.

The UK is very dependent on European countries for food and medicines despite having large industries in both sectors. In 2018, about one-third of Britain’s food – much of it fresh produce trucked through the Channel Tunnel -was imported from the EU, and the volume has been growing.

Last week, in a little-noticed announcement, it emerged the government would not, after all, introduce detailed border checks on trucks coming into the country, or introduce tariffs. It hoped the EU would reciprocate on goods coming from the UK, but Brussels said “No.” An alarmed government has urgently ordered the National Health Service to build up stocks of medicine and health equipment, both of which have declined alarmingly because of hopes for a trade deal.

However, these matters are not the main concern in European chancelleries today, or in Whitehall. The EU is totally focused on trying to resolve a rift that has developed between those countries in southern Europe hardest hit by the coronavirus – Italy, Spain, and Portugal – and those known as the “frugal four” – Austria, the Netherlands, Sweden, and Denmark.

The issue is over a huge Eurobond or other such fund that could rise to an incredible three trillion euros, designed to help those countries whose livelihoods have been hardest hit by COVID-19. The needy south, supported by many other EU members, argue against the frugal four’s insistence that the bail-out should be by way of repayable, long-term loans at low interest rates. Italy, facing a significant rise of nationalism and strongly supported by Spain, Portugal, and France, believes all or some of the money should be made in grants.  In coming days, all 27 EU leaders will convene by video conference to try and resolve the matter.

They have before them a proposal from the new European Commission president, Ursula von der Leyen, for a bold package of coronavirus recovery measures worth €1.85 trillion. It is a bold first initiative which the Commission president brands as “Next Generation EU.” The biggest part involves Brussels borrowing €750 billion on the capital markets and distributing €500 billion in grants, with the remainder in loans, all with conditions attached. Under the Commission president’s plan, most of the money would be used to target sound business and infrastructure projects, with an emphasis on competitiveness rather than propping up failing industries. The digital and green economies both feature strongly.

German Chancellor Angela Merkel originally leaned towards the views of the Frugal Four, but now has backed French President Emmanuel Macron in supporting Next Generation EU.  To succeed, the plan needs the support of all 27 EU leaders; agreement to sanction this level of borrowing will be hard won.

The next step is an EU summit on June 19. As prime minister of a country transiting out of the EU, Boris Johnson will be patched in only to that part of the meeting devoted to Brexit. Should a major capital raising receive the EU “nod,” Britain will play no part. Ironically, the London financial markets will almost certainly have a part to play, as it will when chancellor Rishi Sunak turns to raise a similar amount to save the UK’s shattered economy.

Colin Chapman is a writer, broadcaster, and public speaker who specialises in geopolitics, international economics, and global media issues. He is a former president of AIIA NSW and was appointed a fellow of the AIIA in 2017.

This article is published under a Creative Commons License and may be republished with attribution.