Brexit: EU believes UK economy could be hit 10 times as hard by no deal as its own

EU confidence that the UK would come out far worse is bad news for Tory leadership candidates planning brinkmanship

EU officials are working on the basis that the UK economy will be hit up to 10 times harder by a no-deal Brexit than the continent's, the latest analysis by the European Commission shows.

The working assumption in Brussels is bad news for Tory leadership contenders like Boris Johnson, who are hoping to use the threat of a no-deal Brexit as part of their strategy for renegotiating Theresa May’s Brexit deal.

But with the EU convinced that the UK will fare much worse than the continent if it decides to crash out, the brinkmanship may struggle to produce results.

A “state of play” document put out by the commission this week, meant to brief EU leaders, MEPs, and central bankers on the current situation, cites a 2019 estimate by the IMF that the long-term effect on the EU’s GDP by a no deal will be “well below 1 per cent”. The commission says this is “in line with most other studies”.

By contrast, when looking at how the UK fares, the commission cites figures ranging from 3 per cent to 8 per cent for the hit to the UK economy, including the British government’s own 2018 estimate of 7.7 per cent.

“As the commission has constantly stressed, contingency measures can only mitigate the most significant disruptions of a withdrawal without an agreement. While the commission does not speculate on the possible economic implications of different scenarios, it is clear that a withdrawal of the United Kingdom without an agreement would have a serious negative economic impact, and that this impact would be proportionally much greater in the United Kingdom than the EU27 member states,” the document says.

“Preparations by member states and stakeholders are likely to reduce their individual exposure to the negative impact of a withdrawal without an agreement. A high level of preparedness across all sectors of the economy will also mitigate the negative impact.”

The economic assumptions are based on the British economy being subject to WTO “most favoured nation” tariffs, which apply to WTO members in the absence of other agreements. Under the withdrawal agreement struck by the UK, a multi-year transition period would apply, during which the UK continued to benefit from EU policies, while a replacement deal was negotiated.

The judgment comes just days after a leaked UK cabinet paper warned that the UK was not ready for a no-deal Brexit on 31 October, when the current extension of the Article 50 period will expire if it is not extended again.

The note, obtained by the Financial Times, said it would take “six to eight months” to build up supplies of medicines for a no deal, and that it would take “at least 4-5 months” to make traders ready for new border checks that might be required.

The EU has constantly said at all levels that it will not renegotiate the withdrawal agreement struck by Theresa May, which was rejected by MPs back in the UK three times and which precipitated the prime minister’s resignation. The deal has been rejected by all leading candidates in the Tory leadership race, who advocate various forms of renegotiation with the bloc.