Brexit : why does the United Kingdom really need a trade agreement of transition with the EU ?

A trade agreement transitional between the EU and the Uk is essential, without which the failures of british companies could increase strongly (+15% in 2019).

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· The election result increases economic uncertainty, upstream of negotiations with the EU.
· If no agreement of transition is put in place, the investment of british firms would fall by up to -8% in 2019.
· In case of signing a trade agreement transitional between the Uk and the EU, France would be less affected by the Brexit : the losses to the export would amount to -600 million euros in 2019, vs.-2.9 Bn € if no agreement is found.

PARIS – JUNE 22, 2017 – According to Euler Hermes, the worldwide leader in credit insurance, without the transitional agreement on trade in goods and services between the EU and the United Kingdom, the failure of british companies could greatly increase in 2019.

In fact, in 2019, the Uk will leave officially in the EU, but it will certainly be more time for both sides to agree on a final agreement on free trade. A trade agreement transition would then be to extend the bilateral negotiations until 2021. During this period, the United Kingdom could keep its access to the Single Market. In return, he would continue to pay its contributions to the EU, complying with certain regulations, and to ensure the absence of immigration controls between the two areas.

“To a certain extent, the outcome of general elections has reduced the risk of a Hard Brexit. An agreement of transition is the scenario most likely and negotiations expected to lead to a free trade agreement is restricted. In the short-term, the political uncertainty resulting from the election, however, could trigger an increase in financial volatility and new depreciation of the pound, as was already the case after the referendum of June 2016, ” said Ana Boata, economist in charge of the EU at Euler Hermes.

A bilateral trade agreement transitional decisive to the british economy

In its latest study ” The Taming of The Brexit “, Euler Hermes provides different scenarios for the british economy. In the worst case, if the United Kingdom leaves the European Union without a free trade agreement as soon as 2019, 3 300 failures of british companies could be registered in the same year. This increase of +15% would bring the total number of failures in a british 25 100 in 2019.

However, if an interim agreement of the free trade agreement signed between the two parties, the negative impact could be far less. The failure of british businesses do not increase by only +3% in 2019 (1 000 failure additional), after an increase of +5% in 2017 and +6% in 2018. In parallel, the foreign investments are expected to decline of-2.5%. The export values to continue to rise, from +1.6%. A performance is relatively weak, but still positive, given the dependence of british firms on imported goods and the depreciation of the pound.

If no agreement of transition is not found, and that the final divorce is pronounced, the losses to the export business to the United Kingdom in 2019 would amount to -30 Bn £ in the goods sector and to -36 Bn £ in the services. This would equate to a contraction of the british exports of -6% compared to 2018. The level of foreign investment is also expected to be affected, and a drop of -8%.

“In the long term, the Uk will be a clear loser if its access to the Single Market is restricted. Higher funding costs, disinvestment, significant decline in exports and new write-downs of the book : so many elements that will increase the pressure on the behaviours of payments, the turnover and margins of british companies “, adds Ana Boata.

“The new government must take the lead to achieve this transitional agreement with the EU, because it will be impossible to negotiate and ratify at the same time the output of the United Kingdom and a final agreement on free trade by 2019. By limiting regulatory uncertainty and by keeping unchanged the trade arrangements in force with the EU, the british economy would be resilient until 2021. This would leave more time to reach a commercial agreement on a final satisfactory for both parties, ” said Ana Boata.

According to Euler Hermes, the Uk would enter recession in 2019 in the event of a Brexit without a free trade agreement with the EU, with a GDP that is set to contract by 1.2 per cent. On the other hand, a free trade agreement transitional would lead to a downturn, but the british economy would continue to grow (+0.9 per cent).

France must hope the signing of such an agreement ?

The French companies trading with the United Kingdom, or established in the United Kingdom, will necessarily be affected by the Brexit, regardless of the outcome, via three main channels : (i) the depreciation of the pound, (ii) the slowdown of the british economy, (iii) the increase in business failures expected in the Uk in the years to come.

“In case of signing a trade agreement transitional, France would be relatively untouched by the Brexit. 2019, in such a scenario, losses at the export for French companies would be -600 million euros, and the cross investments between the two countries would be amputees, -1 Bn €. On the other hand, if the divorce between the Uk and the EU is delivered from 2019 without a free trade agreement, the bill will be much heavier for France. The losses to the export would represent -2,9 Bn € in 2019, and cross-investments is contracteraient of -5,7 € Bn that same year. Finally, to limit the impact of Brexit, the French companies must also hope for the signing of a trade agreement provisional “, concludes Ana Boata.

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