How COVID-19 Might Impact Brexit

May 29, 2020

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In this podcast, we’re talking with Robert Mirsky—Head of EisnerAmper's London office and Head of the firm's Asset Management Group—about what, if anything, has changed with Brexit as a result of the current global pandemic. Will we see a moratorium, perhaps even a Brexit cancellation?


Transcript

Dave Plaskow: Hello, and welcome to EisnerAmper's Podcast Series, where we try to dig a little deeper on the accounting and finance issues facing business professionals and their clients. Today, we're talking with Robert Mirsky head of EisnerAmper's London office and head of the firm's Asset Management Group for the UK, about what, if anything, has changed with Brexit as a result of the current global pandemic.

Robert, welcome and thanks for being here in these truly unique times.
Robert Mirsky: Hey Dave, thanks for having me.

DP: On a more broad scale, how are things in the UK overall from a health and economy perspective, given COVID-19?
RM: I think it's much like it is in the U S right now. Obviously there's a lot of economic stress and we're under very similar kinds of lock-down roles.
DP: Now, I'd have to believe that this pandemic has impacted Brexit and the negotiations in some way, shape or form. Has it? And if so, how?
RM: Yeah, so it has pretty significantly. The United Kingdom formally left the European Union on the 31st of January this year, after a withdrawal agreement was agreed. You may remember from our last podcast, a withdrawal agreement was agreed between the EU and the UK last year. The UK formerly left this year.

But before the full effect of the withdrawal comes into play, the UK is in what's known as a transition period, which runs until at least the 31st of December, this year. During that period, the UK will continue to benefit from the single market, the customs union, regulatory benefits and everything else. There's no immediate changes to the right to live or work between the EU and the UK, no additional checks or tariffs required and things like that, that is until at least the 31st of December this year.

But since the COVID-19 pandemic has disrupted so much of daily life, both here and abroad, there've been calls to delay that 31st of December date for the end of the transition period. In the intervening period, the UK and the EU, through Michel Barnier on the EU side and David Frost on the British side, have been negotiating the intricacies of the trade deals that should come into effect post withdrawal period.

Those negotiations have been ongoing, but as you said, because of the pandemic, both the practical ability to do those negotiations and also the ability for people to come up with a real conclusion here have been pushed back. With all the major EU nations still in lockdown, there are problems in terms of finding conference space where people can socially distance and negotiate. Most of the negotiations have been taking place via video conference. It has really slowed down how things are going.
DP: Okay. Do you foresee any significant developments in the short term? What are the headlines going to be for the second half of the year?
RM: As I said before, there are ongoing negotiations between Frost and Barnier. Actually, the next round of negotiations supposed to be taking place next week. Hopes aren't that high for progress in reaching a trade agreement, post withdrawal, at the end of this year, given the passive aggressive barbs between the two signs after the last negotiations two weeks ago.

There is the possibility that Boris Johnson, the UK's Prime Minister, could request an extension to the deadline by the end of June. In fact, that is the next deadline technically to request an extension if it seems that the UK or the EU you won't be able to stick to the original timeline, but that seems pretty unlikely. If you look at what businesses are doing here, they are preparing. Banks are dusting off their no-deal Brexit plans, again, as that might happen. Without that deal, the UK would be trading with the EU on the same WTO World Trade Organization terms complete with tariffs.

The sticking points over the next few weeks, really the points that are going to be driving the negotiations, there are many. But three of the big ones, and it's interesting to think about this, for example, access to UK fishery areas. The last few days, the UK has suggested that even the British Navy could be used to defend British waters against EU fishing boats, somewhat reminiscent of the Iceland-British Cod Wars in the 1960s and 70s. There's the ... another negotiating point is the so-called level playing field, which involves the UK agreeing to EU rules on workers' rights, environmental protection, state aid taxation in order to have zero tariffs with the UK.

Then the final one, and maybe the most difficult, is what's called the Northern Ireland Protocol. This is the institution of customs borders between Northern Ireland and the Republic of Ireland, as well as Northern Ireland with the rest of the UK. You'll remember Northern Ireland is part of the United Kingdom and will remain in a customs union with the United Kingdom, but will also have single market access to Europe. So how do you implement customs controls between those borders? The UK needs to hire, they estimate, around 50,000 staff, not just to deal with Northern Ireland, but across the UK to deal with the customs border between the UK and Europe.
DP: Okay. Now, from where you sit, give us a little bit of a longer term view. Do you envision perhaps some sort of moratorium or, dare I say, even a Brexit cancellation?
RM: I think it's too late for that. Let's start with the basic fact that Brexit is done already. I mean, there was a formal withdrawal agreement that was accepted by both sides. Brexit is a fact. Now we're just deciding what kind of Brexit it'll be. Back in October, the OECD predicted that with a no-deal Brexit, the UK's economic growth would suffer a loss of around 3% for the next few years. The reality of the impact of Coronavirus, though, on the economy is far greater, with the UK looking at a 14% decrease in GDP. The Bank of England is predicting that this is the worst economic crash since 1706, as a slight interesting historical note. Another natural disaster happened that year with cold and wet weather causing poor harvest pre-industrial revolution and a war with France, which ended up in much lower outputs.

This is a massive hit to the UK economy, and more so than many other nations in Europe and so the prediction for the economy here is that while it may have a particularly deep recession compared to Germany or France, the recovery may end up being steeper here given to relative strength of the UK economy.

It would appear that UK government may actually be in a better position to threaten a so-called hard Brexit now, coming out of the EU without any trade deal, because of the potential for conflation of the economic damage from the pandemic and Brexit itself. The government may be thinking strategically that now is the time to really push very hard for any concessions it could possibly get on trade, as it'll be very hard to parse the difference of economic impact between Coronavirus and Brexit itself. Combined with the insistence by the UK government, that they will not ask for an extension, it seems a very unlikely that we're going to get one at the end of the year.

Now with the peak of Coronavirus seemingly passed in the UK and most of the EU States, there is some hope that talks can begin. We may get some movement. There's some very recent press about that happening in the UK in terms of trade deals. It is appearing very unlikely, at this point, that we're going to get a real significant trade deal in place before the end of this year. Just a couple of quick notes related to this, is particularly as it relates to financial services and regulation between the EU and the UK, unfortunately, there's very little clarity. Both EU regulators and UK regulators are making plans and have had back-channel negotiations to ensure continued functioning of markets and liquidity. But marketing passports equivalency and the like are very much up in the air, and not necessarily at the forefront of the negotiations right now. As such, we've seen a large number of asset managers from the UK and indeed non-EU countries seeking to establish an EU base for continued access to EU markets.

Then interestingly, on a US-UK note that's related to all this, is the likelihood of a UK-US trade deal. One of the points that the Leave campaign in the UK was pushing is that the UK would be able to negotiate its own deals with the rest of the world. I spoke recently with senior US administration officials about what is the likelihood of this happening? Is it really a priority and was told it really is. Although obviously there are a number of other pressing trade negotiations, for example, China and the US happening right now, the UK deal is pretty high on the priority list for the US and UK governments.

For the UK, a deal would show that the UK can go it alone, as well as providing economic benefit, reduction of tariffs, so they're not particularly high to begin with. But reduction of regulatory and tax barriers between the two. For the US, the UK represents a rich market for US agriculture and manufactured goods, as well as being a good trading partner and the financial services flow back and forth between the two. I think that's where we're going to end up, is a US-UK trade deal and no trade deal between the EU and the UK.
DP: Okay. Robert, well thanks for your unique insight. I'm sure we'll talk again. In the meantime, stay safe.
RM: Thanks, Dave. You too.
DP: Thank you for listening to the EisnerAmper Podcast Series. Visit eisneramper.com for more information on this and a host of other topics. Join us for our next EisnerAmper Podcast when we get down to business.

About Robert Mirsky

Robert Mirsky is the Head of EisnerAmper's London Office and Head of the firm's Asset Management Group. With years of experience in advising financial services companies, investors and asset managers in the operational aspects of funds and managers.


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