Berenberg: 60% Chance of "Semi Managed Hard Exit" from EU

- Negotiations to continue until year-end
- 5% chance of disorderly 'hard exit'
- Managed 'hard exit' most likely outcome

Fishing boats Brexit trade negotiations

Above: EU access to UK fishing waters remains a major stumbling block for negotiators. Image © Adobe Images

The odds of the UK failing to agree a trade deal with EU is at 60%, according to economists at Berenberg Bank.

Instead of reaching a comprehensive free trade deal the EU and UK will agree to a series of steps that could be best described as a damage limitation exercise, or "semi managed hard exit", according to Kallum Pickering, Senior Economist at Berenberg in London.

The call by Berenberg follows the cessation of the 7th round of Brexit trade negotiations in Brussels, that saw both the UK and EU express frustration at the other side's unwillingness to compromise on key issues, including fishing rights and future governance.

"While the UK and the EU negotiating teams have made real progress towards a deal this year we continue to expect the two sides to fall short of reaching a deal in time for the UK’s exit from the single market on 31 December. The recent round of talks ended at an impasse as the two sides could not settle their differences on two persisting points of contention, namely, level playing field provisions and fisheries," says Pickering.

Berenberg have applied a 60% chance on a 'semi-managed hard exit' whereby the two sides to agree on some modest stopgap measures in order to prevent a disorderly hard exit.

"Instead of one big cliff edge, where the UK-EU economic relationship suddenly shifts from open single market rules to the much more restrictive World Trade Organisation rules for trade, we expect the two sides to see to it that the switch occurs in a series of smaller steps," says Pickering.

Yet, it is assumed the two sides will ultimately prefer to secure a trade deal, suggesting to Berenberg the risks are titled to the upside.

"We see a 35% chance of a partial or full deal by year end with just a 5% risk of a disorderly hard exit," says Pickering.

Following the conclusion of the 7th round of negotiations, the UK's Chief Negotiator David Frost said:

"The EU is still insisting not only that we must accept continuity with EU state aid and fisheries policy, but also that this must be agreed before any further substantive work can be done in any other area of the negotiation, including on legal texts. This makes it unnecessarily difficult to make progress."

Another round of talks are scheduled to commence on September 7th with a final round of talks due to end on October 02.

An EU Council meeting of European leaders scheduled for mid-month is widely held to be a key make-or-break moment for talks and is looking to be an obvious deadline for markets to turn focus to.

However, Berenberg says talks will likely continue through the end of the year in the hope of a late-stage breakthrough.

"While the two sides have said that a deal in time for 1 January 2021 needs to be ready for the end of October at the latest, in order to give time for ratification, both sides would be flexible and come up with some fudge that buys time if a deal could be struck at the last minute," says Pickering.

According to Berenberg's estimates, a comprehensive UK-EU agreement that included free-trade in goods and some provisions for services would leave UK growth potential at around 1.7% versus 1.5% in case of a no deal. The UK economy experienced trend growth of roughly 2.0% whilst inside the EU.

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