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Deloitte Brexit Briefing | 9 Brexit – Possible options over the short and medium term January 2019

Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

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Page 1: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

Deloitte Brexit Briefing | 9

Brexit – Possible options over the short and medium term

January 2019

Page 2: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 2

The current edition

Perspectives on Brexit

Deloitte Brexit Briefings

Deloitte Brexit Briefings series

In our current edition, ‘Brexit – Possible options over the short and medium term’, we analyse the current status of the Brexitnegotiations. Our goal is to provide an overview over the possible outcomes both in the upcoming months as well as years. A special focus lies on the impact of a no-deal Brexit.

The United Kingdom’s decision in June 2016 to leave the EU will have a far-reaching economic and political impact. For German companies, Brexit means a fundamental change in the business environment.

In this context, the Deloitte Brexit Briefings examine the core Brexitthemes and risks from economic, strategic, taxation and legal perspectives, and are intended to provide orientation about the complex effects of Brexit and the Brexit process.

Feb 2017

March 2017

May 2017

June 2017

Page 3: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 3

Brexit negotiations

The road ahead: What has happened and what will happen next?

Page 4: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

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What has happened so far: the most important milestones

Brexit | Meilensteine

Source: Deloitte Research

29 MarchArtikel 50 triggered

24 JuneDavid Cameron stepsdown as Prime Minister

6 JulyChequers Plan

23 JuneBrexit Referendum

13 JuliTheresa May wird Premierministerin (PM)

12 NovEU und UK agree on an exit deal

8 JuneUK snap elections

26 JuneEU (Withdrawal) Act becomes law

20

17

20

18

14 NovBritisches Cabinetsigns off on deal

20

16

25 NovEU Heads of State andGovernment agree toBrexit deal

12 DezTheresa May winsvote of no confidencetriggered by Tories

20

19

15 JanBritisches Parliamentrejects exit deal

16 JanTheresa May wins voteof no confidencetriggered by opposition

Page 5: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 5

The basic mechanism behind the Brexit negotiations remains unchanged

Brexit | Mechanism

Negotiations between

EU and UK

EU accepts

EU exit

with deal

UK demands

new negotiations

Second

referendum

Agreement

United Kingdom

remains in the EU

EU exit

no deal

No agreementBritish Parliament

accepts

British Parliament

rejects

EU rejects EU rejects

UK demands

new negotiations

Second

referendum

Source: Deloitte Research

Withdrawal of

Article 50

Withdrawal of

Article 50

Page 6: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 6

The road ahead: There are many possible outcomes for the upcoming weeks

Brexit | The road ahead

• Successful vote of no

confidence against the

government by the opposition

• or two-third majority of MPs

call for early general elections

...then:

• Election: the current timetable

of concluding an exit

agreement by Mar 2019

cannot be met

• Options include extending

Article 50 (with EU

agreement), No-Deal Brexit or

withdrawing from the exit

New elections

• PM proposes a second

referendum to Parliament

• and UK Parliament agrees

...then:

• Second referendum: the

current timetable of

concluding an exit agreement

by Mar 2019 cannot be met

• Options include extending

Article 50 (with EU

agreement), No-Deal Brexit or

withdrawing from the exit

Second referendum

• PM and asks for extension of

negotiation phase after

consulting with Parliament

• and EU Member States agree

unanimously

...then:

• Negotiation phase is

extended

• Timescale uncertain

Extension of Article 50

If...: If...: If...: If...:

• UK Parliament agrees to the

current or a new deal

• and Europeans Heads of State

and Government and EU

Parliament agree to the deal

...then:

• Exit agreement comes into

force in Mar 2019

• Transition phase with further

negotiations until Dec 2020

Withdrawal agreement

• UK Parliament rejects all exit

agreements

• and negotiation phase is not

extended

...then:

• If nothing else happens, the

default option would be a no-

deal Brexit on March 29

No Deal

If...:

Final outcomePossible delay on a final decision

Source: Deloitte Research

Page 7: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

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Down the road: No end to uncertainty expected in the coming years

Brexit | The road ahead

Jan – Mar 2019

29 March 2019

Mar 2019 –Dec 2020

From Dec 2020

If there is agreement from the British Parliament and the EU countries, the ratification process continues on both sides:

• UK: EU (Withdrawal) Bill anchored in legislation

• EU: EU Parliament votes on exit agreement

Brexit Day

The United Kingdom officially leaves the EU, unless both sides agree to an extension of the negotiating phase as per Article 50 or an exit from Brexit.

If an exit agreement has been concluded, the transition phase begins in March 2019, during which the future economic partnership is negotiated.

End of transition phase – future economic partnership comes into force unless the UK and EU agree an extension of the negotiation phase.

If the transition phase ends without any future economic partnership agreed, the backstop comes into force.

If the British Parliament does not accept the exit agreement, the British government has 21 days to submit a new plan to Parliament.

If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March.

If Article 50 is extended, negotiations continue between the UK and EU - the United Kingdom remains part of the EU during this time.

No-deal Brexit if EU and UK do not reach an agreement and the negotiation phase is not extended. WTO rules apply to trade.

Source: Deloitte Research

Page 8: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 8

Brexit negotiations

Exit agreement vs. No Deal

Page 9: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 9

What are the six key points in the current withdrawal agreement?

Brexit | Exit agreement

Transition phase• 29 Mar 2019 to 31 Dec 2020• UK continues to comply with EU regulations,

but loses membership of EU institutions• Transition phase can be extended once for a

definite period• Decision about extension must be made

before 1 Jul 2020

02

01

Citizen rights• EU citizens living in the UK and UK citizens

living in the EU retain all of their rights, including during the transition phase

• Free movement of people - one of the four basic freedoms of the EU - ends

• Travelling without visa should however remain possible in future

04

03

05

06

Backstop• If the transition phase ends without

agreement, the UK and EU remain in a customs union - for an indefinite period

• This backstop can only be lifted with agreement from both parties

Financial settlement• EU and UK agree on a financial settlement of

approx. EUR 44 billion• This consists of contributions to the EU budget and

British commitments made in the past • In case of an extension of the transition phase,

further payments become due

Goods trade• During the transition phase, UK and EU remain in a

customs union under EU regulations, therefore no customs duties or goods controls are necessary

• During a Backstop the whole of UK would form a single customs territory with the EU. Northern Ireland would further align with the EU single market on goods standards, agriculture production and veterinary controls.

Governance• A committee with representatives of both parties

was founded to deal with all legal questions to do with the exit agreement

• The ECJ remains the jurisdiction for all questions relating to EU law

Source: European Commission

Page 10: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

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320 votes are required in Parliament to approve a deal – however, the parties are fragmented and a majority Parliament assent remains unlikely

Brexit | British Parliament

Distribution of seats by party in the British Parliament (N=650)*

Source: UK Parliament, Deloitte Research*11 Members of Parliament will not vote: The Speaker and his three deputies are not allowed to participate, 7 members of the Northern Irish Sinn Fein party refuse to take their seats in parliament.

315

10

257

3512 21

Conservative

Democratic Unionist Party

Labour

Scottish National Party

Liberal Democrat

Other

Page 11: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 11

The situation after a disordered Brexit would be chaotic - an overview in numbers

Brexit | No Deal

10 percent customs dutiescould arise for cars alone according to the World Trade Organisation (WTO). Lowering the level of duties bilaterally without a full free trade agreement is prohibited by WTO regulations. However, the UK could choose to levy applied rather than bound tariff rates provided this rate is granted to all WTO members.

75 percent of derivatives tradingin euros is conducted in London, according to the Bank for International Settlement. Without a specific agreement, European customers would no longer have access to clearing services after a no-deal Brexit. However, the European Commission has already announced that it would temporarily classify British clearing houses as equivalent to those in the EU.

11,000 HGVstravel to Calais every day. Passport and customs controls would be necessary at the border with Great Britain. This could lead to long delays, especially for the economy; Imperial College London estimates that a delay of two minutes per HGV in Dover and at the Eurotunnel would lead to a traffic jam of 47 kilometres.

154 million passengersa year fly from Great Britain to the EU, plus 457 thousand tonnes in freight. Without a specific agreement, European airlines would no longer have access to British airports, and vice versa, British airlines could not longer fly to European airports.

219,000 EU citizenscame to the UK in the year ending June 2018. Although the rights of EU citizens living in the UK long-term are supposedly secure even in case of a no-deal Brexit, this does not clarify the right of residence for many other European citizens.

45 million medicinesare transported every month from the UK to the EU. Due to delays and traffic jams in Calais, these might not reach the EU in time.

Source: WTO, UK Parliament, Imperial College London, ONS, Eurostat, Bank for International Settlement

Page 12: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 12

-2,1

-1,4

-0,8

-0,7

-0,6

-0,6

-0,6

-0,4

-0,3

-0,3

-0,3

-0,3

-0,2

-0,2

-0,2

-0,2

-0,2

-0,1

-0,1

-0,1

0,0

-2,5 -2 -1,5 -1 -0,5 0

United Kingdom

Ireland

Poland

Czech Republic

Slovakia

Denmark

Greece

Sweden

Finland

Portugal

Hungary

Belgium

Netherlands

Italy

Spain

France

Germany

Austria

Croatia

Romania

Bulgaria

The immediate effects of a no-deal Brexit on growth would be manageable for many European countries on a macro level, but...

Brexit | No Deal

Effect of No Deal on gross domestic product compared to UK remaining in the EU (% difference in GDP level in Q4 2020)

Source: Oxford Economics, NIESR, UK in a Changing Europe, Bank of England

Whereas the effect on the other EU Member States appears comparatively low across various studies, the forecasts for the British economy fluctuate considerably due to the large number of uncertain factors.

The NIESR think tank, for example, estimates that in case of No Deal, British GDP would fall by 5.5% compared to its level if the UK remained in the EU until 2030.

The ‘UK in a Changing Europe’ group predicts that British GDP per capita would fall between 3.5% and 8.7% over the next ten years as a result of No Deal.

The Bank of England also estimates that UK GDP could fall by up to 8% in the worst case if the United Kingdom and the European Union cannot agree on a deal. During the 2007/08 global financial crisis, the British economy shrank by 6.25%.

In absolute terms, a 0,2% lower GDP for Germany would result in a 7 billion EUR lower prosperity level.

Page 13: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 13

Brexit Briefing III: Connectedness of German industries with UK Brexit Briefing V: Effects of a hard Brexit on automotive manufacturers

The sectors with the highest employment are transport and logistics (95,700 employees), finance and insurance (59,100 employees) and retail (44,600 employees).

1,000 German companies have subsidiaries in the UK, this includes 160 of the largest German corporations

These 160 large German companies employ around 400,000 people in the UK and achieve revenues of approx. EUR 150 billion

The automotive sector is the most valuable, achieving revenues of EUR 40.1 billion, followed by the energy sector and the transport and logistics sector with revenues amounting to EUR 24.3 billion and EUR 20.6 billion respectively.

Taking British consumer behaviour into account, sales in the United Kingdom are expected to fall by approx. 550,000 vehicles (-19%) in the year of EU exit.

Total turnover from vehicles in the UK will decline by approx. € 12.4 billion (-18%)

Based on the declines in sales and turnover, approx. 18,000 jobs in the German automotive industry would be endangered directly.

If vehicle manufacturers pass on this cost increase 1:1 to their customers, the price of a car in the United Kingdom would increase by € 3,700 on average.

...individual industries would be strongly affected

Brexit | No Deal

Source: Deloitte Research

Retail

no-deal

Page 14: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 14

There are four key areas for European companies to consider

Market

Product

Regulation

Market

RegulationTariffs

Exports

Growth

Strategy

Finance

Capital

Flows

Local

Content

Funding

subsidiary

Valuation

Tariffs

Tax

Transferpricing

ProfitTax

IndirectTax

CorporateTax

Brexit

Topics

Organization

Global Group

Structure

Employee

Mobility

Location

Strategy

Legal

Supply Chain &

Extended Enterprise

Ability to

supply

Logistic and

tariff processes

Indirect

risks

Restructuring

Suppier

Risks

Page 15: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

2018 Deloitte 15

Brexit Strategic Response Team

Economic Research

Dr Alexander Börsch

Director Research

Tel: +49 89 29036 8689

[email protected]

Julius Elting

Research Analyst

Tel: +49 89 29036 6486

[email protected]

Dr Mathias Hanten

Partner Banking & Finance Law

Tel: +49 69 71918 8424

[email protected]

Dr Julia Sierig

Partner Employment Law

Tel: +49 71 16696267

[email protected]

Tax

Dr Alexander Linn

Partner International Business Tax

Tel: +49 89 29036 8558

[email protected]

Diana Imhof

Director FSI Cross Border Tax

Tel: +49 69 75695116021

[email protected]

Claudia Sendlbeck-Schickor

Director Mergers & Acquisitions (Tax)

Tel: +49 89 2903 68301

[email protected]

Markus Kircher

Partner Transfer Pricing (Tax)

Tel: +49 69 7569 57011

[email protected]

Legal

Christofer Rudolf Mellert

Partner Deloitte Legal

Tel: +49 211 8772 2947

[email protected]

Dr Florian Klein

Head of Center for the Long View

Tel: +49 69 9713 7386

[email protected]

Strategy & Scenario Planning

EU Customs Law

Michael Schäfer

Partner Global Trade Advisory

Tel: +49 621 1590 1869

Email: [email protected]

Bettina Mertgen

Director Global Trade Advisory

Tel: +49 621 1590 1869

Email: [email protected]

Risk Advisory

Volker Linde

Partner Risk Advisory

Tel: +49 221 87722399

[email protected]

Anton David Schweizer

Senior Manager Risk Advisory

Tel: +49 711 16554117251

[email protected]

Olaf Babinet

Director Strategy & Operations

Tel: +49 211 8772 4592

[email protected]

Real Estate Consulting / Location Strategy

Financial Services & Banking Operations

Tilmann Bolze

Director Financial Services Consulting

Tel: +49 30 25468 325

[email protected]

Thomas Peek

Director Financial Services Assurance

Tel: +49 69 75695 6562

[email protected]

Clive Laurence King

Director Financial Services Assurance

Tel: +49 89 29036 8912

[email protected]

Carl-Friedrich Mueller

Senior Manager Finance & Risk Operations

Tel: +49 69 9713 7441

[email protected]

Alexander Weber

Director Finance & Risk Operations

Tel: +49 69 9713 7441

[email protected]

Page 16: Deloitte Brexit Briefing | 9...If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March. If Article 50 is extended, negotiations continue between

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