What ‘No-Deal Brexit’ Means and How It May Be Averted

(Bloomberg) -- With the U.K. set to leave the European Union next March, and more than 40 years' worth of complex integration to unravel, there's a real chance of a messy breakup. The Brexit deal that Prime Minister Theresa May has brought home looks unlikely to be accepted by Parliament. If lawmakers vote it down, the default option is that Britain crashes out into a legal limbo -- a no-deal Brexit. While the government prepares for that scenario, groups of politicians on all sides are plotting alternatives.

1. What does a no-deal Brexit mean?

It means a U.K.-EU divorce with no agreement in place on how to continue doing business with each other. Absent a deal, various rules, permits and accords fall into limbo. Free trade between Britain and the EU will give way to basic World Trade Organization tariffs and become subject to border checks where now there are none.

2. How bad would that be?

Bank of England Governor Mark Carney says a no-deal Brexit could, in the worst case, shrink the U.K.'s gross domestic product by 8 percent within a year and send property prices plunging by almost a third. (Some lawmakers accused the BOE of scare-mongering and said the likely impact wouldn't be nearly that severe.) The effects of a no-deal divorce would be felt in many ways. Delays would be so bad that the British government has plans to turn a major highway near the Port of Dover into a holding zone for trucks. Bottlenecks could bring shortages of everything from imported food to manufacturing components. Regulations on vehicle safety, medicines and food standards, now coordinated at the EU level, would need a new U.K. home. EU citizens living in the U.K. and Britons living on the continent could be stranded without permission to remain.

3. Wasn't there talk of a smooth transition?

Yes. The two sides reached an accord on a transition, or grace period, that would keep all rules and tariffs the same until December 2020. But there will be no such organized transition if they can't agree to a broader divorce deal.

4. Why is a no-deal Brexit even possible?

Because there's not a majority in Parliament for May's Brexit deal, and there may not be a majority for any alternative. May triggered the two-year negotiating process in March 2017, setting the clock ticking to exit day. It's now enshrined in legislation that Britain will leave next March.

5. How could no-deal be averted?

An extension to the negotiating timetable is possible, if the U.K. asks for it and all 27 EU members agree. A case is in the European Court of Justice now to test whether Britain can unilaterally withdraw its notice. Groups of politicians across Parliament are working on possible amendments and motions to prevent no-deal and engineer either a second referendum or an extension to allow for more time to negotiate a different deal. An extension would also be possible if a general election is called.

6. How are the two sides preparing for a no-deal Brexit?

The EU has told governments and companies to prepare for the worst. Belgium and the Netherlands, which have ports facing Britain, have led the way hiring border officials and boosting resources in preparation. Other countries are also stepping up. The U.K. government is preparing for bottlenecks and supply shortages, but has been criticized for not doing enough.

7. What else can they do?

There's been some talk, mainly on the U.K. side of a "no-deal deal," a barebones exit agreement that would seek to protect consumers and citizens from the most damaging consequences of a crash-out Brexit. It could, for example, spell out how airplanes can continue taking off, or how crucial data can continue to be shared so business doesn't grind to a halt. Still, the EU's public position is that it isn't an option and the bloc is preparing unilaterally for no deal.

The Reference Shelf

• More on Carney's cautions about the economics of a no-deal Brexit.
• How European countries are preparing (very differently) for a no-deal Brexit.
• QuickTake explainers on what Brexit means for the Irish border, British banks and Gibraltar.
• Brexit for beginners.
• Economists actually seem to agree that Brexit will hurt, deal or no deal, Therese Raphael writes in Bloomberg Opinion.

To contact the reporter on this story: Emma Ross-Thomas in London at erossthomas@bloomberg.net

To contact the editors responsible for this story: Heather Harris at hharris5@bloomberg.net, Laurence Arnold, Kevin Costelloe

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