5 minutes to midnight in the United Kingdom

In the midst of a COVID-19 pandemic and with Joe Biden soon to become the U.S. president, the last thing that the United Kingdom needs is another shock to its economy. Yet that is what could happen on Dec. 31, when the UK’s one-year Brexit transition period ends, if the UK soon does not manage to strike a trade deal with its European partners.  

It would be an understatement to say that the COVID-19 pandemic has had a devastating effect on the UK economy. According to official estimates, the UK economy is likely to have contracted by 11 percent in 2020, making that its worst economic performance in 300 years. At the same time, the pandemic has blown a gaping hole in the country’s public finances, with the budget deficit now on track to reach almost 20 percent of GDP in 2020.

There is little doubt that leaving the European Single Market without a trade deal would constitute a major blow to the UK economy. Not only would it put UK exports at a distinct disadvantage in the European Single Market, which currently absorbs around 50 percent of the UK’s exports. It would also complicate the UK financial sector’s access to the large European market. This could be of long run economic consequence considering that the city of London accounts for around 10 percent of the UK economy.

Official estimates paint a grim picture of a no Brexit deal UK world. According to the UK Office for Budget Responsibility, a no deal Brexit would make it all the more difficult for the UK economy to recover from the pandemic. It estimates that leaving Europe without a trade deal could knock around 2 percent off GDP growth next year and as much as 6 percent over the next 15 years. 

One of the main arguments for Brexit was that freed of its European shackles, the UK could strike favorable trade deals with the rest of the world in general and with the United States in particular. It was hoped that those deals would more than compensate for any loss in trade with the European Single Market. But the prospects for striking such deals has now dimmed in a post-COVID-19 world where, mired in deep recessions, countries are likely to be more inward-looking than they were before.   

With Joe Biden soon to become U.S. president, the British Prime Minister Boris Johnson government’s holy grail of a favorable free trade deal with the United States would seem to be on the back burner. 

It is not simply that Johnson will no longer have Donald Trump in his corner. It is also that a Biden administration is likely to be ill-disposed to rewarding the UK with a favorable trade deal after the UK will have disrupted the Good Friday Agreement with Ireland. Should the UK leave Europe without a trade deal, the Republic of Ireland and Northern Ireland would have to reinstitute a hard border. The removal of that border constituted a key pillar of the Good Friday Agreement that ushered in two decades of Irish peace. 

Although the hour is late, there is still reason to hope that the UK will not crash out of Europe without a trade deal. Although the European economy would be less affected than that of the UK by a no deal Brexit, it too is in no position to absorb a no deal economic shock. Indeed, as a result of a second wave of the pandemic, it is now officially being estimated that the European economy will experience another leg down. One would think that with both sides now having a great interest in avoiding a no deal economic shock to their weakened economies, a compromise deal will somehow be found at the eleventh hour.

Yet another reason not to give up hope is that it is very much in the nature of European economic negotiations for deals to be struck only at the very last possible moment. It is also the European practice for the clock to be stopped if necessary to avoid going over an economic cliff. 

For all of our sakes, we must hope that this time will be no exception and that the UK and Europe will avoid a self-inflicted economic wound at a time of a global pandemic.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.