While the entire United Kingdom has come together to fight against the “invisible enemy”, the Brexit logjam is still floating under the surface. With the rise in the pandemic, the pressure on the UK government is also developing to consider an extension of the transition period. How beneficial it would be for the struggling economies at this stage?
The world is living and coping with the aggravating pandemic caused by the novel coronavirus, popularly known as COVID-19. The situations needed immediate attention as the pandemic is spreading like a wildfire. To stop the spreading of the infection, governments of the countries have ordered a lockdown. Prime Minister Boris Johnson called for a nationwide lockdown on March 23. Later, Dominic Raab announced the extension of the lockdown for the next 3 week on April 16. The Monetary Policy Committee (MPC) has been taking measures to mitigate the damage. Chancellor Rishi Sunak is aiming to control the economic meltdown that the UK may have to witness if actions are not taken on time by the government. Different economic support packages have been designed to provide financial relief to businesses and individuals alike.
However, eyebrows were raised when talks surrounding Brexit started. Last week, the European and the UK government decided to resume the talks that were disrupted by coronavirus. Both the governments will go through three rounds of negotiation that holds the future of the UK and the EU.
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Brexit and Transition Period
Formally, the United Kingdom left the European Union on 31 January 2020 with an 11-month transition period. All the rules and regulations of the EU will continue to apply in the UK. The transition period was expected to give both the governments to prepare for the new arrangements. The UK government has to strike a deal with Brussels until 31 December 2020 and everything involving that must be completed by the end of June 2020.
The effect of COVID-19 may start reflecting on trade and commerce from the beginning of 2021. The UK government may not ask for a further extension of this period and has also said that it will not any such offer from the EU. The government is aiming to achieve tangible results by doing a review meeting in June. According to the World Trade Organisation (WTO), world trade is expected to decline by 13 to 32% in 2020. Recovery in the trade is expected in 2021 but that entirely depends on the gravity of the outbreak and the effectiveness of policies drawn to fight against the virus. To prepare for such a hard economic shock, the UK may need an extension to the current transition period.
Warning by IMF on Brexit Trade Deal
The global financial crisis of 2008 can be easily compared to the current pandemic-generated crisis that the world is going through. The UK government has introduced various monetary and fiscal policies to counter the downturn of the economy. However, recently the International Monetary Fund has warned to reconsider the decision of extending the transition period. Not extending it may add to the current uncertainty is what the IMF has stated. Kristalina Georgieva, Managing Director of IMF has specifically asked the governments to reconsider their decision for the future of the world economy too.
Extension of Transition Period – Risk or Opportunity?
A new survey conducted by Focaldata of more than 2,000 online voters has found that nearly two-thirds of Britons want the current transition period to be extended so that the ministers can completely focus on strategies to fight the battle against the invisible enemy. The pandemic has entirely changed the way we use to interact and conduct businesses. Johnson’s government has cleared the air by saying that they will not delay it anymore.
If the UK decides to extend the transition period beyond the current decided deadline, it will enter into a completely new financial cycle. Designed by the European budget, it will not offer the UK any rebate. A further extension will prolong the business uncertainty and will also delay the control of the borders. A newly designed financial engineering is required for both the governments, especially for the UK.
The European Union will get more time to propose new decisions that may interfere with the current decisions. EU has its own reasons if they want to propose an extension to the transition period. A longer transition period means more British funds will keep going to the EU. It may trigger a situation for a compromise between the 2 governments on the next 7-year budget for the bloc. The treaty specifies that if the UK wants to extend the period of transition, they would have to contribute to the Union Budget.
An extension may prove to be a financial loss to the UK. Britain will not be covered under any budget system designed by the EU in its next budget session.
A trade deal being drawn by the end of this year is daunting thought given the pandemic. The government is already under tremendous pressure of fighting with the virus. It has introduced different schemes to make the financial lives of people easier. Bank of England has published their business condition report in which they have mentioned that the pandemic-generated recession will be even worse than the global financial crisis of 2008. However, the Monetary Policy Committee has said that actions taken by the BoE may not help save the economy from melting. Increasing unemployment, significant failure of large scale businesses may hard the economy in the long run. To mitigate the damage, the banks are instructed to lend loans to business and individuals.
The United Kingdom is fighting with COVID-19 by doing everything possible to minimise the loss. The picture of an extension will be clear once the governments hold a talk. A Brexit extension is expensive but it may allow the UK to reconsider the future of their relationship.
