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A No-Deal Brexit—With Its Catastrophic Consequences—Is Coming Into Clearer View

The risk of a no-deal Brexit is increasing every day, the European Union’s top negotiator warned after the British Parliament yet again failed to achieve consensus about an alternative way forward.

On Monday night, U.K. lawmakers voted in a second round of so-called indicative votes, which are votes on possible alternatives to Prime Minister Theresa May’s thrice-rejected negotiated Brexit deal. As in the first round, no option won the support of a majority of MPs, although the idea of the U.K. staying in a customs union with the EU—a “soft Brexit” option—came within three votes of success.

“No-deal was never our desired or intended scenario,” Michel Barnier said Tuesday. “But the [rest of the EU] is now prepared. It becomes, day after day, more likely.”

The options presented in Parliament on Monday evening all fell due to opposition from the vast majority of the ruling Conservative Party. Unless there is some sort of consensus in the U.K. Parliament, a catastrophic no-deal Brexit is indeed the default outcome, and it will happen a week from Friday.

Barnier isn’t the only one who sees the risk rising; currency traders are also feeling bearish. Following Monday evening’s indicative votes, sterling fell 0.5% against the dollar. “With just 10 days to go until the U.K. leaves the EU, ministers failing to agree to an alternative plan increases the probability of a no deal Brexit. This fact is being reflected in a weaker pound,” said London Capital Group in a Tuesday note.

Even before the votes, Deutsche Bank was expressing a glum outlook. “We believe…that implementation of a softer Brexit or even confirmatory referendum will be impossible for the present government,” said macro strategist Oliver Harvey in a Friday note. “Should elections be called, this should not be positive. First, the market may be concerned about the prospect of a potential Labour led government. But more relevant, in our view is the fact that polling suggests the result could be similar to that in 2017, which has led to the current parliamentary deadlock.”

Late Monday, the Daily Mail carried carried a scoop about a leaked analysis from Mark Sedwill, the U.K.’s most senior civil servant, in which he warned ministers about the effects of no-deal.

Sedwill predicted: a recession that would hammer sterling in particular, due to its localized nature; a 10% rise in food prices, with fresh produce becoming even more expensive than that; pressure on the government to bail out masses of British companies; disruption to the U.K’s national security and stability; and the need for London to once again impose direct rule on Northern Ireland, due to the “pace, breadth or controversy of the decisions needed to be taken through a no-deal exit.”

May’s Cabinet is meeting on Tuesday to hold crisis talks. The Cabinet is deeply split between those who would have preferred to remain in the EU, most notably including Chancellor of the Exchequer Philip Hammond, and those who are comfortable with the no-deal scenario, such as Trade Secretary Liam Fox. Hammond is reportedly in favor of there being a second Brexit referendum, but that would mean securing a long extension from the EU on the Brexit deadline, which would mean the U.K. having to field candidates for next month’s European Parliament elections—a toxic option as far as Brexit hardliners are concerned.

The whole mess is exacerbated by Conservative politicians’ jostling for power, due to May’s likely imminent departure. The prime minister promised to step down once her deal had been approved, but even without that happening, there is constant talk about her being kicked out anyway.

Barnier had some uncomfortable news on Tuesday for the no-deal squad, though: even if the U.K. crashes out of the EU due to Parliament’s unwillingness to back the negotiated Withdrawal Agreement, once they come back to the table to negotiate a new trading relationship the EU will demand the same things.

The EU negotiator also echoed Sedwill’s warning about security cooperation in the event of a no-deal Brexit. “There will be a break in the level of talks, less mutual commitment, risks to intelligence pooling,” Barnier said. “There might be inconsistencies in applying sanctions regimes because of a low level of co-operation. The U.K. would no longer be taking part in EU operations or in the European Defense Agency’s capacity-building programs…No-deal for some time poses the threat of there being no organized framework.”