- François-Xavier Branthôme
EU should "get ready" for a no-deal outcome
Britain is due to leave the EU on 29 March 2019. The no-deal scenario seems to become the more realistic outcome by the day, so there is broad agreement that Brexit will result in higher food prices in the UK.
According to the European specialized press, as UK Prime Minister Theresa May works to re-open the withdrawal deal – an agreement two years in the making that Brussels insists will not be re-visited – there seems little hope that she can win over support in the House of Commons for her vision of the UK's “divorce” settlement.
As of 6 February, there was no clear majority for any of the different options (Irish backstop, “soft Brexit” with closer ties with the EU, general election that could re-set negotiations, second referendum, etc.) discussed in Parliament. On the other side of the channel, sources state that the European Commission is "angry" that it has "wasted two years" negotiating a deal with May's team that does not have the backing of British politicians.
No-deal is starting to look like a serious possibility.
In meetings in early ebruary with the Commission's chief negotiator Michel Barnier, representatives of the European food industry urged the EC to take unilateral action to keep the food trade flowing, something it is believed will only happen if the UK takes similar steps. The delegation included representatives from Copa and Cogeca, CELCAA and Food Drink Europe (FDE). During the meeting – and in a follow-up joint letter signed by the three organisations – the food sector stressed the need to avoid a no-deal Brexit scenario and deliver "an orderly Brexit" to ensure trade between the EU and the UK "remains as frictionless as possible".
In the wake of the initiative taken recently in Italy by Coldiretti and Princes (see our article of 12 February), companies, farmers and agri-cooperatives from both sides of the Channel are engaging in contingency and preparedness measures. But according to the joint letter, "these measures will not prevent significant disruption of supply chains in case of a no-deal. It is also proving difficult for smaller operators to suitably prepare as they will be facing export procedures for the first time and they lack the required resources".
“Significant disruption” to the food supply chain
Copa and Cogeca, CELCAA and FDE called on EU Institutions to consider "unilateral contingency measures" specific to the agri-food sector. "The impact of a no-deal will be immediate and harsh” they warned. "We need to have smooth customs and transportation of food," stressed Marco Settembri (FDE board member and Nestle CEO of the EMEA zone), adding that the EU will "likely not accept" the UK position or an extension to Article 50 (with reference to Article 50 of the Treaty of Lisbon, which provides for the modalities for exit from the EU and on which the deadline of 29 March 2019 depends). "We don't like the current situation in which no deal is the likely scenario for the future."
While preparations for a no-deal Brexit can limit the damage to industry, Marco Settembri stressed that the situation will have negative economic consequences in the short, medium and – possibly – long term. "This will cost money to society at the end of the day... Society and the consumer will pay the price of this decision," Settembri predicted.
Meanwhile, the UK's Food and Drink Federation (FDF) has long been warning also that the possibility of a no-deal Brexit would be bad for British businesses and consumers. According to the FDF, preparations for a no-deal, such as the stockpiling of ingredients, are already costing British food makers dearly.
If a deal cannot be reached, the UK industry will be faced with the “cliff edge” of trading on World Trade Organization terms. This will further increase costs because imported food and ingredients will be subject to tariffs. Currently, the UK imports 30% of the food it eats from the EU.
No-deal Brexit and food prices: how much will it push up the average basket?
This additional expense will at least be partially passed along to consumers, resulting in higher food costs. Financial advisory group NimbleFins has calculated the impact that extra tariffs alone will have on food prices, based on data from the WTO and the Office of National Statistics.
Food is already a significant cost for most British inhabitants, consuming 10% of the average UK household budget. If there is a no-deal Brexit, as seems increasingly likely, the cost of each household's weekly shopping will surely rise due to tariffs.
In order to determine the impact of a “no-deal Brexit” on prices, NimbleFins has done some back-of-the-envelope calculations to estimate the effect on the average basket of food and beverages for UK households.
The results showed that tariffs the British pay on food and drink each year could cost as much as two weeks’ worth of grocery shopping, regardless of the amount typically spent. UK households with average spending may need to budget an additional GBP 132 (EUR 150, USD 170) per year due to tariffs on food and drink shopping, and GBP 78 (EUR 89 or USD 101) per year on takeaways and restaurants – or GBP 210 in total for the year.
As a consequence of tariffs, the average UK household (spending GBP 66 (EUR 75, USD 85) per week on groceries, including drinks) could pay 3.8% more to eat at home, raising the cost of the average weekly shop from GBP 66 to GBP 68.54 — an increase of GBP 2.54 (EUR 2.9, USD 3.3) per week. According to NimbleFins, the biggest impacts would come from dairy, beverages and meat.
Depending on the size of their budget, the British may spend more or less than the "average" household spends on food and drink in total. To consider the impact of tariffs for different budgets, experts estimated the results for a range of food and drink spending from EUR 50 to EUR 200 per week. Roughly speaking, for every EUR 50 spent on food and drink each week, the British should expect to pay around EUR 100 extra due to tariffs each year.
NimbleFins' estimate does not take into account any appreciations or depreciations of the UK currency based on the political outcome of the current situation.
Less than six weeks before the planned exit date, on March 29, the modalities of the divorce remain very vague and fears of a "no deal" – an exit without agreement and without a transition period to mitigate the economic impact – continue to rise.
Experts recently interviewed by Reuters unanimously answered that a negotiated Brexit would benefit the British currency while an exit from the EU without agreement would weaken it. But the potential gains are, according to them, lower than expected losses in case of "no deal". As showed by the Reuters’ survey, the British pound is likely to lose between 5% and 10% if this Brexit takes place without a clearly defined framework. With a negotiated agreement, it could be appreciated from 2% to 5%.
Some complementary data
EC presentation on Brexit withdrawal agreement
Sources: foodnavigator.com, nimblefins.co.uk, challenges.fr