We go to press with Parliament locked in battle with the Government over threats to take the UK into a ‘no-deal’ exit from the European Union (EU). I’m not going to offer political predictions but we are clearly at the point where a disorderly exit from the EU is a very real prospect for the country and the profession.
The good news is that the largest UK law firms feel confident they can largely mitigate the immediate impact of no-deal, even with the abrupt end of EU rights to practise that have been such a boon. This is because potentially obstructive Bars in key markets in France and Germany have been kept onside and UK lawyers feel that other decent workaround options are available (see pages 12-13). With leading UK firms also having substantial foreign operations, including the Legal Business 100 having 19% of their lawyers in mainland Europe, and rapidly increasing their ranks of Irish-registered solicitors, the large outfits at least are braced. The Law Society recently issued research arguing a no-deal would knock 10% off the value of the UK legal market, equivalent to more than £3bn, and costing 10,000 jobs. Most law firm leaders see such predictions as excessive – a scepticism I share – though the industry does believe such an exit would be damaging.
Which leaves the wider impact of a disorderly Brexit on the economy and the City. With the UK economy apparently stalling over the summer, a no-deal exit is projected by the Office for Budget Responsibility (OBR) to tip the UK into outright recession, causing on its central forecast a £30bn annual hit to the UK’s £2trn economy. That would be enough to double projected borrowing to nearly £60bn next year and is modelled as causing a 2% contraction in 2020 before recovering in 2021. For context, the OBR has taken what is regarded as a mid-range view of the potential no-deal outcomes and one that is less pessimistic than that of the UK Treasury or Bank of England, which predicted a worse recession than the 2008 financial crisis.
True, some economists believe the Treasury, Bank and even the OBR have been consistently too bearish in Brexit predictions but credible neutral forecasters do in general agree that no-deal has a negative short and long-term impact on the UK economy, investment and vulnerability to shocks.
The other major factors are the longer-term effect on the City and English law, which have both given so very much to the industry. The mainstream view among lawyers is that both will prove resilient even in a chaotic withdrawal. On this I part from my own contact base. Network effects, liquidity and established skills and infrastructure mean large, entrenched financial markets can withstand huge stress before they start to weaken. But the history of financial markets is that gradual erosion can rapidly become an avalanche. The City is aided by the lack of a single competitor EU hub, but it was built in the last 30 years on the foundation of easy access to EU markets and a highly-predictable business environment. Neither will survive a bruising no-deal.
English law’s position, meanwhile, would look stronger if the last decade had not already seen a marked shift in influence towards US law, agencies and investors. Throw in the impact of falling sterling on a legal profession already facing a challenge from US rivals – a factor in the end of Allen & Overy’s US merger dream – and the industry has cause for concern.
In the final analysis, the profession will be far from the worst-hit industry from Brexit, and its record of resilience will stand it in good stead in a disorderly departure, but these strange times call for a good deal more constructive pessimism than has so far been evident.
For more on how law firms are approaching the possibility of a no-deal Brexit see Dealing with no deal – Can top law firms cope with a chaotic Brexit?