Brexit Endpoint Remains Unclear
Following yesterday’s defeat of the Brexit withdrawal deal, Ben Lofthouse, Head of Global Equity Income, and Simon Ward, Economic Advisor, discuss the potential for a “hard” Brexit, which Parliament votes on today.
The outcome of the vote on Prime Minister Theresa May’s Brexit deal yesterday was largely expected, but the size of the defeat was larger than the UK government would have hoped. Therefore, in our opinion, the endpoint of the Brexit process – even at this late hour – remains very uncertain.
Yesterday there was an opportunity to achieve some clarity, but a vote in favor of Ms. May’s deal was always considered a long shot. As a result, there is no change to the order of events: a vote today on a “hard” Brexit at the end of the month, then a vote tomorrow on a delay.
It is expected that there is no majority for hard Brexit, and on that basis a delay is needed. The uncertainty comes in the form of the delay. The key question will become, what is the basis for the delay, and will the European Union accept it. There has been some reduction in uncertainty, in that a hard exit seems to be less likely, but it is fair to say that UK assets still remain unloved.
Following yesterday’s second heavy defeat for her European Union (EU) withdrawal agreement, we believe Ms. May has lost control of the Brexit process. This has increased the risk of a no-deal Brexit, despite parliamentary opposition to such an outcome.
There are three ways to avoid a no-deal Brexit. The first is for the hardliners of the Conservative European Research Group (ERG) and Northern Irish Democratic Unionist Party (DUP) to abandon their opposition to Ms. May’s deal. They won’t. The ERG hardliners desire no deal. The core members have fought for a complete break from the EU for 30 years and have never compromised with the party leadership. They would prefer Brexit to go down and to cry betrayal rather than accept what they view as a watered-down outcome.
The second possibility is that a House of Commons majority coalesces around a new agreement involving a softer form of Brexit, in which the UK stays in the customs union and single market. Such an initiative, however, requires a government to push it forward. A Conservative-led administration attempting to do so would split the party irretrievably and lose its majority. It is not even clear that a majority exists across the House of Commons for a soft Brexit – members of Parliament (MPs) representing “leave” constituencies could find it impossible to support an agreement allowing unlimited EU immigration, which was a key issue in the referendum campaign.
The third possibility is an extension to Article 50 to allow time for a new consensus to form, possibly involving another referendum with several options for voters to rank. Again, many MPs would regard this as failing to respect the original referendum result and would oppose it. More importantly, the EU might not accede. A long extension would require the UK to participate in European Parliament (EP) elections in May, possibly resulting in an influx of troublesome UK MEPs from a new Brexit party. It would also allow the UK more time to prepare for a no-deal exit, thereby reducing the EU’s leverage in future trade talks. Many EU businesses, moreover, have already implemented contingency plans for no deal and might prefer this to go ahead this year rather than suffer a further long period of debilitating uncertainty.
A reasonable central scenario would be for the UK to request and be granted an extension of Article 50 to June, avoiding a need for UK participation in the EP elections. Ms. May then uses this extra time to heap pressure on the ERG/DUP to accede to her deal, likely with no success. Parliament could then attempt to forge an alternative deal, which we think would probably run aground. Preparations would continue for a no-deal Brexit on both sides of the channel, with growing political and public awareness that such an outcome is likely.