Brexit Update – The End of the Beginning
Paul O’Connor, Head of the UK-based Multi-Asset Team at Janus Henderson Investors, discusses the difficulties Prime Minister Theresa May faces as she sells the draft exit treaty to her Cabinet.
This week, UK and EU negotiators reached a draft agreement on Britain’s terms for leaving the EU (the withdrawal agreement), including backstop mechanisms designed to ensure that Brexit does not create a hard border in Northern Ireland. Earlier today, the prime minister presented the draft exit treaty to her Cabinet, which approved the nearly 600-page document after a five-hour meeting. The broad plan here seems to be to get Cabinet approval today, then get a formal agreement signed off at a special EU summit in late November before seeking UK parliamentary ratification in December.
Securing Cabinet approval will be the first of many challenges for Theresa May’s Brexit process. In the lead-up to the meeting, it was widely reported in the UK press that a handful or more of the 22 Cabinet ministers opposed the plan and were close to resigning. While Ms. May described the Cabinet’s decision as a collective one, subsequent resignations could raise big questions about the prime minister’s ability to win parliamentary approval later on.
For some time, it has been clear that UK parliamentary ratification loomed as the biggest threat to the UK-EU withdrawal agreement. As things stand, the House of Commons’ arithmetic looks very challenging for Theresa May, with a significant number of Conservative MPs and the Democratic Unionist Party (DUP) threatening to vote against the deal. While there is a decent chance that the prime minister will ultimately be able to overcome the opposition she faces here, that process is likely to involve many weeks of disconcerting public hostilities. It is quite possible that the treaty is rejected the first time it is presented to Parliament and threats of a leadership contest, a general election or a second referendum will be needed to get it over the line in a second hearing in the new year.
Financial markets celebrated the draft agreement by sending the sterling higher against all major currencies. However, even with Cabinet approval, we believe the difficult process of parliamentary ratification is likely to keep a lid on sterling optimism in the weeks ahead.
The recent political progress should be seen as no more than the first few steps down a long and difficult road. It has taken more than two years to get this far, and there is a long way to go. Expect more surprises, setbacks and market volatility.