The Days of Brexit

Principal Economist's View 

In the almost three years since the UK public voted to leave the EU, developments around the future of the UK-EU relationship have seemed like a soap opera. Progress has been tediously slow. You could tune out for a while and when you come back the story line has not moved on at all. The plot lines, or should I say, the red lines are the same, week in, week out. Some actors have changed, but the main protagonist continues to face crisis after crisis.

But in any good soap opera, the story line always builds to a climax – the season finale if you will. And that is what we are fast approaching in the UK, with the scheduled Brexit deadline of March 29 just two weeks away. In case you missed the show in Westminster this week, here is a brief recap.

On Tuesday, Prime Minister May’s EU Withdrawal Agreement was voted down for a second time. The defeat, by 149 votes, was almost as overwhelming as the 230-vote loss seen in the first vote in January. About ¼ of the Conservative Party, Labour and the DUP voted against May’s deal. May had hoped for better, after securing a last-minute concession by the EU. These concessions included (i) a joint statement that the EU could not deliberately keep the UK in the EU via the Irish backstop arrangements (i.e. the Customs Union) by failing to negotiate a trade deal in good faith; (ii) a non-binding declaration that both sides would seek to develop alternative technologies at the Irish border by December 2020 so that there would be no need for the backstop; and (iii) a unilateral UK declaration that it could get out of the backstop should the EU not act in good faith and with its best endeavours to agree to a trade deal to replace the backstop arrangements.

Despite these concessions, Prime Minister May’s Withdrawal Agreement was doomed to fail following the Attorney General’s legal advice. His legal position remained unchanged – that the UK has no lawful means of unilaterally ending the backstop arrangements if there were simply intractable differences between the parties. In other words, the UK could effectively remain trapped in a customs union indefinitely if it signed the Withdrawal Agreement.

On Wednesday, the UK Parliament voted on whether it wanted a no-deal Brexit. Here the soap opera took a few surprising twists and turns. The original motion put forward by the Government was a vote on whether to rule out leaving without a deal on March 29. But an amendment was surprisingly passed by 312 to 308 votes to remove reference to the March 29 date, so that it rejected a no deal ever; the vote on this amendment was May’s second crushing defeat for the week. Due to this amendment, the PM then rallied her party to vote against the government’s (amended) motion. Here May lost her third key vote, with the motion approved by 321 to 278 votes. In other words, the UK Parliament has given a resounding signal against leaving the EU without a deal at any point. However, the problem is that this is not legally binding; under Article 50 the UK ‘will’ leave by March 29 unless the EU decides otherwise.

On Thursday, the UK Parliament then voted on an extension to Article 50. This was approved by 412 to 202 votes and allows the government to seek a delay to the Brexit deadline. The extension request will be either to the end of June if Theresa May’s Withdrawal Agreement manages to pass on its third attempt on March 19. Otherwise, the UK will seek a long extension to allow time to develop an alternative plan for Brexit. If the UK seeks a longer extension, potentially up to 2 years, it will likely be required to participate in the European elections in May.

What happens next? An extension of the Brexit deadline is not automatic. The EU’s remaining 27 members all have an opportunity to veto the extension. However, signals from the EU suggest that this is unlikely, and it is expected to agree to an Article 50 extension on March 21.  

But, will the scriptwriters include another twist-and-turn in this saga? The passage of Theresa May’s Agreement next week appears unlikely. However, the threat of a long extension to Article 50 could persuade some Conservative Brexiteers and the DUP to agree to May’s deal, despite the risks around the Irish backstop.      

If May’s deal dies, then a series of indicative votes will occur in the UK Parliament on March 20 on how to proceed. A second referendum cannot be ruled out. Although an amendment seeking a vote on a second referendum was overwhelmingly defeated in Parliament this week, this was because Labour decided to focus on the Article 50 extension first, not that it does not support another referendum. A softer Brexit than May’s current plan also remains on the cards; either a customs union or a Norway-style single market.    

In many respects, it seems like the Brexit soap opera has not moved on at all over the past two years. But there has been lots of drama and we should expect some more. However, let’s just hope the UK economy doesn’t end up in coma, which would be the likely outcome if a no-deal Brexit eventuates.      

Table 1: Financial market movements, 7 – 14 March 2019

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,808.5

2.2%

US

2.63%

-0.9 bps

US Dollar Index (DXY)

96.79

-0.9%

Nikkei 225

21,287.0

-0.8%

Japan

-0.04%

-3.4 bps

USD-JPY

111.70

0.1%

FTSE 100

7,185.4

0.4%

UK

1.22%

5.2 bps

GBP-USD

1.324

1.2%

DAX

11,587.5

0.6%

Germany

0.09%

1.9 bps

EUR-USD

1.130

1.0%

S&P/ASX 200

6,179.6

-1.3%

Australia

1.97%

-11.2 bps

AUD-USD

0.706

0.7%

Source: Bloomberg

 

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