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The Brexit mess continues. Is it an unsolvable conundrum?


What happens when you try to deliver Brexit within a hung parliament of which around two thirds of MPs are considered “remainers”? The answer, much to everyone’s consternation, is a log-jam where nothing can get through. It would seem that Brexit is the circle that cannot be squared. A multitude of different opinions and significant issues over the Irish Backstop mean that the Government has been unable to deliver Brexit by its own mandated deadline of 29th March. Theresa May has tried three (well, two and a half) times to get her Withdrawal Agreement through the House of Commons in a so called “meaningful vote”, but each time she has lost (albeit by decreasing margins). The EU-27 has granted the Prime Minister a short extension to Article 50 but her failure to get her deal through Parliament means that the UK has until 12th April to indicate a different path for Brexit. How will the situation evolve and what are the implications for sterling?

Brexit question what next (1)

Over recent weeks, as the Government has lost numerous votes on its deal and other various procedures, Parliament has gradually taken increasing control of the Brexit process. In voting to grant itself the power to drive the process (significant constitutional implications aside), Parliament has undertaken a series of indicative votes to try and work out what to do. Here we look at the next steps and whether Brexit is a conundrum that simply cannot be solved.

 

Firstly, what of Theresa May’s Deal?

Theresa May already has an agreed deal with the EU-27, but simply put, the UK Parliament hates it. Mrs May has alienated so many people along the way. Be it either through horrific expectations management, or a lack of inclusivity, she has been unable to get enough votes to get it through Parliament. May has struggled to persuade her confidence and supply partners, the DUP (issues over the treatment of Northern Ireland in the Backstop), and also the Brexiteer wing of her Conservative MPs (who want a harder Brexit). Even after saying that she would step down as Prime Minister if her deal were to be passed, a third Meaningful Vote (MV3) failed. According to Parliamentary sources, if there were to be a secret ballot of MPs, it is quite possible that the deal might pass. However, May’s inability to act as a competent front line politician, or leader have rendered her deal toxic to those who oppose her.

Add to all of this, the House Speaker, John Bercow, has ruled that the Government cannot just keep bringing back the same deal to be voted upon time and again. In the absence of significant “changes”, there will not be a fourth attempt to get her deal passed. If by some form of chicanery, there were to be yet another vote on essentially the same deal, there is still a small chance that it could squeeze through, simply due to panic over a no deal Brexit. However, this is still not our base case scenario.

 

PARLIAMENT TAKES CONTROL – EVEN THAT FAILS

Could someone other than the Prime Minister cobble together enough support for a version of Brexit to pass through Parliament? With the Government in paralysis over Brexit, the plan from opposition MPs was to table a series of indicative votes in order to see what Parliament could get behind. Could MPs finally coalesce around some other kind of solution?

In short, no.

Each vote failed and Parliament once more showed what it does not want, rather than what it can support. The takeaway from these votes is that with the Cabinet abstaining (and reportedly unofficially whipping its MPs to vote against), this has contributed to the lack of direction. However, there were also a portion of Labour MPs (from “leave” constituencies) that, had they voted differently, could have ensured that something got through. Both the Customs Union and the “Common Market 2.0” options (which involves single market and customs union membership) were close, but did not get through. A second referendum was also close, but ultimately failed.

There is an appetite for a softer form of Brexit through a customs union or EFTA/EEA Norway plus style Common Market 2.0. However, with MPs voting records public knowledge, it means that party lines and whipping largely drags all the alternative options off the table. It is also notable to say that these votes are indicative (non-binding) and even if one was passed, would Mrs May even abide by it?

Mrs May will likely try for a final time to get her deal through (fourth time’s a charm?). It is important to remember that in her third attempt, Mrs May got 286 votes (344 votes against, a defeat of 58), so at least 30 MPs need to switch allegiance from the opposition benches. This is highly unlikely. Also, even if May scrapes the deal through, this does not necessarily mean the end of the matter as there will be lots of votes still to get the deal into legislation and an unstable majority does not make this a formality.

With nothing emerging from the indicative votes and Mrs May’s deal consistently failing, what does this mean for Brexit and the Prime Minister?

 

WHAT NEXT?

In all likelihood, we are looking at a lengthy extension to Article 50, purely because there is no other palatable option. A “no deal” Brexit results in a massive breakdown of the Conservative government; and no Brexit at all (revoke Article 50) does not command enough support in Parliament. In short, it is an absolute minefield (to put it politely).

One thing is for sure, there is no appetite for a “no deal” hard Brexit. Therefore, this means that the first thing the UK needs to do is beg the EU-27 for another, much longer extension, before 12th April. There is likely to be another EU Summit around 10th April in order for this to be discussed. Donald Tusk is certainly all for a longer extension:

A much longer extension would probably be for a year or 21 months (to the end of 2020), during which time an enormously visceral set of European elections will need to be held. However, will sceptics such as President Macron even go for this option? Macron seems to be increasingly fractious over the UK putting a spanner in the works of his European dream and the UK staying temporarily in as a wounded animal may drive him to veto. Again, a Marcon veto is not a base scenario and a much longer extension would likely be granted (reluctantly). In that situation, all options still remain on the table.

 

The winds of change?

Mrs May is Prime Minister but she does not command the support of Parliament. Can she continue to lead the Brexit process? Will she resign? Will there be a general election?

Surely, with a long extension Mrs May would have to resign as Prime Minister. She has already said to the 1922 Committee (backbench Tory MPs) that she would step down once her deal got through. However, May’s authority has been fatally damaged. Already the papers are full of a leadership contest and the writing is on the wall. If there needed to be re-negotiation for a different deal, May has lost all credibility to lead the UK’s team. Furthermore, she said recently that she could not lead the UK into European elections, which would need to be held if the UK was granted a long Article 50 extension.

But who would replace her? May’s resignation would cause huge ructions in the Conservative Party. There are many candidates who would be willing to replace Mrs May, but under the circumstances, logic suggests that only a more consensual leader would be needed to shift the numbers in Parliament. Parliament has indicated the desire for a softer Brexit than Mrs May negotiated. However, the Conservative Party membership is far more extreme on Brexit than much of the country and certainly than a remain-leaning Parliament. A Brexiteer Prime Minister (such as Dominic Raab or, heavens preserve us, Boris Johnson), would not be able to negotiate a softer Brexit in good faith. So it would have to result in a general election to legitimise any renegotiated deal..

 

ANOTHER VOTE IN 2019

I still believe that the UK will be voting again in 2019, whether it be another general election, or a second referendum.

With Parliament in such a febrile mess, a general election is becoming a distinct possibility. It would need to be either driven by :

  • The Government – two thirds of MPs need to vote in favour (little appetite for this)
  • The Opposition – could there be another vote of no confidence in the Government? Given how the numbers are ebbing away from the Government majority, this is becoming a distinct possibility to win a simple majority. If so then a general election would be highly likely.

 

A public vote (second referendum) on any deal seems to be gaining support and is a growing possibility. There have been 6 million signatures put to a “Revoke Brexit” petition on the Parliament website, and the (supposed) million person march demanding a second “people’s vote” in London. This is the public fighting back against Brexit. Of all the indicative votes on Monday, a second referendum got the most votes in favour. Could Mrs May take on a confirmatory referendum to her deal? It would probably bring enough Labour voters over to get the vote through Parliament. However, given the number of signatures, there certainly seems to be an appetite growing for Revoke Article 50 and stopping Brexit all together. Adding a second referendum to get Mrs May’s deal across the line could be a double edged sword for a Government that is intent on delivering Brexit.

 

WHAT A MESS!

What should  happen?  It is our belief that unless there is some give and take across Parliament, Brexit is a conundrum that cannot be solved and we are in for a long extension to Article 50. Given the complete lack of consensus on any approach, the only way forward that has a chance of surviving and is perhaps the best compromise for the UK is May’s deal with a second referendum. Her deal is the only one on the table and if she were to tack on a second referendum to confirm that this is what the country wants, then this would be sensible. However, this will not happen because the Government know this is an unpopular deal in the country that would not survive a referendum.

What should not  happen? In short what is the point of leaving the EU only to go into a Customs Union (a rule taker, no right to make trade deals) or Common Market 2.0 (a rule taker, with paying money into the EU budget and requiring freedom of movement)? Both options are a downgrade on the benefits of full EU membership, with none of the benefits of being outside the EU. Absolutely pointless, and the UK would be much better served to remain in the EU.

What will  happen? Intransigence will continue, a long extension to follow and basic government will breakdown. This will lead to a general election. This is the hardest scenario to forecast for as a general election comes with the tail risk of Jeremy Corbyn as Prime Minister. However, it could also lead to a softer Brexit or even no Brexit at all. It would likely be a wild ride for sterling.

 

IMPLICATIONS FOR STERLING

In recent weeks even as the uncertainty over Brexit has increased, sterling has remained remarkably well supported. There seems to be a line in the sand now above $1.3000. Given the failed indicative votes and Mrs May’s deal which still cannot pass, sterling seems to at least be priced for one thing, that a hard “No deal” Brexit is off the table. Although there has to be the potential for no deal (on a technicality), it is clear that it will not be driven by Parliament now. Also Parliament would surely move to reject that option if the Prime Minister looked to go for it.

Sterling volatility on one week options remains elevated and at its highest level since the referendum, so there is clearly still a risk of significant moves ahead.

 

What are the potential levels for GBP/USD?

No deal – Perhaps the EU could deny the UK a longer extension to Article 50 (driven by Macron perhaps), and this raises the potential for “no deal” on a technicality. In Parliament, the overwhelming majority of MPs are against no deal and this is why GBP/USD has not fallen on the uncertainty. GBP/USD at $1.1500/$1.2000 – Probability 20%

May’s deal passes – (eventually) This would lead to the most certainty for the economy and at last allow the country to move on from Brexit. GBP/USD at $1.3600/$1.3800 – Probability 30%

Softer Brexit – Common Market 2.0/Customs Union/Second Referendum coming after another forced extension to Article 50. GBP/USD at $1.3800/$1.4000 – Probability 30%

Revoke Article 50 – A forced binary choice between no deal and revoke Article 50 would likely mean that revoke would win and the UK would stay in the EU. GBP/USD at $1.4200/$1.4400 – Probability 20%


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.