Groundhog Day at the Brexit corral

As MPs prepare to vote on whether to back Theresa Mays deal for leaving the EU, Stephanie Kelly assesses the political and economic landscape.

The issues on Brexit remain the same. Deep divisions in the Conservative Party will continue to challenge Theresa May’s ability to get her withdrawal agreement through Parliament.

The European Union’s unwillingness to renegotiate illustrates the rules-based approach of European negotiators. Any changes are overwhelmingly likely to be cosmetic rather than substantive.

Equally, there are still reasons for Tory Brexiteers to think twice about opposing May’s plan. If they do so, they risk fatally injuring the Conservative government and increasing the likelihood of a general election. An election could result in a Labour government and a form of Brexit that those who are most in favour of it would like even less than May’s current plan.

Opposing the prime minister’s plan will also probably increase the selling of sterling and other UK assets, as investors focus their minds on what a chaotic Brexit could mean.

For these reasons, we maintain that there is a 40% likelihood that May’s withdrawal agreement passes through Parliament by the end of January. If not, we expect already strong momentum to accelerate for a second referendum.

Choosing “no deal” as a genuine exit strategy still seems unlikely. May has always avoided the prospect owing to the economic and political damage that it would likely cause to the UK economy and Irish relations.

More importantly, the balance in Parliament remains the same: while there is no majority for her withdrawal agreement, there is also no majority for a no-deal Brexit.

MPs could avoid a government-mandated hard Brexit with amendments to the implementation legislation that would be required for any outcome including a “managed” no deal. A referendum is the most likely option to break the gridlock, with support from all, excluding around 20 Labour MPs, Liberal Democrats, Scottish National Party and a number of Tory MPs.

The “Norway plus” solution has been discussed in the UK press, but it creates as many issues as it solves. European Economic Area (EEA) membership implies single market access without customs union; so the “plus” is a customs union to ensure free movement at borders.

However, countries inside the EEA, but outside the EU, are instead members of the European Free Trade Association (EFTA) - a group comprising Iceland, Norway, Sweden and Lichtenstein - that makes its own free trade deals. It is not clear that EEA members would excitedly welcome the UK to their group, as they would not be partaking in the trade strategy of EFTA.

It would also require free movement of people, which was a key tenet of the Brexit vote among both Conservative and Labour Leave voters. Membership would also require consent from all 30 EEA members, so negotiation would be required before entering, necessitating an extension of Article 50.

There are some suggestions from leaked media reports that Europe may offer some genuine concessions, perhaps around the so-called backstop, or by extending Article 50.

But these remain whispers from unnamed sources in articles, and the substance of any concessions will not become apparent until further down the line and only when Europe thinks that it is necessary to stave off a no-deal Brexit.

Europe has its own issues and Brexit is just one of them. As has always been the case, clarity on Brexit will come only at the very last minute.

Stephanie Kelly is a political economist at Aberdeen Standard Investments.

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