Brexit Update: The finals
- The EU and the United Kingdom reached an agreement on a draft deal on 13 November
- The Irish conundrum has been solved by keeping the UK in a Customs Union with the EU and Northern Ireland aligned with parts of the EU Single Market legislation for goods
- The UK could also stay longer in the transition period, something a Joint Committee in which both the EU and UK are represented will decide
- The timing is positive news as it leaves more time than expected for getting the deal through the UK Parliament
- However, given the diffuse and sometimes fluid positions on Brexit in the UK Parliament getting the deal approved will be very challenging
- Prime Minister (PM) May could first have to overcome a possible leadership challenge
- The rest of the year will be characterised by high uncertainty and high tensions
- We consider that the deal can be ratified by 29 March 2019, but we also see the chances of a ‘hard Brexit’ almost as high as those of getting an orderly Brexit
We have a deal!
On 13 November the UK announced they reached a draft deal with the EU in the Brexit negotiations. The 585 pages withdrawal document describes the divorce conditions between the EU and the UK, such as the financial settlement between the EU and the UK and the settlement of the rights that EU and UK citizens have built in the past, and was published on 14 November. The agreement also provides information on the transition period and a solution for preventing a physical border between Northern Ireland and the Republic of Ireland after the transition period. The terms of the future relationship between the EU and the UK are not part of the withdrawal agreement, though a political statement on this is annexed to the document.
The draft withdrawal agreement was published after the scrutiny of PM May’s cabinet on 14 November. Following a five hour tense meeting the cabinet provided their backing to the deal, though the ministerial resignations that followed the next day weaken this backing. The EU Chief Brexit Negotiator Barnier called the draft deal a ”decisive progress” towards an orderly Brexit and European Council President Donald Tusk pencilled in a Brexit dedicated EU summit on November 25, “if nothing extraordinary happens”. In case of complications, the EU summit of 13-14 December can also serve as a moment for the UK and the EU (Council) to sign the treaty.
Having the draft deal is positive as the timing is somewhat better than expected and that leaves more time for getting the deal through the British Parliament. However, as we have noted in earlier updates, getting an agreement between the EU and the UK is an important milestone, but is not the major hurdle for getting to an orderly Brexit. Getting the deal approved in the – severely divided - UK parliament is the decisive factor. The ball is now in the British court and the finals are being played at home. (see below). If all goes well the treaty will then have to be translated into British legislation and be ratified by the EU parliament before 29 March 2019.
Squaring the Irish circle
A large part of the 585 pages document is dedicated to a solution for preventing a physical border between Northern Ireland and the Republic of Ireland. In line with recent expectations, the backbone of the solution is de facto keeping the whole of the UK in the EU Customs Union and on top of that keeping Northern Ireland aligned to those rules of the Single Market on goods that are essential for avoiding a hard border. The customs territory excludes the fishing and aquaculture products until further agreements on access to fishing waters are made. In order to maintain a level playing field in the newly defined customs territory that includes the EU and the UK, the latter has committed to respecting specific provisions of EU law in the areas of taxation, environmental protection, labour and social standards and state aid. This back-up construction will be implemented only if by the end of the transition period the Irish conundrum cannot be solved by the eventual partnership agreement the EU and the UK will have agreed on. As the treaty also allows the UK to opt for a one-off extension of the transition period until “20xx”, the implementation of such a construction can further be delayed beyond December 2020.
The future relationship
As expected, the agreement also includes a non-binding political declaration on the future relationship in the appendix. The only 7 pages long document sketches the contours of what the EU and the UK intend to agree on during the transition period. On goods, the intention is to reach “comprehensive arrangements creating a free trade area combining deep regulatory and customs cooperation, underpinned by provisions ensuring a level playing field for open and fair competition”. The intention is also to have “ambitious, comprehensive and balanced arrangements on trade in services and investment”. The financial services relation will be underpinned by equivalence and it is the intention to conclude equivalence assessments by both parties before June 2020. All in all, in line with our call so far, the deal could take the shape of a comprehensive Free Trade Agreement that might include customs arrangements and that will be complemented by cooperation on other issues such as security.
The key battle is domestic
Now that the deal enjoys the backing of the British cabinet, getting it signed by the EU and the UK is within reach. However, the step with the most uncertain outcome is the vote on the deal in the British parliament, which is likely to be the toughest battle PM May has had so far. The agreement needs the vote of 320 MP’s out of 639 to pass (the House of Commons has 650 seats but only 639 can vote currently), though abstentions can reduce this number. The arithmetic in the House of Commons was never very encouraging. The position of the Irish DUP against the deal is not a surprise, since they had already indicated they would not support an agreement that could increase legislative divergence between Northern Ireland and the rest of the UK. We do note that the withdrawal agreement specifically highlights that under the back-up construction agreed it is up to the UK to prevent any further legislative divergence between the Northern Ireland and the rest of the UK.
The pro-Brexit Conservative camp of reportedly around 40 MP’s has been vocal against a ‘soft Brexit’ since PM May’s blueprint for the future EU-UK relationship this summer. Thus, their opposition to the deal does not come as a surprise either. The cabinet backing on 14 November was surprisingly positive in that sense. Since it occurred without the resignation of important eurosceptic ministers such as Fox, Hunt, Gove or Javid. Hence, the backing could generate political leeway for the deal with some Conservative Brexiteers. The relief was short lived, however. The resignation on 15 November of Brexit Secretary Raab, a pivotal figure in the last phase of Brexit negotiations, represents a significant blow and reduces the positive implications of the cabinet backing. More resignations could follow. Also concerning is the fact that pro-referendum politicians have openly called for MP’s to vote against the deal, thereby fragmenting the pro-EU Conservative camp in parliament. Given the above, it looks like PM May needs the votes of opposition MP’s to get the deal through the House of Commons. Labour’s official rejection of the deal makes the picture seem grim.
However, many analysts report that there is no ‘no-deal’ majority in the UK Parliament. MP’s have many other considerations to make when casting one of the most important vote in their careers. For example, Brexiteers might consider the fact that rejecting the deal in parliament could lead to a second referendum and, thus, a Bremain scenario. Such a rejection also increases the odds of a ‘hard Brexit’, which is something pro-referendum MP’s might be mindful of. Last but not least, while Labour has an interest in trying to trigger early elections, the party has repeatedly spoken in favour of a Customs Union with the EU in the past year and some Labour MP’s have rebelled in previous votes. All in all, getting the deal approval through the UK Parliament is not impossible but it will be very challenging. Some suggest it might take several voting rounds and significant market pressure to get an approval. The resignations on PM May’s team on 15 November pushed the GBP 1.6% lower against the USD and certain stocks were also bruised. A definitive rejection of the deal is likely to lead to a political chaos with several possible outcomes: a new PM, general elections or a referendum. The odds of a ‘hard Brexit’ would increase in this case.
But before we get the UK Parliament vote on the deal, the first question is whether Theresa May will survive an eventual leadership challenge by her Conservative party. As we highlighted on several occasions, this threat was there for months now. Past rumours failed to materialise into an actual motion of confidence by her own party. However, this time the rumours are accompanied by a public call by hardliner Rees-Mogg for the PM to step down. He needs 48 more Conservative MP’s to trigger a vote of confidence and the votes of 159 Conservative MP’s to get it passed. If PM May survives the following weeks unscathed, that could strengthen her political support with fellow Conservatives and therefore the chances of the UK Parliament approving the deal. Toppling PM May is likely to increase the odds of a ‘hard Brexit’ as she could be replaced by someone favouring less close ties to the EU. Her removal could also push the UK into a political crisis and lead to early general elections and even a referendum. In that case, an extension of Article 50, leading to a delay in the Brexit process, could be in the cards.
The division in British politics along Brexit lines does not come as a surprise and neither do the strong reactions to the negotiated agreement. Getting the agreed deal through the UK Parliament will be a major challenge for PM May, but not an impossible job. A very high level of uncertainty and tensions is likely to prevail until the end of the year. Meanwhile we still consider that a deal can be reached and ratified by 29 March 2019. However, we also see that the chances of a ‘hard Brexit’ (no-deal) are almost as high as those of reaching a deal.