RaboResearch - Economic Research

Brexit Update: Extreme brinkmanship

Economic Comment

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  • The British Parliament rejected the EU-UK Brexit deal on 15 January in a historic defeat for the government
  • The vote on the government’s follow up plan on 29 January was regarded as a unique opportunity for the British Parliament to assert more influence on the Brexit course
  • However, the British parliament backtracked and an amendment that would oblige the government to request an extension of article 50 with the EU failed to pass, amongst others
  • Further votes revealed nothing new, as the fact that there is a majority against a hard Brexit in the British Parliament was already known
  • The fact that the cabinet did support an amendment that envisages the adjustment of the ‘Irish Backstop’ surprised on the negative side as that is not constructive for the path to an orderly Brexit
  • Fortunately, reaching out to the opposition for consensus is another way to reach an orderly Brexit, particularly as the EU is more likely to agree to adjustments that are related to the future relationship and therefore not part of the withdrawal agreements, but its appendix
  • Labour’s official support for a permanent Customs Union with the EU bodes well for garnering support for a slightly adjusted EU-UK deal in the British Parliament
  • Therefore we maintain our expectation that once all other options will have been exhausted a somewhat adjusted EU-UK deal will be approved by the UK Parliament. A second vote on the deal is planned for 14 February. An extension of article 50 is highly likely
  • However, the current game of chicken in British politics is a risky approach, in particular Prime Minister (PM) May’s approach of keeping all options open, including a hard Brexit
  • Thus, we maintain our assessment that a hard Brexit is still almost as likely an orderly one
  • We also note that Bremain remains an option given the increasing support for a referendum in the past month, though we see the odds to be much lower than the other two outcomes

The British Parliament’s turn

Brexit deal rejected

As we had anticipated, the deal the EU and the UK agreed in November 2018 was rejected by the British Parliament in a first vote on 15 January. The defeat margin of 230 votes is a historic record and way worse than expected. It was in line with the worst possible outcome we had calculated a day before the vote assuming the opposition, the coalition partner DUP and both Brexiteers and Bremainers in the Conservative party would vote against the deal.

This means that besides the Conservatives on the government payroll who need to resign to vote against the government only 48 moderate Tories supported the deal. The main reason the deal was rejected is the fact that it does not represent the optimal outcome for any faction in the UK Parliament. Labour, for example prefers triggering an early election as they have a high chance of coming to power. Which is what they also did the day after the deal was rejected. Namely, Labour submitted a motion of no confidence in the cabinet, but this failed to garner sufficient support in the British Parliament. The threat of an early election however persists and labour could make another attempt if they sense PM May’s position weakens markedly.

British Parliament backtracks

Following the rejection of the deal the government tabled a follow up plan, the so called ‘Plan B’ in Parliament. The vote on this amendable plan B took place on 29 January and it was regarded as the perfect opportunity for the British Parliament to influence the course of the Brexit process, something which according to rumours was likely to happen. One of the amendments that could have shifted the balance was an amendment that required the government to request an extension of article 50 if the Brexit deal was not approved before 26 February. However, the British Parliament backtracked and this amendment was rejected by 321 to 298 votes. We do note that the amendment was also controversial as it could create a precedent in shifting power from the executive to the legislative.

Several other amendments would have given Parliament the chance to reveal their preferences by allowing for indicative votes on the various Brexit options, such as a second referendum, a permanent Customs Union or a Norway style relationship. Such indicative votes could help break the current gridlock in British politics and give PM May a basis in further talks with the EU on how to tweak the deal in order to make it palatable for the British Parliament. An amendment rejecting the option of the UK “leaving the European Union without a Withdrawal Agreement and a Framework for the Future Relationship" passed with the support of 318 MP’s. But that only confirms the already known fact that there is a majority against a hard Brexit in the British Parliament. Expectations were high before the 29 January vote, but instead the vote turned into another missed opportunity to reduce Brexit uncertainty.

Tweaking the deal

Mission Impossible

One of the amendments that the cabinet itself supported and also passed with the support of 317 MP’s was the one that requests the government to seek “alternative arrangements” for the Irish backstop. This amendment was initiated by Tory Brexiteers and the cabinet decided to back it to appease to them. The government’s support of this amendment was surprising given the fact that PM May had often stated that the current deal was the best possible arrangement the EU and the UK could reach and a stretch on the EU side to accommodate UK’s desire to limit further divergences between Northern Ireland and the rest of the UK. Coming back on her own agreement with the UK could cause the EU to question the reliability of the UK leader as a negotiation partner. However, support for the amendment allowed the PM to at least reunite the Leave-Remain factions of her own party.

The support is also surprising because the EU has repeatedly stated that the core of the deal, the withdrawal agreement, is not up for renegotiation. Besides, the so called “alternative arrangements” are already considered in the withdrawal agreement as an option to avoid having to fall back on the ‘Irish Backstop’. As these arrangements can currently not prevent the erection of a hard border between Norther Ireland and the Republic of Ireland, the withdrawal agreement leaves it up to a Joint Committee in which both the EU and the UK are represented to decide whether this will have changed at the end of the transition period, when the ‘Irish backstop’ could kick in. Given the fact that the ‘Irish backstop’ by definition needs to be an “all weather solution” it is unlikely that the EU will agree to alter the current construction. The EU might agree to further assurances or clarifications though.

Alternative pathway to an orderly Brexit

Fortunately, gaining the support of the Tory Brexiteers is not the only way to get the EU-UK deal through the British Parliament. Reaching out to the opposition to reach a consensus on a desired future relationship is another way, though this could split Pm May’s party down the middle and is therefore difficult for her to do. From that perspective it is positive that PM May has also started this trajectory on 30 January when she held an official meeting with Labour leader Jeremy Corbyn. Further steps are also being carried out. The government has reportedly approached Labour MP’s to discuss “cash injections into poor constituencies” and ensuring the protection of environmental and workers’ rights post Brexit. Talks with various MP’s are planned for the coming week. Labour has officially expressed support for a permanent Customs Union in the past, a form of cooperation with the EU that differs little from the Irish Backstop and one that the EU could consider including in the political declaration on the future relationship. This bodes well for the cabinet’s efforts to gain support with Labour MP’s.

What’s next?

Don’t go Brexit my heart

Figure 1: British parliament arithmetic
Figure 1: British parliament arithmeticSource: Rabobank

PM May is expected to return to Brussels for further talks in parallel to the ongoing consensus seeking efforts at home. A second vote on the deal is planned for 14 February (Figure 2). The parliamentary arithmetic is still not in PM May’s favour. Given her thin majority in Parliament she can only afford losing 6 votes of coalition MP’s (Figure 1). Every additional vote lost needs to be compensated by support from opposition MP’s. Quite a daunting task for the government, but not impossible given the parliamentary majority against a hard Brexit and the time pressure.

Extreme brinkmanship

The time pressure is on the other hand a huge matter of concern. The vote on 14 February leaves us in uncertainty until 6 weeks before Brexit day or longer. And British politicians have just pushed the game of chicken to another level. For example, PM May’s support of the “Irish backstop” amendment might be an attempt to keep Brexiteers in check. However, the amendment can also be seen as a way for Brexiteers to keep PM May in check, by keeping the option of a hard Brexit alive. Namely, she is unlikely to request the EU for an extension of article 50 while trying to garner their support. The option of a hard Brexit also maintains the pressure on those MP’s that are against a hard Brexit and the EU. This is unlikely to bear fruit with the EU who is unlikely to cave in to pressure the alter the withdrawal agreement.

Figure 2: What’s next?
Figure 2: What’s next?Source: Rabobank

Expectations

However, even in the best case that the EU-UK deal gets approved by the British Parliament on 14 February, there is insufficient time to translate the deal into legislation. PM May’s approach of maintaining the risk of a hard Brexit alive is extreme brinkmanship that can lead to a hard Brexit by accident. Namely, the 29 March exit date is currently dictated by British legislation which needs to be altered to avoid it. We maintain our expectation that a deal will eventually be reached, but given these circumstances we also still assess the chances of a hard Brexit to be almost as high as those of an orderly one. We also note that a Bremain is also still possible, though we think the odds are much lower than those of the other two outcomes. Support for a referendum has grown in the past month and the threat of a hard Brexit could push a majority of MP’s to support such a vote once this is the only option left. However, we note that a win for the Bremain camp cannot be taken for granted, despite better performance and taking the lead in recent polls.

Figure 3: Rabobank's expectations
Figure 3: Rabobank's expectationsSource: Rabobank
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Author(s)
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60441

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