RaboResearch - Economic Research

Brexit Update: Leading on the edge or off the edge?

Economic Comment

  • On 14 February another British Parliament vote on Brexit passed by without any change of course
  • The MP’s rejection of amendments it had approved only 16 days before highlights the difficulty of achieving a sustainable parliamentary majority on Brexit
  • It also highlights the ineffectiveness of Prime Minister (PM) May’s approach of catering to both Eurosceptics and Europhiles in her party
  • The easiest way to getting the current deal through the British Parliament seems cooperating with Labour and endorsing their preference for a permanent Customs Union with the EU
  • Such an outcome could lead to a rupture of the Conservative Party, which is why PM May is likely to take Brexit to the wire in trying to avoid it
  • This is a risky approach that maintains the odds of a no-deal (hard) Brexit almost as high as those of an orderly one
  • 27 February is the next milestone as MP’s will have another chance to influence the Brexit course
  • Given the parliamentary majority against a no-deal and plans to impose a request to extend article 50 on the government on 27 February, we still see an orderly Brexit as likely
  • An extension of article 50 is needed to achieve that
  • While EU unanimous approval of the Brexit delay is likely, uncertainty on this decision is likely to persist until the EU Summit of 21 March

British politics at crossroads

The meaning of a meaningless vote

On 14 February, a vote in the British Parliament on the government’s Plan B following the rejection of the EU-UK deal in January once again turned into a missed opportunity to change the Brexit path. Following an exciting first vote on the Plan B on 29 January, the government promised to give MP’s a second chance on 14 February and initially it looked like this could even be the second ‘meaningful vote’ on the deal. However, expectations were quickly downplayed. The vote itself was even more disappointing as just before the vote date it became clear that the motion the government was bringing forward was an endorsement of the two amendments approved on 29 January, namely the mandate to talk to the EU about alternatives to the Irish backstop and non-binding support for avoiding a no-deal outcome. The first was meant to appease the Eurosceptics in PM May’s Conservative Party and the latter was meant to appease to the Europhiles in her party. However, in the end the motion failed to garner the support of both groups and the government’s motion was rejected by 303 to 258 votes. This vote was meaningless in content, but the outcome teaches us a few things. First, the fact that the British Parliament rejected content it had approved only 16 days before highlights the difficulty of sustaining a parliamentary majority on Brexit. Though, of course, the contradictory content did not help. Second and most importantly, it highlights the fact that PM May’s approach of trying to cater to both pro-Brexit and pro-EU MP’s is not a very effective approach as it often fails to garner support with any of the two groups.     

My party or my country?

PM May’s approach to try to cater to both groups is driven by her intention to unite her party despite Brexit rifts. Or at least to deliver Brexit without creating a definitive rupture of the Conservative Party. It looks like PM May is trying to avoid such a division by keeping all options open until the last moment and then facing her party with a last minute decision and hoping Tory MP’s will unite and back her under pressure. However, a rupture might be inevitable. In fact, three pro-EU MP’s defected on 20 February, though that does not represent a significant rupture. An easier way for PM May to get her deal through the British Parliament would be to support Labour’s preferred Brexit outcome of a permanent Customs Union. Labour leader Corbyn has expressed support for a deal that leads to this outcome in an official letter on 6 February. This is also an option the EU’s Brexit negotiator Barnier has expressed support for as it could be included in the political declaration attached to the withdrawal agreement. PM May has rejected this option on ground that it does not allow for an independent UK trade policy. However, neither does the Irish backstop in the current deal, though the backstop is meant as a solution of last resort. Hence, it seems that PM May’s rejection of a permanent customs union is driven by her fear that shifting towards a softer Brexit will push the Tory Brexiteers to break with the party. The main question therefore is whether national interest will prevail over party interest when a choice between the two can no longer be postponed.

Conservatives are not the only ones struggling with rifts along Brexit lines, though other issues also play a role there. On 18 February 7 Labour MP’s whom are in favour of a referendum announced they were leaving the party to form an Independent Group. Another defection followed later. This split could work both ways, pushing Labour towards increasing support for a referendum or towards reducing such pressure from within the party. So far, Labour leader Corbyn seems to maintain his position of favouring renegotiations with the EU towards a permanent Customs Union, close alignment with the EU single market and on rights and protections. This bodes well for getting an adjusted deal approved by the British Parliament, though it would require support from across the House.

Down to the wire?

Back to Brussels

The UK government is heading back to Brussels in the week of 18 February. This time UK attorney- general Geoffrey Cox, whom has provided legal advice on the Withdrawal Agreement, is joining the team. His judgement on eventual adjustments to the deal are regarded as essential for winning over the Brexiteers in the Conservative party. PM May will join the team later in the week for talks with EU Commission President Juncker. She also is pursuing talks with the leaders of the EU27.

The defeat on 14 February has weakened PM May’s position in discussions with the EU. The block will likely be careful with any concessions in the absence of a clear position of the British Parliament on Brexit. Various EU officials have reiterated the readiness to provide additional clarifications, but also the refusal to reopen negotiations on the withdrawal agreement. Given the “all weather” character of the Irish backstop and the fact that alternative arrangements have already been investigated the EU is unlikely to move on the withdrawal agreement. But further reassurances or adjustments of the political declaration are possible. Actually, rumour has it such adjustments are in the making and the PM intends to schedule a second meaningful vote on the Brexit deal before 27 February.    

Next stop: 27 February

The vote on 14 February passed without serious amendments because PM May asked MP’s to give her more time for talks with the EU. Part of the deal was a new vote on the Brexit course on 27 February. However, the majority of the British Parliament wants to avoid a no-deal Brexit and some regard 27 February as an important moment to force the government’s hand to exclude this option. The truth is that the UK does not seem ready to leave the EU in any form, since without additional pieces of law the exit would cause serious legislative vacuums and there is insufficient time to solve this before 29 March. Hence, it is questionable whether the government would push a no-deal through. However, PM May might be willing to take Brexit to the wire and only apply for an extension of article 50 last minute. This approach was recently reinforced by Olly Robins, the PM’s Europe advisor, whose discussions with colleagues in Brussels were overheard by the press. The good news is that such a situation could be avoided if the British Parliament will indeed manage to impose a request for the extension of article 50 on the government on 27 February. The approval of such an amendment could likely reduce the odds of a hard Brexit markedly.

The less positive news is that some uncertainty will persist, as the confirmation of the extension will take longer. The Cooper amendment currently in the pipeline for imposing a Brexit delay requires the government to ask extension only if no deal will have been approved by 13 March. Moreover, the unanimous approval of the EU27 is not for granted, though likely. And because an EU summit is needed for such a decision and one is planned for 21 March it is likely that a resolution will have to wait until this date.   

What next?

Given the majority in the British Parliament against a no-deal and the opportunity to impose an article 50 extension request on the government we still regard an orderly Brexit as likely. An extension of article 50 will be needed to achieve this, given the legislation work that is needed to translate a deal to British law (Fig 1). Extension is likely. However, if the extension decision is left to PM May she is likely to take the Brexit to the wire in an attempt to avoid a division of her own party and in order to pressure various decision makers. A risky approach that could lead to a no-deal (Hard) Brexit by accident. We see the chances of this outcome almost as high as those of an orderly Brexit.

Figure 1: An extension is needed for an orderly Brexit
Figure 1: An extension is needed for an orderly BrexitSource: Rabobank
Alexandra Dumitru
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
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