RaboResearch - Economic Research

Brexit Update: It's the turn of the UK Parliament now

Economic Comment

  • The British Parliament will vote on the EU-UK deal on the evening of 15 January
  • The expectation is that the deal will be rejected and push the United Kingdom into a period of political turmoil in which various factions in parliament try to impose their favoured Brexit outcome such as an early general election or a referendum
  • The defeat margin is what can make a difference and parliamentary arithmetic does not bode well in that sense
  • We think that a ‘tweaked deal’ will be approved after all other options will have been exhausted. Some light concessions from the EU in the form of clarifications are likely. Hence, we still see an orderly Brexit as the most likely outcome
  • The cabinet will also need to reach out for consensus to various factions in the UK Parliament; the start of these talks will likely be the so called plan B that the government must table within three days
  • An extension of article 50 is likely if the deal gets rejected. The unanimous approval of the EU could be problematic if we are stuck in the current political gridlock in the UK
  • The game of chicken in the UK Parliament and the uncertainty around an eventual extension of article 50 maintains the odds of a ‘hard Brexit’ (no deal) almost as high as those of an orderly one. The odds of Bremain have picked up somewhat in the past month, but are still much lower

The UK parliament votes

The long awaited 'meaningful vote' of the UK Parliament on the deal the EU and the UK agreed upon in November 2018 is finally here. An initial vote on the deal on 11 December was cancelled by PM May in an attempt to get more assurances from the EU and thereby avoid a defeat. However, the situation has barely changed ever since and assurances provided by the EU in a letter released on 15 January is unlikely to have any impact. Consequently, it is expected that the UK Parliament will reject the deal during the vote stalled for the evening of 15 January. The question is not whether the deal will pass, but how big the defeat will be.

The UK House of Commons has 650 MP’s, but only 639 can currently vote. Hence the deal needs the support of 320 MP’s to pass, though abstentions can change this number. A defeat by a margin lower than 50 would be seen as a positive, while a margin higher than 200 would be a disaster and weaken PM May significantly. A defeat by more than 100 votes is regarded by many as weak and could unnerve markets.

Figure 1:Votes on the Brexit deal
Figure 1:Votes on the Brexit dealSource: Rabobank, House of Commons

Back on the envelope calculations of the parliamentary arithmetic do not bode well for keeping the margin low (Figure 1). PM May can count on the votes of roughly half of the 316 Conservatives in Parliament who are on the government payroll and need to resign to vote against the deal. Assuming the DUP will vote against the deal in line with their opposition against the Irish backstop, PM May needs to limit the number of Conservative voting against the deal to 21 (see Figure 1) to keep the defeat margin below 50 and to 46 to limit the defeat margin below 100. The group of Brexiteers has in the past been estimated at 40-80 and that of Conservative Bremainers at 20-30, so in the worst case that all these people vote against the deal the defeat margin would reach 227.

Game of chicken

Winston Churchill once said “you can always count on the Americans to do the right thing after they have tried everything else.” That is also our base case for the UK Parliament on the Brexit deal. The reason why we expect the deal to be rejected on 15 January is because it does not represent the optimal outcome for any faction in the UK Parliament. Labour, for example, will likely attempt to trigger an early election. Also, support for a second referendum has increased beyond the traditional camp of Bremainers in the past month so PM May could come under pressure to call one. We expect both actions to prove unsuccessful. An early election can only be held with the support of two thirds of Parliament and that would mean Conservatives voting against their own party and taking the risk that Labour could come to power. A referendum looks more likely, but is also fraught with contentious issues. For example, there is no consensus on which questions should be asked. Also, “no-deal” is likely to be an option if a referendum is called, and that could make MP’s that only see it as a last resort solution to avoid a ‘hard Brexit (no-deal) reconsider their support.

Building consensus

A more likely outcome is that the government will engage in negotiations with both the various factions in the UK parliament and the EU and that a somewhat tweaked deal will eventually pass through the UK Parliament. When we say tweaked deal we are referring to adjustments to the non-binding political declaration on the intentions with respect to the future EU-UK relationship annexed to the withdrawal agreement. The EU has repeatedly stated that the latter is not up for further negotiation. An additional EU Brexit summit might be required for the tweaks to be negotiated and approved. The Brexit debate amongst various factions in the UK parliament is also focusing on the envisaged future relationship with the EU. The start of negotiations within the UK Parliament will be the so called plan B that the government must table within 3 days after the rejection, since the plan is amendable. It is unclear when the vote on this plan is to take place, but legislation allows it to be even a month later, pushing uncertainty way into February.

Figure 2: Turn of events post- ‘meaningful vote’
Figure 2: Turn of events post- ‘meaningful vote’Source: Rabobank

So far, the only majority seen in the UK Parliament is that for avoiding a ‘hard Brexit’ (no-deal), as reflected by recent efforts in the UK Parliament to hinder such an outcome through legislation. And that creates room for PM May to reach out for consensus to the various factions. This could take the form of promises to empower Parliament in the future Brexit process (e.g. allowing them to vote on whether to extend the transition period in 2020), negotiations with Labour or holding indicative votes to gauge which 'deal tweaks' would attract the support of a majority of MP’s.

Therefore, a tweaked deal might be approved by the UK Parliament eventually, once various factions will have exhausted other options and the least preferred outcome of a ‘hard Brexit’ gets closer. However, this game of chicken is fraught with risks and that maintains the odds of a ‘hard Brexit’ almost as high as those of an orderly Brexit.

Brexit brinkmanship: extending article 50

Time is not on the UK’s side, as getting the EU-UK deal through parliament is not the last step towards an orderly Brexit. The necessary legislation also needs be passed by the UK Parliament. An extension of article 50 could provide some relief. The UK government can request with the approval of the British Parliament. Support is likely given the majority against a ‘hard Brexit’ there. But the unanimous approval of the EU Council is not for granted, though the tone in Brussels seems to have softened. In case of a marked shift in British politics through an early election or a referendum an extension is likely and could also be longer. The extension might turn problematic if the current gridlock persists and there is no progress towards a consensus on the desired Brexit outcome in the UK.

PM May has so far excluded an extension, probably in order to maintain time pressure on the UK Parliament through the ‘meaningful vote’. Her answers have become more avoidant in the past days, but until she states the opposite the odds of a ‘hard Brexit’ remain uncomfortably high. An extension however does not change the possible outcomes (Figure 3), which at this phase are threefold: an orderly Brexit by approving the withdrawal agreement (possibly with some amendments of the political declaration regarding the future relationship); a ‘hard Brexit’; or Bremain. As mentioned before the first two options are most likely. But increasing support for a referendum and the ECJ’s decision that the UK can unilaterally revoke article 50 makes Bremain an increasingly likely third option.

Figure 3: Possible Brexit outcomes
Figure 3: Possible Brexit outcomesSource: Rabobank
Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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