RaboResearch - Economic Research

Brexit update – Brexit 2.0

Economic Comment

  • The Conservative party has elected Boris Johnson to be the new leader of the party and Prime Minister (PM) of the country
  • Boris Johnson’s first speech and cabinet appointments reflect his tough electoral rhetoric on Brexit
  • Time is a major constraint and not on the new PM’s side, who has a maximum of 6 weeks to deliver Brexit
  • If the new UK PM opts for a hard Brexit once EU negotiations fail, he will face firm opposition from the British Parliament
  • Such a conflict is likely to lead to an early general election, an outcome the new PM might be able to avoid by opting for a second referendum
  • Either way, a third extension of article 50 by the EU will be necessary and we regard that as the most likely option on 31 October
  • The odds of a hard Brexit on 31 October remain uncomfortably high
  • In 2020 we still see the same three possible Brexit outcomes, but the odds of the three are closely tied, with an orderly Brexit being slightly more likely than a Bremain or a hard Brexit

Boris Johnson Prime Minister

The members of the Conservative Party have chosen Boris Johnson to be their leader and the new PM of the UK. Johnson won a landslide victory, gaining 66% of the roughly 140,000 votes casted. Some would regard this as an endorsement by party members of Johnson’s harder stance on Brexit. This stance includes his aim for a departure from the EU on 31 October, “no ifs or buts”. Given Johnson’s track record of opportunistic behavior, one could expect his Brexit approach to become more pragmatic now that the campaign has ended. However, his first speech and cabinet appointments hint toward the opposite. Seventeen ministers from May’s cabinet either resigned or were fired and their replacements are mainly eurosceptics. The appointment of hardliner Dominic Raab as Foreign Secretary and the retention of Stephen Barclay as Brexit Minister gives body to the shift towards a tougher stance on Brexit. So does the controversial appointment of Dominic Cummings—the leader of the 2016 Leave Campaign—as a chief adviser, and the appointment of hardline Brexiteer Jacob Rees-Mogg as Leader of the House of Commons. 

Brexit déjà vu

Boris Johnson’s approach to Brexit might be different from Theresa May’s, but he seems to be following his predecessor’s footsteps in terms of trying to square circles. Namely, his Brexit rhetoric falls back on various myths that have already been deemed unrealistic during the negotiations led by May, as also explained in our previous note. Some of these myths also came back in his first speech. For example, he intends to avoid checks at the Irish border without the “undemocratic backstop” while pursuing a “a new and exciting partnership with the rest of Europe based on free trade and mutual support”. But leaving the EU Customs Union and Single Internal Market leads to checks at the border, and these cannot be eliminated by a free trade agreement. Which has been the main reason that the EU insisted on including the Irish backstop in the Withdrawal Agreement in the first place. And the EU is unlikely to budge on this.

Another example of a myth is the Brexit dividend, the GBP 39bn bill (amount which has become lower after the extension of article 50) that the new PM intends to use to finance his expansionary fiscal plans that would “lubricate” the departure from the EU. But the Brexit bill is not a lump sum payment. Instead it consists of various liabilities formalized in existing contracts that run up to 2064. The only savings the UK could make post-Brexit are on the 8bn GBP net contribution to the EU budget in 2020. As a matter of fact, a hard Brexit comes at a fiscal cost. The Office for Budget Responsibility indicated in the Fiscal Risks Report of 18 July that a hard Brexit would increase borrowing by GBP 30bn a year as of 2020-2021. These Brexit myths mean that the new PM will be confronted with a reality check soon and will then be forced to either back down on his intentions or opt for a hard Brexit on 31 October.

Time is not on Johnson’s side

The new PM wants to “crack” Brexit in 99 days. However, Johnson’s time constraint is even tighter than that. With both the EU and the UK parliaments on vacation in August and the EU Summit on the course of Brexit scheduled for 17-18 October, the PM has a maximum of six weeks to deliver Brexit. Theresa May did not manage to do that in three years, and one of her main hurdles was the British Parliament. Boris Johnson faces the same unfavorable parliamentary arithmetic. Actually, the thin majority of three seats that the Conservatives enjoyed in Parliament has only been getting thinner and could be reduced to one after the Brecon and Radnorshire by-election on 1 August. On top of that, the number of Tory MPs that have stated their intention to vote against the government as an option of last resort to prevent a no-deal Brexit has been increasing—and their number is likely to be swelled by the ministers that Johnson fired on his first day in office. Tory MPs opposing a no-deal Brexit have recently flexed their muscle and managed to amend the Northern Ireland Executive Formation Bill to make it harder for the new PM to prorogue Parliament in October. Similar interventions are expected if the PM sets course for a hard Brexit.

Brexit to get messier

We see a third extension of article 50 as the most likely outcome on 31 October, but the odds of a hard Brexit remain uncomfortably high given the fact that Johnson’s plans to negotiate a better deal that excludes the Irish backstop are poised to fail. Opting for a hard Brexit will face the opposition of the British Parliament, a gridlock that can only be resolved by an early general election or a second referendum. The first option seems more likely at the moment, as the numbers in Parliament seem to be there to topple the government through a confidence vote. Actually, Johnson himself might call a snap election emboldened by recent polls that place the Conservative party in the lead again. There are some omens that Boris Johnson might be preparing to campaign on a no-deal ticket. However, polls place the four largest parties at a close distance from one another, so the chances of a hung Parliament after elections are high. Johnson might forms an alliance with the Brexit party, which does not seem inconceivable but still does not add up to a majority. An alliance in the Remain camp, on the other hand, looks less likely. Either way, none of the blocks can form a majority

All in all, the outcome of the Brexit will remain very uncertain in the coming months and the odds of a hard Brexit in October remain uncomfortably high. We do see a third extension as more likely though, pushing the Brexit decision into 2020. We still see three possible outcomes in 2020. However, the odds of any of these outcomes materializing are closely tied, with an orderly Brexit slightly more likely than a Bremain or a hard Brexit. The reason for this very uncertain outlook is the high degree of polarization in the UK, visible both among the population and in politics.

Figure 1: Brexit with Boris Johnson in the lead
Figure 1: Brexit with Boris Johnson in the leadSource: Rabobank


Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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