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Brexit update - Johnson in the lead

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  • In the first phase of the Conservative leadership contest Tory MPs selected Boris Johnson and Jeremy Hunt to go to the second phase
  • Tory party members will vote until 21 July and the winner will be announced on 23 July
  • Both candidates want to alter the current EU‐UK Withdrawal Agreement, something the EU is unlikely to accept
  • Time is a major constraint and not on the new PM’s side
  • Both candidates want to keep a no‐deal option on the table, but Hunt is considering an extension beyond 31 October while Johnson is not
  • If the new UK PM opts for a hard Brexit once EU negotiations fail, it will face firm opposition from the British Parliament
  • The ensuing conflict could triggeran early general election, unless the new PM opts for a second referendum
  • Either way, a third extension of Article 50 by the EU will be needed; we regard that as the most likely option on 31 October
  • In 2020 we still see the same three possible Brexit outcomes, an orderly Brexit, Bremain or a hard Brexit
  • While the three options are closely tied and the odds of a hard Brexit on 31 October remain uncomfortably high, an orderly Brexit is slightly more likely

Second round

The Tory leadership contest commenced on 10 June when the final candidates were confirmed.  The 313 Tory MP’s had four voting rounds to select two of the ten original candidates for the second round. Boris Johnson’s frontrunner position was confirmed in each voting round and by the final round he gained 160 votes. He and Jeremy Hunt made it to the second round of the Tory leadership election in which the 160,000 party members will vote between 22 June and 21 July. Meanwhile, the candidates will tour the country until 17 July and participate in 16 hustings along the way. The winner will be announced on 23 July. So far Johnson remains the frontrunner. As highlighted by recent incidents, the biggest threat to Boris is Boris (making a blunder), especially as he will find it harder to keep a low public appearance profile in this second stage.

Brexit strategy

Both Johnson and Hunt want to renegotiate the deal with the EU, including the Irish backstop. As we highlighted earlier, a renegotiation of the Irish backstop is unlikely to be successful, while changes to the non-binding political declaration on the future relationship are possible. From this perspective, Hunt might be more successful in Brussels than Johnson. But both candidates face an enormous constrain: TIME, which is not on their side. Both in the EU and in Britain, politicians are away for an August-long summer holiday, and will only return at the beginning of September. But British politics will soon thereafter get distracted by the Party Congresses at the end of September, whereas the EU is likely to be absorbed with many other processes and decisions in the aftermath of the European Elections of May this year. The cut-off date in Brexit is 31 October, but in fact the decisions regarding the UK’s departure will be taken at the EU Summit of 17-18 October. That gives the new PM a maximum of 6 weeks to negotiate a better deal with the EU, but the time window will likely prove shorter.

Both candidates are keeping a no-deal on the table. However, Johnson has stated that leaving on 31 October is the main priority, deal or no-deal – “do or die”, to quote him precisely. As his rival has pointed out, opting for a no-deal will most likely push the UK towards an early election through a motion of confidence against the cabinet in which Conservative MP would have to vote against their own party. Some have already warned they will do so and we assess a parliamentary intervention to hinder a hard Brexit as highly likely. The new PM can also opt for a referendum to break the gridlock while remaining in power. Either one of this outcomes would require a third extension which we regard as the most likely outcome on 31 October, though we also think the odds of a hard Brexit have increased with the resignation of Theresa May.

Brexit myths

Boris Johnson no-deal rhetoric has brought back certain Brexit options which had previously been rebuffed as unrealistic. This means that if in charge, he will have to face a harsh reality and make choices he is now keeping at bay by implying these options are viable. Let’s take a look at why so:

  • A standstill trade agreement. Johnson has said that the UK could make use of Article XXIV of the WTO’s GATT. This article allows for the adoption of an interim trade agreement on goods while two countries are negotiating a full agreement. There many issues with this article, but two of them are crucial: 1) such an interim agreement needs to have a plan, schedule and clear agreement the parties are working towards. This is not the case here, and the UK has not even made up its mind about the desired future relationship with the EU. 2) Both parties need to agree to the interim agreement. The EU seems unlikely to cooperate on this, as it has repeatedly stated that any negotiations (let alone an agreement) are only possible after ratifying the current Withdrawal Agreement, even if the UK chooses to leave without a deal in first instance.  
  • Not paying the Brexit bill. As the Office for Budget Responsibility has clearly calculated last year, the Brexit bill is not a lump sum payment. Instead, a large part of it is represented by liabilities formalized in contracts (e.g. pension of EU employees, subsidy contracts) that extent in time until 2064. Missing these payments is not necessarily tantamount to a sovereign default, but damages the UK’s standing with international creditors. The only part of the exit bill not formalized in contracts is the net contribution to the EU budget of EUR 18.5bn over 2019 and 2020. However, this was a commitment, so the EU could bring the UK to court and force the country to pay after all.
  • Negotiating the Irish backstop in the implementation period. In withdrawal agreement (WA) terms this would be the transition period, which can only start after ratifying the withdrawal agreement, including the Irish Backstop. The EU is unlikely to accept any alterations of the WA, as also stated by the officials after the EU Summit of 20-21 June.
  • Proroguing British Parliament. Some of the Tory candidates have ventilated the idea that of proroguing (ending the parliamentary session) the British Parliament ahead of 31 October so that MP’s cannot block a no-deal departure from the EU. Johnson has not excluded such a decision, though he has also stated he is not attracted to it.The prorogation of parliament is a decision of the PM, but there are some issues with it. First of all it is a prerogative of the Crown. Hence, it would drag the Crown into a political dispute, which looks like a complex situation. The Crown could drag on the execution allowing the Parliament to trigger an early election through a motion of confidence instead. Second, it would be an unsettling precedent for the UK’s democratic and constitutional institutions.  

Brexit outlook

If the third extension materializes, we still see three possible outcomes in 2020. However, the odds of either 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 amongst the population as in politics.

Figure 1: Brexit moving forward
Figure 1: Brexit moving forwardSource: Rabobank

 

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Author(s)
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2326 6856

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