RaboResearch - Economic Research

Brexit Update: In uncharted territory, again

Economic Comment

  • Article 50 was extended during the EU Summit of 21-22 March
  • The new cut-off date is 12 April, the deadline for UK to either approve the Withdrawal Agreement or come up with a follow up plan that includes a decision on holding European Parliament (EP) elections
  • An additional extension to 22 May is contingent on the UK approving the Withdrawal Agreement by 29 March
  • Odds seem to be turning in favour of the current deal in a third meaningful vote (MV3), but resistance by the DUP means that the chances of an approval on 29 March are slim
  • A rejection would bring us in uncharted territory again, as the pressure will be high to get the deal through the British Parliament before 12 April and an extension beyond this date becomes uncertain
  • Nevertheless that will not be the end, as MP’s could reach a consensus based on cooperation across the House of Commons and leveraging on Labour’s support for a customs union
  • An orderly Brexit remains our base case and the high support for a permanent customs union with the EU revealed during the indicative votes on 27 March bodes well in that sense
  • However, given the gridlock on Brexit in British politics the odds of a Hard Brexit are almost as high
  • A longer extension is also a possibility, but it depends on the UK holding EP elections and a major shift in British politics
  • A Bremain also becomes a possible outcome in this case

Article 50 extended

New cut-off date

In line with the decision of the British Parliament on 14 May the UK requested an extension of article 50 during the 21-22 March EU summit. As expected, the EU27 leaders unanimously agreed to an extension, though the EU did not approve 30 June to be the new exit date as requested. Instead the EU leaders came up with an own timeline, as follows: article 50 is extended up to 12 April to give the UK the time to either approve the EU-UK deal or come up with a follow up plan; a further extension to 22 May is contingent on the UK approving the Withdrawal Agreement by 29 March. These dates were also carved in British legislation by the British parliament on 27 March. A Hard Brexit on 29 March is therefore 100% off the table and the new cut-off date in the Brexit process is 12 April. A longer extension also remains a possibility and the UK holding EP elections is a hard condition for that.

Full of surprises

As usual in the Brexit process the extension of article 50 was full of surprises. First, PM May surprised by requesting a short extension while a few days earlier she was facing parliament with a choice between her deal and a long term extension. This was yet another blow to PM May’s credibility as she has been moving back and forth on various Brexit issues. Second, for the first time in the Brexit process the EU leaders took matters into their own hands rather than following the line suggested by the EU Commission and advisors. The main reason for this change is the fact that while the EU leaders indeed want to be accommodating and not bear the responsibility for a hard Brexit, their absolute priority is to protect the integrity and functioning of EU institutions. Their decision underlined this focus. 12 April is not random. It is the date by which UK has to make legal arrangements to organise European Parliament elections.

30 June had been seen by many as the most likely date for an extension as it was the biggest stretch the EU could take to give the UK more time to pave the way to an orderly Brexit. The date is related to 2 July when the newly elected EU MP’s are installed in their seats. An orderly Brexit before this date would not have interfered with the functioning of the EP. A longer extension would have been problematic at this point as the UK would not have held EP elections. Some argued this constraint could be circumvented through various constructions, such as the UK holding EP elections retrospectively. Obviously EU leaders were not willing to make any exceptions that could undermine EU institutions, even against the threat of a hard Brexit materializing in the coming months. The good news however is that the terms of the extension leaves the door open for a longer extension. 

Way forward

What does the UK want?

We have long argued that the path of least resistance to an orderly Brexit would be working across the commons and leveraging on Labour’s support for a permanent customs union with the EU. Indicative votes would be the most natural way to achieve such consensus. On March 13 the government promised to organize such votes, but MP’s decided on March 25 to take matters in own hands by adopting an amendment that imposed this on the government. A first round of such votes was held on 27 March and a second round will follow on 1 April. On 27 March the British Parliament voted on 8 options:

  1. Revocation of article 50. Allow for article 50 to be revoked in case the Withdrawal Agreement is not approved by the penultimate day of the article 50 period and no-deal is rejected by Parliament on that day.
  2. Confirmatory referendum. Make any EU-UK deal subject to a confirmatory people’s vote.
  3. Common Market 2.0. Revise political declaration to accede to EFTA and the EEA while gaining derogation to enter a comprehensive customs arrangement with the EU.
  4. EEA+EFTA (Single Market). Remain in the EEA and join the EFTA, while declining a customs union with the EU and seeking an agreement on the Irish border and agri-food trade.
  5. Labour’s plan (CU+). Labour’s alternative plan envisages a permanent customs union with  the EU, close alignment with the single market including sharing institutions and participating in agencies and funding programs, dynamic alignment on right and protections, and security arrangements. These objectives should be enshrined in the political declaration to the Withdrawal Agreement and domestic legislation.
  6. Customs Union (CU). Adjust the political declaration to commit to a permanent and comprehensive EU-UK customs union.
  7. Managed no-deal. To agree contingency preferential agreements with the EU for a period of up to two years (looks like a transition period without the rest of the withdrawal agreement particularly the Irish backstop, which is anathema to the EU).
  8. No-deal. Leave the EU without a deal on 12 April.
Figure 1: Outcomes of the indicative and meaningful votes
Figure 1: Outcomes of the indicative and meaningful votesSource: Rabobank, BBC

Unfortunately the British Parliament failed to coalesce around any of these options, though we note that a customs union was rejected by a mere 8 votes while 26 cabinet staff abstained in line with instructions. Also very clear is the massive rejection of a no-deal. The high number of abstentions seems related to strategic voting as MP’s were probably testing the support for their favorite option. It also means there is room for shifts in a second round where only the options with the highest support will be included. That makes it more likely that a majority will be formed around one option after at this stage. A customs union seems the most likely winner given the tight defeat margin. In our view, a customs union is not very different from the current deal and hence not a softer Brexit. Namely, to prevent the Irish backstop from kicking in the EU and the UK must agree on a deal that keeps the Irish border frictionless. This is likely to lead to an FTA that also includes customs arrangements comparable to those in the Irish backstop. And that is why a comprehensive FTA plus a customs union remains our base case for the future relationship.

More meaningful votes?

EU conditioned a further extension from 12 April to 22 May on the Withdrawal Agreement being approved before 29 March. However the question remains on whether and when a third MV will be held, given that the Speaker of the House on 27 March refreshed his warning that the deal cannot be subject to another vote without having been substantially changed. The government has tabled MV3 on 29 March, but it will only put the Withdrawal Agreement to a vote. Which in line with the EU decision is sufficient to get the additional extension to May 22. The odds seem to be tilting in favor of the deal, but the odds of an approval tomorrow still look slim.   

PM May’s recent announcement that she will resign once Brexit is delivered seems to have convinced quite a number of hardliners to support her deal, including Boris Johnson. However the DUP has continued to oppose the current deal and that has prevented a larger number of Eurosceptic Tories to change their position in favor of the deal. The indicative votes might bode well for PM May’s deal. The high parliamentary support for a confirmatory referendum (which in turn could boost the chances of a Bremain depending on the question to be asked) maintains the threat of a no Brexit after all if the current deal gets rejected. The signals are mixed on the threat of a softer Brexit (options 3, 4 and 5 above). While these developments bode well for a deal approval in a MV3, the parliamentary arithmetic remains tight. Labour has already stated they will not support the separate Withdrawal Agreement, which they regard as a ‘blindfold Brexit’.

And that would push us in unchartered territory again, but it will not be the end. The high support for a customs union could pave way for an alternative way to an orderly Brexit, based on a parliamentary majority in favor of a permanent customs union. This could be processed in the political declaration to the Withdrawal Agreement and is something that seems workable for the EU. Given all the above, we still maintain our view that an orderly Brexit can still be achieved within the current timeframe. However, the odds of a Hard Brexit are almost as high against a backdrop of a tight time schedule, the lack of a coherent parliamentary majority for a Brexit outcome and a persistent gridlock on Brexit and the complication caused by the decision of the Speaker of the House regarding the meaningful votes.

Another year of Brexit saga?

If the British Parliament fails to reach a consensus on a desired Brexit outcome and a follow up plan before 12 April, a longer extension is also in the cards. This will imply the UK holding EP elections. It is questionable whether PM May would take such a decision, but if not MP’s might once again take control. A political crisis and early elections are then likely to materialize. A Bremain also becomes a possible outcome in this situation.

Figure 2: Where does Brexit go to from here?
Figure 2: Where does Brexit go to from here?Source: Rabobank


Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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