RaboResearch - Economic Research

Brexit Update: Going nowhere fast

Economic Report

  • The UK held local elections in England and Northern Ireland on 2 May. The Conservatives and Labour took a drubbing in the polls
  • The results were expected to concentrate minds and lead to a breakthrough in Tory-Labour talks on a desired Brexit outcome. There has however been a lack of progress, and talks could even collapse
  • The UK has confirmed it will hold European Parliament (EP) elections on 23 May
  • The government’s new aim is to get the Withdrawal Agreement ratified before the instalment of the new EP on 2 July
  • The pressure on Prime Minister May to resign mounts, but attempts to remove her from her function have failed so far
  •  However, the risk of a forced leadership change or a cabinet fall persists and is likely to rise following the EP elections on 23 May, an important milestone in that sense
  • Meanwhile, we still see an orderly Brexit as the most likely outcome, but the slow progress in Tory-Labour talks is concerning
  • A series of parliamentary votes on various Brexit outcomes can be an alternative way forward
  • Given the gridlock on Brexit in British politics the odds of a Hard Brexit remain high
  • Another way to break the Brexit deadlock could be a general election, an outcome that can also pave the way to a referendum. This is only possible if the departure date is delayed once more

Mainstream parties battered

On 2 May the UK held elections for 248 local councils in England, six mayors and all 11 councils in Northern Ireland. The English results were full of surprises. The drubbing of the Conservative party was expected, but the magnitude of the losses, the largest since 1995, was not. The Tories lost more than 1,300 councillor seats and thereby lost control of 44 councils. The defeat was spread over both remain and leave areas, but was larger in remain areas. Such losses by the incumbent party are usually accompanied by gains by the main opposition party, but in this case Labour was also bruised. The party lost 82 councillor seats and thereby lost control of 6 councils. Their losses were higher in leave areas. The big surprise winners of the local elections were the Liberal Democrats who gained more than 700 councillor seats and the control of 10 councils. Their gains were slightly skewed towards remain areas. Independent candidates also did very well as they gained more than 600 seats and gained control of 2 councils. 37 councils were left without overall control. Results were similar in Northern Ireland where smaller parties gained at the cost of the largest parties.

The main message of the local elections seems to be a widespread voter disenchantment with main parties and Brexit fatigue. Both the Tories and Labour have been punished for fudging their Brexit position and thereby dragging the process for so long. Some have assessed the gains for the Liberal Democrats as support for staying in the EU. But this is in stark contrast with the outcome of recent EP elections polls that place the Brexit Party (which did not participate to the local elections) in the lead, ahead of Labour. These contradictory outcomes reflect the high degree of polarization on Brexit characterizing the UK at the moment, both with the population and the political class. The Conservatives also perform incredibly poor with EP election surveys coming in fourth of fifth. So it is expected that the party will suffer another drubbing during the EP elections that were not meant to happen on 23 May. Unsurprisingly, the party’s campaign for the European poll has been very low profile.

Local elections fail to concentrate minds

The local election results were also regarded by some, including the PM, as an appeal to "get on with Brexit". Hence, it was expected that they would push talks between the government and Labour towards a consensus on Brexit. In the past week rumours have been lingering about an eventual compromise by the cabinet on pursuing some kind of a customs union with the EU in the future, as well as enshrining alignment of EU laws on workers and environmental protection in domestic law. But there has been no breakthrough and occasionally the negotiations seemed to be near collapse. Even with an agreement the way to an orderly Brexit will be rocky because the parliamentary arithmetic still is challenging, as both leaders face a backlash within their own party on softening their position. Moving towards a Customs Union is likely to cost PM May significant support amongst Conservatives, while failing to impose a confirmatory referendum on the deal is said to cost Corbyn significant support with his MP’s. That means that a deal that envisages a Customs Union might only gain the support of a thin majority and it is questionable whether that would withstand the various voting rounds needed to ratify the Withdrawal Agreement.

To avoid such a complication the PM is said to be considering bringing the Withdrawal Agreement Bill forward with the aim of winning approval in one voting round. This however could also be the end game, because the only way to bring the bill back to parliament after a rejection is the prorogation of parliament followed by the opening of a new parliamentary session with a Queen’s speech, a speech that can be rejected by parliament. Should the talks collapse the cabinet can proceed with (indicative) parliamentary votes on various Brexit options as a way forward. As we feared the sense of urgency has faded since the extension on 10 April. PM May has given up on her aim to get the deal approved before the EP elections on 23 May and avoid the embarrassment of organizing a vote for an institution that many British people want to abandon. Instead, her new milestone is 2 July, the moment when the newly elected members of the EP will be installed in their seats. This frontloading, if successful, is actually necessary to avoid another crisis in October. Because after the start of the summer recess on 20 July the Parliament will only gather for one month before the 31 October Brexit deadline. However, it is questionable whether significant progress can be booked without the time pressure. Nevertheless we still see an orderly Brexit before 31 October as the most likely outcome.

Can May stay?

The risks to reaching an orderly Brexit before 31 October are tilted to the downside, so the odds of a hard Brexit remain high. The risks stem from the persistent deadlock on Brexit, but also from possible challenges to PM May’s leadership. Such a threat may come from her own party, which has been enraged by the second Brexit extension and the cooperation with Labour. Tory backbenchers have tried to alter party rules to allow for a vote of confidence in her leadership in June rather than in December 2019. Labour can also capitalize on May’s weakness and try to trigger an early general election. The EP polls are an important milestone in that sense, as the expected major defeat for the Conservative party could trigger a leadership challenge. An early election could also open the door for the UK to eventually stay in the EU, if the pledge of a referendum is back in play during the electoral campaign. A third delay to Brexit would be needed to accommodate such a referendum. Keep in mind, however, that a win for Remain should not be taken for granted.

Alexandra Dumitru
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2326 6856

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