Brexit: All options on the table

Robert Lea, Head of Global Equity Research at Ashburton Investments

As divides widen and the ultimate outcome of Brexit remains uncertain Head of Global Equity Research, Robert Lea, looks at where the UK goes from here.

Review

Theresa May secured sign-off on the draft Brexit agreement from her Cabinet late last night. However, her Party, Parliament and the country as a whole remain deeply divided. Brexit Secretary, Dominic Raab, has resigned this morning as has a junior Northern Ireland minister. STOP PRESS: Work and Pensions Secretary Esther McVey has also just resigned.

The draft details: i) how much money will be paid to the EU (the ‘divorce settlement’; ii) confirms that there will be a 21-month transition period after Brexit day on 29th March 2019; iii) provides commitments on the rights of EU citizens in the UK and UK citizens living in the UK.

The draft Brexit agreement is not a trade deal. This will be negotiated during the transition period if all goes to plan.

Although the provision of a formal draft Brexit agreement is a step forward, the situation remains fluid and the ultimate outcome uncertain. All options are on the table.

Northern Irish Backstop

The Northern Irish Backstop issue (avoiding a hard border between Northern Ireland, which is part of the UK, and the Republic of Ireland) proved to be a major sticking point during the Brexit negotiations.

The draft agreement avoids the need for a hard border, avoiding the need for customs checks between Northern Ireland and the Republic. In order to secure this, Northern Ireland will stay aligned to some EU rules on food products and goods standards etc. It will also require some new checks on goods being brought to Northern Ireland from the rest of the UK.

This means in effect that the whole of the UK will remain the EU customs union. This is a heresy in the eyes of the hardline brexiteers, who are likely to reject the draft agreement.

Next steps

• The draft deal needs to be ratified by the UK Parliament, as well as the European Council.

• The EU Council meets on 25 November to finalise the agreement, assuming ‘nothing extraordinary happens’
   according to Donald Tusk. The leaders of all 27 EU nations must approve the deal.

• The UK parliament will vote on the draft agreement in December. The UK Parliament is split. Theresa May’s
   conservative party is deeply divided, as is the opposition Labour Party.

• The situation in the UK Parliament is complicated by the fact that the Conservative Party does not have an outright
   majority. The Conservatives hold on power is secured by the support of the minority Northern Irish DUP Party.
   The DUP have already said they will not support the draft deal.

• As things stand, Theresa May will need the support of at least 100 Labour MPs to get the deal through. This is far
  from certain. On balance, it will be tough to get the deal through UK Parliament.

• If the agreement is approved by both sides, a 21-month transition period will begin. Trade talks will then  
  commence, with a view to potentially sign a permanent trade deal.

• If the agreement is rejected by the UK Parliament (a distinct possibility) then the UK Government has 21 days to
  put a new deal forward. However, time is running out, as the March 2019 deadline is fast approaching.

• A rejection by the UK Parliament raises the following possibilities:

1. The UK renegotiates. As stated, time is running out. The probability of reaching a new agreement within the requisite time frame is diminishing.
2. The UK crashes out of the EU without a deal. This option remains possible, though is less likely. All sides want to avoid a no-deal Brexit , as the economic impact would likely be highly damaging.
3.  General election. Theresa May could chose to call a new general election, potentially offering a second referendum as a means to boost her electoral chances. Public opinion has shifted towards a second referendum option in recent months as many former ‘leave’ voters believe they were misled during the referendum campaign. A number of high profile UK politicians (including ex PMs Tony Blair and Gordon Brown) have publically supported a second referendum.
4. Parliament agrees to hold a second referendum on the EU exit: Parliament could simply vote to hold a second referendum without the need to first have a general election.

• As a further complication, Theresa May faces the risk of a no confidence vote from within her own party. Assuming
  this happened and Theresa May was forced out, it seems unlikely that a new leader would enjoy strong support.
  As a result, this scenario might also result in a general election being called.

The situation remains highly uncertain and betting on the outcome is currently a bit of a lottery.

Either way, the UK’s reputation as a bastion of stability has been tarnished.

Leaving the EU will cause economic damage to the UK economy – a view supported by the vast majority of economists and UK/international business leaders.