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Brexit saga set to drag on until June or longer

Brexit saga set to drag on until June or longer

15-03-2019 | インサイト
Investors are bracing for the prospect of a delayed or canceled Brexit, as the saga looks set to drag on for at least another three months.
  • Léon  Cornelissen
    Léon
    Cornelissen
    Chief Economist

Speed read

  • British PM to ask for extension to leaving EU after 29 March
  • Two votes in Parliament still fail to back withdrawal agreement
  • Request may come up at European Summit on 21-22 March

Prime Minister Theresa May is set to ask the European Union for an extension to leaving the bloc on the currently set date of 29 March, having twice failed to get her proposed withdrawal agreement through the British Parliament. It has raised the prospect that Article 50 – the process used to leave the EU – will be extended or even withdrawn.

“The most likely outcome is a delay, and the longer this delay, the greater the chance that there won’t be a Brexit’ at all,” says Robeco Chief Economist Léon Cornelissen. “For financial markets, the prime issue is the avoidance of a hard Brexit – a disastrous outcome that still remains very unlikely.”

It follows two key votes by the House of Commons to try to resolve the impasse and allow the UK to leave the EU with some sort of trading agreement. A vote on Wednesday 13 March rejected the idea of leaving the EU without a deal, ruling out a so-called hard Brexit. However, the vote is not legally binding, and a hard Brexit will still occur by automatic process of law on 29 March, unless active steps are taken to prevent it.

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European Summit ahead

On Thursday 14 March, British MPs voted to ask the EU for a delay to Brexit so that the political problems associated with getting it through Parliament can be ironed out. This could take place on the next European Summit, scheduled for 21-22 March.

May has said she will ask for a delay to June 30, if a majority of the House of Commons approves her withdrawal agreement – at the third time of trying – in a vote scheduled for Wednesday 20 March. The first attempt on 16 January led to the biggest defeat for a government motion in British history; following a rebellion by 118 Tory MPs, she lost by 230 votes. A second attempt on 12 March was defeated by a lower margin of 149 votes, after some Tories relented, believing that her deal was better than Brexit being canceled.

“If her third (maybe followed by a fourth) attempt fails again, she has threatened to ask for a much larger delay, putting the whole prospect of Brexit into doubt,” says Cornelissen. “It is doubtful that enough hardline Eurosceptics can be convinced to accept the withdrawal agreement after all, but it cannot be ruled out either.”

“In this case, the UK would leave the EU on 30 June, thus after a short ‘technical’, politically insignificant delay to ensure an orderly process. Markets will probably react positively to the reduced uncertainty, though the withdrawal agreement says nothing about the future relationship between the EU and the UK.”

It’s still only ‘round one’

“We’ve only seen the end to round one of the Brexit process. Negotiations on the future relationship are theoretically supposed to end in December 2020, but will probably take much longer as is usual in these type of negotiations. Apart from that, the new relationship will be worse than the current one, which gives these negotiations a rather peculiar character, and increases the difficulties of reaching a national consensus.”

“For the foreseeable future, we would expect a Brexit in name only, which bodes well for the UK economy, which would prove more resilient, while sterling and UK assets in general would benefit.”

Sterling has been in the doldrums ever since the original Brexit referendum in June 2016. From a peak of 1.44 euros to the pound in July 2015, it has slumped from around 1.30 euros at the time of the referendum to a low of 1.08 in August 2017. It has since ticked up to around the 1.17 level amid hopes of a resolution to the saga.

Even longer delay

If May does not succeed in pushing the unpopular withdrawal agreement through on 20 March, she has said she will ask for a longer delay. EU leaders have to unanimously agree on any extension.

“EU Council President Donald Tusk is pleading for a long delay, so that the UK can make up its mind again,” says Cornelissen. “But other politicians worry that this would enable a crisis without end around Brexit. In the end, European leaders will probably agree on an extension, possibly initially for a shorter period to keep up the pressure. As a measure of last resort, the UK government could unilaterally engineer an extension of indefinite duration by withdrawing its Article 50 notification.”

“In any case, European leaders won’t want to take the blame for a hard Brexit, as the negative economic and logistical consequences would hurt the European economies as well. And it would be especially negative for the Irish Republic, as the immediate need for a hard border would rise.”

Border controls

The Irish border issue is a major sticking point, since leaving without a deal would mean the need for customs posts to collect tariffs and check the quality of goods traveling into and outside of the Single Market. The meandering 300 km frontier is extremely difficult to police, and keeping it open is a condition of the Good Friday Agreement that brought peace to the province.

“The UK has already stated that in case of a hard Brexit, it would unilaterally keep the border open probably, primarily to prevent a return of the ‘Troubles’,” says Cornelissen. “But the EU and the UK have a legal obligation to protect their external borders, and leaving the backdoor open indefinitely isn’t a feasible long-term strategy. It would mean the need for customs posts to collect tariffs and check the quality of goods traveling into and outside of the Single Market.”

“In the grim negotiation climate in the event of a hard Brexit, the EU would probably insist on keeping at least Northern Ireland in the internal market, effectively creating a border in the Irish Sea. It would also insist on the UK continuing its contributions to the EU budget.”

“So, a hard Brexit absolutely doesn’t mean starting with a clean slate. A hard Brexit is a very unattractive option for both parties involved and remains highly unlikely. ‘Realpolitik’ would most likely prevail, and the UK would be offered an extension. This saga is going to run on for a while longer.”

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