Western Europe August 08, 2019 / 09:24 am UTC

Brexit: Approaching the End-Game - Again?

By Andrew Wroblewski
  • Prime Minister Boris Johnson’s continued suggestion that he would welcome a no-deal Brexit as an option is probably more than just a negotiating tactic. A no-deal would have clear and very adverse economic repercussions, but the option remains popular among Johnson’s supporters, and would almost certainly underpin his position as prime minister by marginalizing the rival Brexit Party, thereby helping to ensure the primacy of the Conservative Party.
  • Bottom line: Given the low probability that the EU will bend to Johnson’s demands to renegotiate the Withdrawal Deal, it seems that only Parliament stands in the way of the UK leaving the EU on October 31 without a deal or a transition period. However, the question is whether Parliament actually has the means to stop a no-deal Brexit. If it does, it will resort to unprecedented procedures that will have marked constitutional implications and repercussions.
  • Market implications: Looking at some of the likely chains of events, the possibility of a no-deal Brexit may now be as high as 50% (up from 30% previously). If the UK exits the EU without a deal, then the recession that would likely ensue would trigger a plunge in GBP, Bank of England (BoE) easing and further damage to domestic UK equities. However, if Parliament succeeds in preventing a no-deal Brexit before the October 31 Article 50 deadline, market uncertainty will remain intact, as this would probably result in another general election sometime in Q4 that resolves little, maintaining the possibility that the UK exits the EU with no deal at a later date.

Figure 1: Balanced Brexit Probabilities

Brexit Is Deferred - 50% Brexit Goes Ahead as Scheduled - 50%
Yet Another General ElectionNo Deal and No Transition Period
◦ Parliament either blocks no-deal or votes the government down in a no-confidence motion. This would likely involve a further extension of Article 50 to delay the UK’s EU exit
◦ Increasing possibility of another general election, most likely after the existing Brexit deadline on October 31
◦ EU remains uncooperative
◦ New prime minister is unable/unwilling to compromise
Market ImplicationsMarket Implications
◦ Rates: The BoE may shift to easing bias as the economy may already be contracting
◦ Equities: Volatile given continuing uncertainties and the likelihood that any election would still leave no-deal Brexit on the table
◦ Currency: GBP makes modest short-term gains, but upside is very limited
◦ Rates: The BoE is very likely to ease, as recession risks will intensify
◦ Equities: Recession and damage to earnings prospects are negative for domestic UK equities, despite a weaker GBP
◦ Currency: EURGBP rises close to 1.00. Greater GBP declines against USD and JPY as EUR is also undermined

Source: Continuum Economics

Whose Default Is It Anyway?

Uncompromising remarks from Johnson’s administration, demanding that the EU make the first steps to a Withdrawal Deal compromise, are worrying markets that a no-deal Brexit is becoming increasingly likely. However, as the media is now realizing, the rising risk of a no-deal Brexit may have just as much to do with Parliament’s possible impotency to stop the scheduled Article 50 deadline on October 31―even assuming that the government is not able to prorogue Parliament. 

Faced with a long summer recess that lasts to September 3, it is now unlikely that Parliament can trigger a general election before the Brexit deadline date, at least one that could avert the default position of the UK leaving the EU on October 31. Instead, if Parliament is to prevent a no-deal Brexit, it seemingly now has two options, both probably based around a confidence vote. We now expect to see a parliamentary vote of confidence on the Johnson government very soon after Parliament sits again. 

We see only a 20% chance that the government would survive such a vote given the unfriendly parliamentary arithmetic and the fact that anti-Brexit Members of Parliament (MPs) will consider such a vote as a ballot on Brexit itself. If the government were to survive this vote, it is hard then see what would prevent a no-deal Brexit, save for the small possibility that the EU may then belatedly bend and allow some re-working of the existing Withdrawal Deal, probably involving some dilution of the Irish backstop.

Figure 2: Key Dates Ahead

Date/EventDetail
August 25-27: G7 SummitG7 summit in Biarritz, France
September 3: Parliament returns for scheduled new sessionScheduled date for the House of Commons to return from summer recess and first date that a confidence vote can be requested, but only for the following day. 
September 22 - October 2: Party conferencesThe Labour and the Conservative Party conferences are held in consecutive weeks, with Parliament in temporary recess.
October 8: Parliament returns from conference LullThe date MPs would return to Parliament after the conference break recess, 18 working days before the UK would be due to leave the EU.
October 17-18: Scheduled EU SummitPotentially the final scheduled meeting for EU leaders ahead of the then-looming Article 50 deadline on October 31.
October 25: Possible general electionEarliest date for a general election if no-confidence vote is passed right after summer recess ends.
October 31: Current Article 50 deadlineAlso the date when the new EU Commission President Ursula von der Leyen takes over. She could reassess the Brexit timetable/approach partly set by her predecessor Jean-Claude Juncker (who appointed Michel Barnier as European Chief Brexit Negotiator).

Source: Continuum Economics

Johnson Loses Parliament’s Confidence

The more likely scenario is that the government loses such a confidence vote. In such an instance, the Fixed Term Parliament Act would set unprecedented events in motion: There would then be 14 days in which either the existing government regains the confidence of Parliament, or an alternative government wins in its place. If neither occurs, then an election would have to occur some 25-27 days later, i.e. no earlier than October 25. Johnson’s government probably would not regain the confidence of Parliament, as it would almost certainly have to agree to defer Brexit once again, which would destroy Johnson’s credibility and electoral value to the Conservative Party. 

Uncharted Constitutional Waters

Johnson may refuse to resign, or he could suggest an election date to the Queen after October 31, meaning Brexit would go ahead. The problem here is that the Queen may ignore such advice, especially if she were made to believe that Parliament felt differently. Such resistance from Johnson could therefore raise marked and unprecedented constitutional issues, if not crises, that may undermine his main support if the monarch was drawn into the political fray. Indeed, it is possible that the Queen may decide that, under such circumstances, Johnson no longer has authority, especially if she believes that Parliament would support an alternative stopgap administration headed by a neutral figure as prime minister whose sole aim would be to extend the Brexit deadline until after a new general election. However, such a “government of national unity” would be difficult to build given existing divides and animosities in Parliament. 

Alternatively, Parliament itself may try to concoct some form of procedure that would formally force a further Brexit extension: House Speaker John Bercow has already suggested that a no-deal Brexit would be impossible without the will of Parliament. Exactly how this would be achieved is unclear, as it is the government that normally controls the agenda of the House of Commons, but one possible method is “Standing Order 24,” which could be used to grant Parliament control of the government’s agenda. However, for the Speaker to use this recourse, Parliament would need to delve into previously uncharted constitutional waters. 

At the same time, if the government loses a confidence vote and Johnson shows resistance to the spirit of the Fixed Term Parliament Act, the Speaker may very well believe he has both the rationale and authority to take such unprecedented action. We think this is the more likely means through which the current Brexit deadline could be extended.

Conclusion

What is clear is that the coming weeks, even before Parliament formally sits again, will be rife with debate about what the House of Commons can and cannot do to prevent a no-deal Brexit. Legal minds are already offering conflicting views. What does seem to be the case is that the possibility of a no-deal Brexit on October 31 has increased to as high as 50%. Moreover, the likely alternative, which would almost certainly involve a general election, may merely result in an outcome that still leaves a hard Brexit in the cards, albeit at a later date. Current opinion polls are consistent with a hung Parliament, but UK polling has become volatile this year from the surge of the Brexit Party and Liberal Democrats, as well as the recent rebound in support for the Conservative Party under Johnson. 

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Analyst Certification
I, Andrew Wroblewski, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.