This post has been updated to reflect the events of Thursday March 14.
Alastair George, Chief Investment Strategist
This week the UK Parliament has voted to avoid no-deal under any circumstances and at any time. In addition, Parliament comprehensively rejected the government’s Withdrawal Agreement, as modified by the additional instrument and declaration negotiated with the EU at the weekend. Following the votes on Thursday March 14, the choice for next week will be between supporting a short extension to Article 50 – and by implication supporting the modified Withdrawal Agreement – and a much longer extension. Under the second option of a prolonged extension, all possibilities (except perhaps no-deal) are on the table, including a new government, general election and second referendum. It is high stakes but we still cannot rule out the UK Parliament will do the “right” thing, for investors at least, by approving the Withdrawal Agreement – after trying everything else.
Not only has no-deal been taken off the table, but the earlier Parliamentary vote of no-confidence in the government and Conservative party vote of confidence in the Prime Minister leaves lawmakers penned in to a corner of their own making. This is being skillfully exploited by the government, although it has to be acknowledged that the months-long impasse has also delivered some important improvements to the Withdrawal Agreement and its accompanying documents.
Following the vote on UK PM May’s deal earlier in the week we have to admit we had underestimated the depth of the opposition to the modified Withdrawal Agreement. The revised opinion of the UK attorney general, in which lawmakers unduly focused in our view on the single paragraph reflecting the unchanged narrow legal risk of the UK remaining in the backstop indefinitely, was decisive in hardening opposition to the revised deal. It remains to be seen if any additional clarification will garner the support of the DUP or at least some members of the ERG.
Following the votes yesterday, the choice is now between a short extension to Article 50 and implicit acceptance of the current deal; or a much longer extension which in effect would reset the UK’s political Brexit clock to a time before the original referendum. Pro-Brexit MPs will therefore have to weigh carefully whether what is on offer now represents the best deal they can get.
Separately, we note that in terms of an “accidental” no-deal exit from the EU, the ECJ has previously confirmed that the UK has a unilateral right to revoke its Article 50 notification, should it wish to do so. Furthermore, in the circumstances of the UK Parliament ratifying the Withdrawal Agreement, we see little reason for an extension request to be refused by EU member states. There is therefore limited no-deal risk from this angle in our view.
While there appears limited support in Parliament for resetting the Brexit clock or a second referendum, the challenge will be to gain sufficient support for the government’s deal at the third attempt. We note press reports that rebel Conservative MPs are continuing to assess the attorney general’s advice on the government deal, as are the DUP. It is high stakes but we still cannot rule out the UK Parliament will do the “right” thing, for investors at least, by approving the Withdrawal Agreement – after trying everything else.