Global Daily – Brexit deadlock

by: Bill Diviney , Nick Kounis , Aline Schuiling

UK Politics: A Brexit deal is as uncertain as ever – Brexit negotiations have continued to dominate headlines in recent days. The key hurdle to a deal remains the Northern Ireland backstop plan – the so-called insurance policy guaranteeing no hard border between the Irish Republic and Northern Ireland. While the EU seems to have accepted the UK’s proposal for the entire UK to remain in a customs union with the EU – and sterling has strengthened today on this – the sticking point is whether there should be a time limit on this. The EU side has long argued that the backstop must be indefinite, otherwise it does not meet the definition of a backstop. The UK initially agreed to this principle earlier on in the negotiations, but has rowed back in recent months as the prospect of the UK being stuck in indefinite limbo has caused alarm among eurosceptics in the Conservative Party. Brexit Secretary Dominic Raab appeared to signal some flexibility on this point on Sunday by saying ‘it could be time-limited, there could be another mechanism,’ but it is not clear what ‘another mechanism’ could mean.

Since then, Prime Minister Theresa May has suggested a longer transition period as an alternative to a backstop, which the UK could ‘make a sovereign decision’ on when the time comes, but that this could not be indefinite, and in any case should finish ‘well before the end of this parliament’ – i.e. mid-2022. Brexit co-ordinator in the European Parliament Guy Verhofstadt has reiterated that the EP would veto any deal that doesn’t contain a ‘real backstop’, and a deadline would be contrary to that. Domestically, meanwhile, the Prime Minister is facing pressure not just from eurosceptics, and the Northern Irish party propping up her government – the DUP – but also an unnamed centrist in her party is now calling for a new leadership contest to be held.

Our base case remains that an orderly Brexit is the most likely outcome to the negotiations. To break the impasse, it looks likely that the UK will accept that the backstop is in some way indefinite, but with some creative wording to ease the concerns of eurosceptics in the Conservative Party. However, as the latest developments underscore, our conviction level in this base scenario is low, and the risk of a disorderly Brexit continues to be very high. (Bill Diviney & Nick Kounis)

Euro Macro: Consumer confidence stabilises – Consumer confidence in the eurozone increased ever so slightly by 0.2 points to -2.7 in October. No details have been published yet, but it seems that the worries about the state of the economy and fears for deteriorating labour market conditions, which had reduced confidence during the past two months, eased somewhat. Despite its declines in August and September, confidence is still well above its long term average value of -12 and, therefore, consistent with robust growth in consumer spending. Although private consumption growth currently is weighed down by a rise in energy prices, which we think has further to go, it continues to be supported by ongoing solid expansion in employment and a strong housing market. Moreover, consumption continues to be supported by the low level of interest rates. Indeed, yesterday’s Bank Lending Survey for Q3 showed that banks, on balance, reported rising demand for consumer credit. (Aline Schuiling)