Global Daily – Brexit pathways begin to crystalise

by: Bill Diviney

UK Politics: May’s deal with a short delay, or a very long delay – Last night, the UK parliament rejected a no-deal Brexit in two votes – one in vague terms (which won by 321 to 278 votes), and another which rejected no-deal under any circumstances, which won by a much narrower 312 to 308 votes. Parliament will again vote tonight on whether to request an Article 50 extension to delay the Brexit date from the current 29 March. We expect this motion to pass. There will be further amendments voted on, including on a second referendum, and on indicative votes to test parliament’s support for various Brexit options. We doubt these amendments will make much headway at this stage.

More important to us has been Prime Minister May’s response to last night’s votes – today confirmed by her Cabinet Office minister David Lidington – which pointed to two main pathways: 1) MPs approve May’s deal in a potential third vote over the coming days, with only a short Brexit delay of 2-3 months necessary; 2) the government requests a much longer Brexit delay of 1-2 years in order to formulate a new approach (‘government will let parliament find the way ahead’). Either scenario is a benign one for markets and the macro outlook. With no-deal clearly rejected by parliament, and government policy now coalescing around these two options, a no deal Brexit now looks even less likely than the 15% probability we had ascribed to it in recent months.

Which of the two pathways looks more likely? And what would a long Brexit delay entail? On Tuesday’s vote, PM May’s deal was rejected by 391 to 242. A different outcome would require at least 75 MPs changing their minds. The most ardent Brexiteer group, the ERG (up to 90 MPs), looks unlikely to shift stance on the deal. However, Reuters reported this morning that the DUP (10 MPs) is considering supporting her deal, which could be indicative of others who have until now been opposed. Faced with the very real prospect of no Brexit at all as the alternative (which a long delay could entail), Brexiteers may ultimately opt for May’s deal. Should they decide not to, and the UK government makes a longer Article 50 extension request, any number of things could happen, but nearly all possibilities are likely to mean a softer Brexit, or no Brexit. For instance, parliament could opt to stay in the customs union or the European Economic Area (the Norway model), or it could opt to support May’s deal on the condition that it be put to a referendum with Remain as the alternative option. While the precise pathway remains unclear, there are now two clear directions the Brexit process can go in, and the most negative scenario of no-deal looks evermore unlikely. (Bill Diviney)