Brexit Forever: Eventually People Will Grow Tired Of This And The U.K. Will Remain
Prediction: The politics of exhaustion will play out between now and the new Brexit deadline of October 31, and people will give up on this whole sordid affair. The U.K. will never leave the European Union.
The market prefers having more time to convince a majority in Parliament that Theresa May’s deal with the EU is the way to go. It’s less immediate stress on the economy and the British pound than a hard Brexit. But the lack of conditions in granting the extension has weakened the incentives for the U.K. parliament to find a resolution. They can kick the can down the road forever.
It is surprising that the majority of EU member states allowed for the extenstion on Wednesday. Had they not, the U.K. would have crashed out of the EU on Friday. World Trade Organization rules on tariffs would apply. But issues such as visas and the free movement of people across borders, especially between Northern Ireland and the Republic of Ireland would be unresolved.
The Conservative Party, the party which brought us Brexit in the first place through a referendum vote proposed by then-prime minister David Cameron, cannot get its act together. So now May has to turn to the Labor Party, led by Jeremy Corbyn.
This brings us to Season III of Brexit Forever, which raises the story question: Will May and Corbyn honor the will of the voter?
Over a million more people voted in favor of leaving the European Union than staying. Nearly every poll indicates that there’s still support for sticking with that original decision, though Labor party voters are less inclined to leave. May has to break bread with a party that has a large constituent of voters who do not want to leave the EU. Good luck with that, Prime Minister.
Plus, it has taken Parliament two years and they still have rejected every single proposal to leave. If May cannot get her party to pull this off, will the Conservative Party splinter in two? This would be a blessing in disguise for the Labor Party, a party that was destroyed by Tony Blair when he “found” Iraq’s weapons of mass destruction. This could be its comeback moment.
The Conservative Party’s popularity is now where it was before Labor took the majority. Since March, popular support for the Tories has fallen to 29% from 37%, according to Bloomberg. And why not? They haven’t done a thing for their voter base.
Labor has demanded a closer relationship with May’s negotiating team. And May has offered to hold yet another round of indicative votes to see what issues the two opposing parties can agree on so they can ratify the Withdrawal Agreement next month.
“The likelihood of the talks between May and the Labor Party leading to an agreement is very low,” says Azad Zangana, senior European economist and strategist for Schroders in London.
May said she will resign once Brexit is complete. This means that the final phase of negotiations could be led by a new Conservative Party prime minister with very different views from May. It’s one step forward one step back for Brexit.
“We struggle to see what will break the impasse,” Zangana says. “There is a high probability that the June review will demand more urgent action, before another emergency EU summit at the end of October to grant another extension.”
Yes. It was German Chancellor Angela Merkel who said the Halloween deadline is malleable and could be extended further if necessary.
Meanwhile, U.K. politicians will have to put up candidates for the European Parliamentary elections on May 23; a political body they were supposed to have vacated by then.
The new deadline (which is probably not a deadline) signals two things. One, there will never be a hard Brexit. Not only did the U.K. parliament “outlaw” it last week, but Merkel said the EU will grant deadline extensions until there is an agreement. This could take a while.
Second, Germany has become increasingly mindful of Britain’s prominence in the EU economy. With France in political turmoil, Italians battling with Brussels over taxes and migrants, and Spain watching a massive rise in EU skeptical nationalists, the damage to the EU should the U.K. finally leave is immeasurable. What dominoes would fall? Countries like Greece or Italy could want out in the future.
“It could represent a mortal blow to the EU project,” Vladimir Signorelli, founder of Brettonwoods Research, wrote in a note to clients yesterday. “The EU can afford to be generous in extending whatever deadlines the U.K. needs to mull and soften or negotiate a new deal.”
What about no deal at all?
Postponing just leads to uncertainty. If the market hates uncertainty and if the market has any say in this, then one can surmise that the needle is moving far away from hard Brexit and no Brexit is looking more plausible.
“You might not get a Brexit,” says Shan Nair, president of international business consulting firm Nucleus in Naples, Florida. “And no, there will not be mass demonstrations like the Yellow Vest movement in France. The Brits don’t get so emotional about things like the French.”
BNP Paribas increased the probability of the U.K. remaining in the EU by 15 basis points to 35%, with Brexit at 50-50 odds. A hard Brexit fell to 15% from 30%.
“A hard Brexit is less likely, but the path ahead is as unclear as ever,” says Paul Hollingsworth, U.K. economist for BNP Paribas. “The political path to a deal remains challenging.”
Which brings me to the original prediction: no Brexit. Politicians will exhaust the electorate on this until all sides give up talking about it.
Assuming that the migrant crisis led to the referendum two years ago, then perhaps the U.K. can appease Brexit voters by closing its border to migrants or rejecting the quotas set by Brussels for Middle East and North African refugees. So far, this topic does not seem to be on the table because it was always assumed that Brexit would take care of that. But Brexit is weakening, and Parliament can stall forever. They were told they can take as long as they want to get this done.
In the meantime, business surveys suggest a weak growth environment, with most activity being dominated by inventory building in preparation for Brexit. That could change swiftly as businesses, too, begin assuming Brexit forever means no Brexit at all.
On the other hand, stockpiling could reach its limit and output will start to slow to match the weaker growth in consumption and investment, says Zangana.
As a result of the uncertainty, the Bank of England (BoE) has been held back from raising interest rates due to the Brexit overhang. There is now a possibility that a longer delay means the BoE assumes Brexit is on hold this year and will opt to raise rates as early as next month.
Schroders gives it a 20% chance.
BNP Paribas doubts a rate hike this year. They expect the pound to strengthen if investors give up on Brexit.
A local election on May 2 in the U.K will give global investors a glimpse into whether pro-Brexit or pro-Remain politicians are winning.
After EU Parliamentary elections on May 23, the U.K. has until May 31 to agree to a Withdrawal Agreement. The Oct. 31 deadline is moot if the U.K. does not participate in European Parliamentary Elections.