As we already commented on in our CIO Insights Memo last night (March 21), the EU27 has agreed to grant the UK an extension to Article 50. If a Brexit deal is approved in the House of Commons next week, the UK would be given a technical extension to May 22.
However, in addition to this decision - and after a long dinner in good old European tradition and fashion - the EU introduced a second, different deadline if no Brexit deal is approved next week by the UK parliament. In this second scenario, the UK would only be given an extension to April 12. The UK would then be required to inform the EU27 as to how it intends to proceed.
The GBP, which had traded as much as -1.47% weaker yesterday, rebounded a bit on then-unconfirmed reports that we were heading towards a short reprieve to close last night -0.69% at 1.3107. It is trading slightly up (+0.18%) this morning.
By postponing Brexit day by at least a fortnight (from March 29 to April 12), the immediate risk of the UK slipping over the cliff in just 7 days’ time has been eliminated. Basically, the UK and the EU have kept all options in play, for now. The UK can now:
(i) Leave the EU with the Prime Minister’s current Brexit deal on May 22;
(ii) Choose by April 12 to leave the EU with “no deal”;
(iii) Seek a long Brexit delay, involving participation in elections to the European Parliament; or
(iv) Unilaterally revoke Article 50.
The easiest path for politicians and markets would be if the UK parliament ratified Mrs. May’s deal in a third meaningful vote (MV3) next week (assuming that this vote will take place and Mr. Bercow’s intervention will be overruled –see our last Brexit CIO Insights Memo for details). However, as we have outlined before, the outcome of this vote is highly uncertain as PM May still needs support from the opposition given ongoing resistance by hard Brexiteers. Hence, most observers are still reckoning with a rejection of Mrs. May’s deal despite growing pressure on all MPs after yesterday’s summit.
If parliament voted down Mrs. May’s deal and agreed a process to seriously contemplate the alternatives in the days after MV3 and in the first week of April, the likelihood of the UK submitting a request for a further longer delay until April 12 would be higher in our view than a “no deal”. That scenario would further increase UK domestic political stresses, most obviously within the Conservative party. While this would further increase uncertainty, it probably would not change the current parliamentary calculus around Brexit in a major way. Still, a majority of MPs would want to retain close ties with the EU and would want to rule out a no deal Brexit.
If the UK decides to take part in the EU elections, we would expect the EU to accept a request for a longer delay in order for the UK to undertake a new political process to debate and vote on alternative arrangements for the future relationship, including the customs union or Norway options, or to provide time for a snap election or second referendum (again see previous Brexit memos for detail). However, the EU would most likely not grant a longer delay for the UK just so it could continue voting on May’s deal again as was evident from comments by the EU Commission and EU political leaders and last night’s decision.
In a nutshell: The ball is now again in the UK’s court. In a series of Brexit debates and votes next week, probably including a third vote on May’s deal (MV3), the UK parliament will get a chance to forge a way forward and possibly take the opportunity to seize control of the Brexit process and reduce the risk of a hard Brexit. But overall there is still a very high degree of uncertainty as to what happens if MV3 gets defeated early next week assuming the government are allowed to bring it back. So, in the near term all eyes will be on the DUP and hard-line Conservative MPs again and what will happen in the UK parliament in the run-up April 12.
As the situation is ongoing, and apart from introducing a new deadline, the Brexit saga is in essence unchanged, we make no change to our probabilities for the potential Brexit outcomes; hard Brexit (25%), forms of softer Brexit (60%) and no Brexit at all (15%). However, the uncertainty around these calls is high. The risks to our probabilities for a hard Brexit are tilted to the upside – in particular if the UK politics does not get its act together in the next three weeks even under the immense political and time pressure the actors are now facing.
Download this CIO Insights Memo as a pdf here.