What has happened?
As widely expected the UK parliament rejected the Withdrawal Agreement (WA) this afternoon again – though by a lower, but still significant margin (58 vs 149 in MV#2 and 230 in MV#1). Even the separation of the WA from the Political Declaration on the Future Relationship between the UK and the EU did not trigger the support for the WA Prime Minister May has hoped for. This separation was necessary in order to satisfy Speaker Bercow’s criteria that the vote must be on something different than last time. Also it satisfied the EU’s criteria from their European Council meeting last week namely that in order to get an extension of the Brexit deadline from the 12 April to 22 May (the day before the European Parliament elections begin), the House of Commons just needs to approve the WA.
The outcome did not come as a surprise, since the Labour Party made clear this morning to vote against the WA and also the Democratic Unionist Party also once more signalled its objection to the deal ahead of the vote again as the backstop in its current form of course is still a part of the WA. Last, but not least, around 20 Conservative Brexiteers claimed ahead of the vote they will not back her deal under any circumstances.
In view of the rejection of the WA European Council president Donald Tusk decided to call a EU Council summit on April 10, 2019.
Sterling weakened against every other G10 currency yesterday (-1.10% vs USD but +0.2% this morning), although other UK assets performed strongly, with sterling’s decline supporting the FTSE 100 (+0.56%) to outperform other European indices yesterday, while UK 10yr gilt yields fell - 1.2bps yesterday, the only major European country to see ten-year debt yields fall. Immediately after vote there was no big market moves as the results had been priced in and did not came as a surprise at all. Cable (Sterling vs the US dollar) fell briefly below 1.30 at the time of the announcement of the vote, but recovered above this level later in the afternoon.
What we have learnt from today’s and Wednesday’s votes in the Commons are the following points:
Parliament is strongly against a no-deal hard Brexit;
There is more support for a softer version of Brexit than Prime Minister Theresa May’s semi-soft deal, which looks to be an unsuccessful solution after today’s 3rd rejection again;
The options of a new referendum and for a “new political process”, maybe via snap elections are not off the table.
Remember: In the “indicative votes“ from Wednesday two options managed more support than all three votes on May’s deal:
Customs union with the EU (264 for, 272 against)
Second EU referendum to confirm a Brexit deal or stay in the EU instead (268 for, 295 against)
A strong majority of MPs is against a hard Brexit. While this remains the default option come 12 April if the UK has not passed the withdrawal agreement or agreed with the EU to a further delay, the clear result strengthens our view that, if need be, the UK would rather ask for a new Brexit delay than plunge into a hard Brexit (see our recent CIO Insights Memos on Brexit for details). This assessment won’t change even if there are changes in the government after today’s vote.
Still, there are some concerns and uncertainties about how the intention of the UK parliament (to keep close ties with the EU in one form or the other and block a hard Brexit) will come into force and can be institutionalized until the new deadline of April 12. The lack of a clear majority for any outcome so far signals that the UK could still be well short of solving its Brexit problem until then. Therefore, it is essential that the Commons will come to clear results on Monday or the days after in the announced voting procedures.
If Parliament is (finally) able to deliver and back a soft-Brexit policy by a significant majority of MPs next week we reckon that the government will adopt such a policy and approach the EU accordingly in the run-up to April 12. However, there are still some obstacles/uncertainties ahead:
Snap elections: Parliament eventually finds a majority for a softer Brexit or second referendum. However, the risk is that the Conservative-led government argues that such an outcome is inconsistent with its 2017 election manifesto and thus decides it cannot deliver it. While parliament could take a further step by voting to force the government to execute the will of parliament, if the government still refuses, it may result in a snap election to resolve the standoff between government and parliament. This scenario becomes more likely if PM May resigns in the aftermath of her 3rd defeat in the course of today, over the weekend or next week. In her immediate reaction to today’s vote there was no sign for her resignation. Labour leader Jeremy Corbyn called for a general election in the aftermath of today’s result. This demand was shared by the leader of the Scottish National Party, Ian Blackford as well.
Long delay: Parliament is unable to find a majority for a softer Brexit outcome but remains strongly against a hard Brexit. Still, even in this case and despite rising anger, Brexit-fatigue and increasingly impatience (in particular from French President Macron for example) the EU would probably accept a request for a longer delay as long as the UK had made a clear shift away from repeatedly debating and voting on May’s deal towards seeking a softer Brexit outcome. Today’s announcement by EU Council President Donald Tusk to call for a EU Council meeting on April 10, 2019 in view of the rejection of the WA supports this expectation.
This highlights the possibility of a long delay in order for the UK to resolve its issues – possibly until end-2020 or until end 2021. That would extend the hard Brexit risk and rise a lot of political questions as in this scenario the UK has definitely to take part in the upcoming European Elections with all the implications and consequences we elaborated to in recent Brexit Memos.
All in all, our main scenarios are still valid as nothing really new and important has been decided again this week. However, apart from the qualitative statements and scenarios mentioned and outlined above our assessment is that recent developments probably represent a shift from one uncertainty, namely whether the UK will go for a hard Brexit, to another less sinister uncertainty – what softer Brexit will the UK go for and how long will it take to get there? Maybe next week we get some more clarification in this process and the good news is that until April 12 at the latest we know definitely more.
Download this CIO Insights Memo as a pdf here.