Brexit: Another crushing defeat for May

Chris Scicluna
  • Theresa May lost this evening’s key second ‘meaningful vote’ on her Brexit deal by 149 votes (242 in favour, 391 against). That’s an improvement on the record defeat of 230 in the first meaningful vote in January. But it’s still another massive setback for the Prime Minister, who had just last night claimed to have secured a major breakthrough in her negotiations with the EU. And it raises significant uncertainty about both the future for Brexit and May’s own political future too. So, what comes next?
  • Despite this evening’s defeat for May, there will certainly NOT be a no-deal Brexit at the end of this month, and we attach a probability close to zero of it happening at all anytime in future. Tomorrow (Wednesday) will see MPs vote on whether the UK should leave the EU without a deal on 29 March, and we expect that prospect to be rejected by a very large margin. And Thursday will see MPs vote to endorse a proposal that the UK Government formally request from the EU an extension of the Article 50 deadline.
  • Of course, while the UK can request an extension of the Article 50 deadline, EU leaders will have to agree unanimously to grant it. But we fully expect that, at the EU Summit on 21-22 March, they will agree to do so. Nevertheless, there is significant uncertainty over the length of extension to be agreed, and what conditions might be attached to granting it.
  • Theresa May’s preference would seem to be for a short extension, of two to three months, so as to avoid the inconvenience of UK participation in the European Parliament (EP) elections on 23-26 May, which will elect members whose term as MEPs would commence from 2 July. As some member states would gain the EP seats to be foregone by the UK if it does not participate, and as EU leaders would fear that more Farage-like UK populist/nationalists might gain representation in the EP if the UK maintained a presence there, the EU leaders might similarly wish to avoid UK participation in those elections. So, May could possibly get her way, opening the way for her to try to amend her deal further and subject it to a third meaningful vote before the summer in the hope of finally finding a majority in its favour.
  • But the magnitude of defeat this evening will make EU leaders wonder whether such a short extension could possibly suffice to allow a majority in the House of Commons in favour of any form of Brexit to crystallise. The timeframe for such an extension could also contaminate the EP election campaigns in other member states. And the EU leaders will be highly reluctant to reopen the current deal to any renegotiation whatsoever, rightly sceptical that May could have any realistic chance of getting it over the line in the House of Commons in such a short timescale.
  • So, it would seem most sensible for the EU to agree only to a significantly longer extension – perhaps one of up to 21 months to end-2020 – that would take account of the forthcoming changes in leadership of the European Commission in November and also, crucially, give time for a more fundamental rethink on the appropriate way forward in the UK. For example, as a precondition for the extension, the EU could insist that the UK hold indicative votes in Parliament on a range of Brexit scenarios to try to discover where a majority lies. Alternatively, the EU might insist upon reopening discussions on the Political Declaration on the future relationship to facilitate the formation of a cross-party majority in favour of a softer form of Brexit, e.g. one that involves a permanent Customs Union and closer Single Market participation (as in the so-called Norway-plus proposal and Labour party policy). Or May might even propose that seeking UK Parliamentary approval of her deal to a second referendum might be the only way of breaking the deadlock. Whatever the conditions to be attached, we attach roughly equal probabilities to the scenarios of short and long extensions.
  • Among other things, of course, tonight’s result also highlights that the UK remains in political crisis with massive dysfunction not least within the ruling Conservative Party and main opposition Labour party. Theresa May’s authority is in tatters, and in normal times she would not survive another defeat of the magnitude of this evening’s. Due to the vagaries of her party’s rulebook, however, she is safe from challenge from her own MPs until the back end of the year. But unity within her cabinet could splinter further. And scenarios such as an early general election, her resignation as Prime Minister, or even revocation of Article 50 still cannot be ruled out before the Brexit saga concludes.
  • From a market perspective, following a modest short-lived appreciation on the announcement of this evening’s result, sterling is now broadly back to where it was as MPs voted (close to $1.307 and £0.864/€). Given that a substantive defeat had appeared likely today as soon as the Attorney General’s legal advice this morning made clear that the deal agreed by May yesterday had failed to eliminate risks that the UK might be trapped indefinitely within the Irish border backstop, the limited volatility would seem appropriate. And MPs’ vote tomorrow to reject a no-deal Brexit and Thursday’s vote to seek an Article 50 extension should similarly be consistent with broad sterling stability over coming days. 

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