BNY Mellon: Market Update: Unpicking Brexit


BNY Mellon: Market Update: Unpicking Brexit

The next few weeks seem set to define the UK’s political future and will therefore likely have an influence on GBP’s shorter and longer-term performance. This is what’s currently known:

What’s happened so far?

Ahead of the start of the formal debate in the UK’s House of Commons on the EU withdrawal treaty, the government has suffered a series of defeats, including being found in contempt of Parliament for the first time.

Importantly, if the withdrawal treaty is voted down next week, MPs will be able to vote on what they want the government to do next (the vote for this was passed by 321 to 299).

Why does this matter?

With a majority of MPs opposed to a no deal Brexit, the opportunity to vote on a Plan B leaves a number of potential other outcomes:

1: MPs may agree to send the government back to Brussels to renegotiate. However, the stated position of the EU so far is that there is no further room for negotiation on the withdrawal agreement itself.

2: There may be a push towards agreeing a Norway-style membership of the European Free Trade Association. However, questions have been raised by the BOE and others about the feasibility of such a deal.

3: There is the possibility of a second referendum.

The legal advice

The government's legal advice reveals that the UK risks becoming stuck in "protracted and repeating rounds" of negotiations to leave the European Union if it enters a backstop arrangement.

What does the schedule look like now?

Tuesday, December 11: (post 1900 GMT) Vote in UK House of Commons and House of Lords on EU withdrawal treaty

• Based upon what is known, the government might struggle to get much more than 278 votes in favor of the deal while those voting against it could reach 361.

• If Parliament rejects the deal then ministers will have up to 21 days to make a statement to the Commons on "how it proposes to proceed". The government would then have a further seven days to move a motion in the Commons.

The vote this week in Parliament means that this motion can now be amended by MPs. It should be noted that the final motion will not be legally binding on the government.

• Speaking in a select committee, Conservative MP Julia Lopez said it was her understanding that no Brexit at all would require government legislation. Trade Minister Dr Liam Fox replied that it would "entirely be possible" for amendments to Brexit legislation to "achieve that effect."

• It is possible that in this three-week window the government could make a second attempt to get the deal through Parliament.

A general election?

• Labour’s official stance is that if the vote is defeated it will push for a general election. There is consequently a chance that it will look to call a confidence motion in the government should the vote fail next Tuesday.

• Given the current composition of Parliament (316 active Conservative lawmakers compared to 313 on the opposition benches) it would take four DUP MPs to vote against the government (rather than just abstaining) to pass a motion of no confidence.

• If a motion of no confidence in the government is passed by a simple majority and 14 days elapse without the House passing a confidence motion in any new Government formed, a 25 working day countdown to a general election kicks in.

• Alternatively, a motion for a general election could be agreed by two-thirds of the total number of seats in the Commons including vacant seats (currently 434 out of 650).

What does the latest polling say?

• Polling by Lord Ashcroft on the question “Should there be a new general election before the terms of Brexit are finalized?” showed 54% of respondents answering “no, there should not” and 22% saying “yes, there should”.

• The latest YouGov poll (taken in early December) shows support for the Conservative Party running at 40% and for Labour at 38%.

A second referendum?

• Mr Campos Sanchez-Bordona, an advocate general of the European Court of Justice, has said in a written statement that if a country decided to leave the EU, it should also have the power to change its mind during the two-year exit process specified in Article 50 of the EU treaty, and that it should be able to do so without needing the consent of the other 27 member states.

While the advocate general's opinions are not binding, the court tends to follow them in the majority of its final rulings.

• Shadow Brexit Secretary Sir Keir Starmer has said: “Obviously, if that (a vote of no confidence in the government) doesn’t happen, we need to press on to other options such as a public vote because, having gone through the first two options, we would need to look at what happens then.” 

• A second referendum can only happen if the government brings new legislation to hold one and secures the approval of a majority of MPs.

• The Electoral Commission's recommendation is that there should be six months between the legislation being passed and referendum day.

• This could be shortened. The UCL Constitution Unit, a research center on constitutional change, suggests that could be 22 weeks.

• The latest poll of polls by The National Centre for Social Research says that Britons would vote 53% to 47% in favor of remaining in the EU were there to be another Brexit referendum on this question.

• It is not clear that a second referendum would include a question asking voters whether they wished to remain in the EU.

Where does this leave the UK?

• While the vote this week in Parliament might have made a no-deal Brexit harder to achieve (although not impossible), there remains a range of other potential political outcomes for the UK in the weeks ahead.

Some of this will depend upon the margin of defeat for the government’s negotiated withdrawal treaty from the EU when the House of Commons votes upon it next week (something which seems likely given what is currently known).

It is certainly possible that a narrower than expected defeat could encourage the government to attempt a second vote on a similar question before the end of the year.

Equally, a robust defeat of the withdrawal treaty could provide encouragement for those seeking a second referendum (even if the questions to be asked and the timing of such a plebiscite remains very much open to question) or a Norway-style deal (despite some significant uncertainties about whether this is achievable).

Moreover, while the Parliamentary balance of power might suggest that a confidence motion in the government would likely fail, it is certainly possible that it could succeed.

Beyond that, it should also be noted that current polling on the question of either a fresh election or a second referendum on the question of EU membership remains very finely balanced.

In other words the past 48 hours has provided little in the way of added certainty on the question of the UK’s political future.

 

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