BNY Mellon: Big Week Ahead For UK

11 maart 2019

The next week looks likely to be one of the most significant in UK politics (and for GBP) in many years. Here’s how it looks from the perspective of Sunday afternoon.

Negotiations on the Withdrawal agreement

Michel Barnier, the EU’s chief negotiator, said on Friday that the EU is committed “to give the UK the option to exit the single customs territory unilaterally, while the other elements of the backstop must be maintained to avoid a hard border. [The] UK will not be forced into a customs union against its will.” This would allow Great Britain to leave the customs union unilaterally while Northern Ireland would remain. This would effectively place a customs border in the Irish Sea.

This idea was rejected immediately by both UK government’s Brexit secretary and the DUP - which has a confidence and supply agreement with the government.

March 12: The “Meaningful Vote”

The UK’s House of Commons has been promised that by March 12 it will have been given a meaningful vote on a (hopefully) revised withdrawal deal between the UK and EU.

At present it appears the meaningful vote will be on the same negotiated deal as was brought to the House of Commons on January 15. On that occasion the deal was rejected by 432 votes to 202. 118 out of 317 Conservative MPs voted against the deal.

Some estimates put the scale of the potential defeat on Tuesday at in excess of 150 votes.

There has been a report that the PM’s team is “drawing up plans to offer MPs a motion outlining the deal it would like rather than the one Brussels has approved, to show the European Commission what it would take to obtain parliament’s approval.”

An imminent vote on a second referendum?

This seems unlikely at present. Shadow chancellor John McDonnell said on Sunday that the Labour Party would focus on defeating the government’s deal on Tuesday and then on delaying Brexit rather than trying to secure a second referendum this week. An amendment proposing a second referendum from two backbench Labour MPs will not now be put to a vote this week.

Will there then be a vote on a no deal Brexit?

Not necessarily. If the House of Commons rejects the negotiated deal with the EU then the PM has said she will give MPs another vote on whether to press ahead with a no-deal Brexit. If Parliament were to reject "no deal” then MPs would be asked whether they wanted a “short limited extension to Article 50”. However, there has been a report that the PM’s team may be forced to scrap the votes planned for Wednesday so that the PM can try to win final concessions at an EU summit on March 21.

A “no confidence” motion?

There has been a report that “senior cabinet ministers have held private talks about whether they will have to visit the UK PM to tell her to go as early as this week.” The same report cited an unnamed ministerial aide as predicting that if Labour tabled another vote of no confidence in the government, “Tories will vote for it” in order to “bring her down”.

What if the vote on a no deal Brexit does go ahead?

On January 29, the House of Commons voted 318 (including 17 Conservative MPs) to 310 (including 3 Labour MPs) in favour of a non-legally binding amendment that rejected “the United Kingdom leaving the European Union without a Withdrawal Agreement and a Framework for the Future Relationship”.

When asked whether the vote would be binding, foreign secretary Jeremy Hunt said that the PM would “listen” to what Parliament had to say.

It is unclear whether the PM would use the party whip on the no-deal Brexit vote.

A softer Brexit?

There has been a report that a cross-party group of MPs has hired three QCs to draw up a new version of the Brexit political declaration, committing the UK to a Norway-style relationship with the EU. Should the government lose the vote on Tuesday the report says this group would table an amendment designed to force the government to adopt it.

An Extension of Article 50?

If Parliament were to reject "no deal” in a vote on Wednesday then MPs would be asked whether they wanted a “short limited extension to Article 50”.

The vote a week and a half ago in Parliament on an amendment that if MPs vote to delay Brexit then the government should seek an extension from the EU and bring forward legislation to change the date of the UK's departure saw 88 Conservative MPs, 10 Labour MPs and 9 DUP MPs abstain in the vote. Twenty Conservative MPs voted against the amendment. More Labour than Conservative MPs voted for an amendment that effectively endorsed the government’s plan.

German Chancellor Angela Merkel has said she would be open to providing the UK with "a little more time". However, there have been a number of reports suggesting that a "short, limited extension" of Article 50 would not be permitted by Brussels.

It is unclear whether there is any consensus in Parliament on the length of time MPs would be prepared to accept that Article 50 could be extended by.

GBP

The rejection of the government’s withdrawal deal on January 15 saw GBP come under significant pressure (only alleviated by subsequent hints of an extension of article 50). Similarly, Mr Barnier’s comments on Friday saw GBP come under renewed pressure. This indicates that the growing likelihood of a defeat on Tuesday will weigh on GBP from the off this week. Therefore the key question on Tuesday (assuming that the vote is on the actual deal rather than on what the government would like it to be) will be the scale of the forecast defeat.

A relatively modest loss (50 votes or less) could see an improvement in sentiment towards GBP given it would suggest that it was still possible to reach an agreement with Brussels by the end of the

month. However, a defeat of the magnitude already being talked about would lead investors to consider what would happen next.

A failure to bring the subsequent two votes to the House of Commons would keep both the idea of a no deal Brexit alive (a key element of the PM’s negotiating strategy) and frustrate those looking for assurances that the UK might seek an extension of article 50. Given that talk of extending article 50 has proved a supportive factor for GBP this year, a development along these lines could undermine the currency.

It seems reasonable to assume that opposition parties would react negatively were the promised votes to be cancelled. It is therefore possible that a vote of no confidence in the government could be called. The last confidence vote (called on January 16) saw the government win by 325 to 306. Much would therefore depend on the mood within the Conservative party. Talk of a confidence motion could therefore act as a further negative for GBP.

While there is no indication the the PM is intending to step down, this cannot be discounted given the reports over the weekend. With most candidates in the running for the leadership tending towards the pro Brexit side of the party, this could prove a negative for GBP as well.

Should the vote on whether to keep the option of a no deal Brexit alive be put to Parliament then much will depend of whether the government decides to whip Conservative MPs to support this view. While not legally binding, it seems reasonable to assume that a vote in favour of taking this option off the table could prove GBP supportive.

Similarly, should a vote to ask for an extension of article 50 pass then this should also be GBP supportive. However, much will depend on what proposals are put to the EU and what time frame the EU will be prepared to discuss.

Beyond GBP

Signals from a variety of markets (ranging from AUD/JPY through to Chinese equities) indicate that underlying tensions remain within the global financial system. It is therefore worth recalling the negative impact that the referendum vote on June 23 2016 had on markets.