Where to next for Brexit: is the UK drifting into no deal?

Brexit has sprung its latest surprise after MPs' all-important vote on Prime Minister Theresa May’s deal was pulled at the last minute. Where does Brexit go from here?

Brexit placard
Source: Bloomberg

The UK has long been a leading example of parliamentary process and democracy-in-action, but British politics is being torn apart at the worst possible time. After a long and drawn out negotiation process, it seems the fireworks have been saved for the final furlong: after a year and a half of negotiations that sees us on our third Brexit secretary (Stephen Barclay), the UK government has pulled the ‘meaningful vote’ for MPs to cast their judgment on Prime Minister Theresa May's Brexit deal.

Read more: Theresa May pulls Brexit vote in Parliament amid fears of defeat

This could lead to a wide range of possibilities that are changing with every development of Brexit. A new deal, staying in the EU, a second referendum, a leadership challenge, a general election and a no deal are all back on the table and, while some are more likely than others, the rapidly changing picture means nothing should be ruled out.

Read more: What are the pros and cons of leaving the EU?

There is support and resistance for all these possibilities, but it is clear there is no consensus in favour of the current withdrawal agreement and a declaration of future trade relations that has been proposed by May. However, while MPs are right to challenge a deal that fails to meet their standards, the most fundamental point currently underappreciated by politicians is that there is one option that requires no agreement or parliamentary approval: no deal.

No deal is the default position: if politicians fail to rally around any other option – whether that be extending Article 50, holding a so-called ‘People’s Vote’ or any other proposal – then the UK does risk sleepwalking into exiting the EU without a deal and with no transition period to cushion the disruption that would ensue early next year.

‘Meaningful vote’ on Brexit postponed with no firm date set

The House of Commons’ all-important vote on May’s Brexit deal has been pulled at the last minute after the government admitted there was no chance of it getting approved. The UK government has promised to hold the vote before 21 January but many MPs are wary, considering the vote was ripped away from them three days into a five-day debate and the fact that they had to fight to get the vote in the first place.

Brexit and the Irish backstop: an impossible impasse?

The disapproval of May’s deal is clear and the House had made its feelings heard after the government lost three votes in one day before being found in contempt of parliament for withholding the text of the legal advice it had been given on Brexit, which it was subsequently forced to publish. That revealed the number one problem preventing any unity over Brexit at present: the Irish border was far from solved by stating the terms of the ‘Irish backstop’ (whereby Northern Ireland would remain in a customs union to create a ‘border’ with the rest of the UK) meant the UK could find itself stuck in the backstop 'indefinitely' and unable to withdraw from it without the agreement of the EU.

Read more: How will Brexit impact UK financial services?

It is important to understand that nobody wants the backstop. It is an insurance policy that tries to mitigate the need to place a border on the island of Ireland if the UK and the EU fail to agree a trade deal that finds a better solution. But, at the bottom line, MPs are rightly concerned about the potential consequences no matter how low the chances are it will be used, especially if it means the UK could be forever tied to the partner it is trying to break away from.

Northern Ireland’s Democratic Unionist Party (DUP) is propping up May’s government and without their support, the prime minister loses her already-thin majority. The DUP has an unmoveable red line that demands Northern Ireland is not treated any differently to the rest of the UK and therefore refuses to back the deal with the current backstop, although it has said it will support the government should May's party colleagues or the opposition party put forward a vote of no-confidence in May’s leadership.

Read more: DUP Won’t back May’s Brexit deal

Possible Brexit scenarios: what happens now?

If the government is to be believed then MPs will have their meaningful vote on the Brexit deal before 21 January 2019. Although the vote has been postponed, it is important to understand the deal on the table will not change. Both the UK government and the EU have said May’s deal will not be renegotiated and that, at best, slight adjustments will be made to try and alleviate concerns about the backstop.

Read more: Juncker says no to renegotiation of Brexit deal

Work and Pensions Secretary Amber Rudd - one of May’s closest allies - and EU leaders Donald Tusk and Jean-Claude Juncker, have all said there is only one deal on the table. If there is little-to-no wiggle room then the government has, as many have said, kicked the can down the road and simply delayed the inevitable rejection of the government’s hard-fought but ultimately unattractive Brexit deal.

Read more: What would no deal mean for UK banks?

The EU is holding a summit this week which was meant to focus on anything but Brexit but the division in the UK and the chaos that has ensued has put the UK’s departure firmly at the forefront of the conversation, even if nobody is expecting much action to follow.

Brexit: can the UK strike an alternative deal with the EU?

'The deal we have achieved is the best deal possible. It is the only deal possible. There is no room whatsoever for renegotiation.' – Juncker, 11 December 2018.

There was a hope that May could use the lack of support for the current deal to show the EU it needed to offer a better deal if they wanted to avoid a no deal, but this looks highly unlikely. The EU has made it clear the deal cannot be renegotiated and act surprised that the deal has been thrown out so quickly.

Labour MP Jess Philips rightly asked the prime minister earlier this week where the logic was in delaying the vote in the hope changing the 'minutiae' would somehow rally the House around her deal. Tusk has said the EU is willing to 'discuss how to facilitate UK ratification' and Juncker has added they are willing to discuss 'further clarifications and interpretations' over the backstop and the role of British politics. No matter what May does with the language of the backstop, it will not be enough to win over the many that don’t want the backstop there at all. This is the impasse: the UK can’t agree on a deal with a backstop and the EU can’t agree on a deal without one.

Read more: ‘Significant upside’ for UK housebuilders if Brexit woes improve

One possibility that could, however unlikely, see May secure enough support by resurrecting a formerly proposed clause would be to allow the UK to unilaterally leave the backstop to trigger a no-deal scenario, meaning the pair would immediately start to trade using World Trade Organisation (WTO) rules. The DUP would still not support such a deal, but it could entice enough of the revolting Conservative backbenchers to reinstall some form of unity among government. May is still somewhat relying on large groups of unsupportive Conservatives making a U-turn and supporting her deal out of fear that losing the meaningful vote would cost her job, spark a general election and hand power over the Jeremy Corbyn’s Labour party.

Brexit: will Article 50 be extended or revoked?

The European Court of Justice – one of the main institutions that Brexiteers want the UK to escape from – caused further controversy by ruling the UK could unilaterally cancel Brexit by revoking Article 50 without the consent of the other 27 member states.

The case was brought by a group of anti-Brexit politicians but was opposed by both the UK government and the EU. While adamant Remainers have called for the UK to wield this power, it is almost impossible to think Brexit would be reversed without some form of public vote as it would throw out the original June 2016 referendum result and cast a bleak shadow over the future of the UK democracy. Many say a second referendum undermines the original vote but reversing Brexit without any second vote would be even more undemocratic.

Although it is highly unlikely that the UK will decide to halt Brexit, it does also open the possibility of extending it by up to a further two years, after which Brexit would have to happen or cancelled entirely. The UK government has insisted it will not do either but, technically, this means the date of Brexit could be pushed back and that the door to staying in the EU is wide open.

Brexit: who will be prime minister in 2019?

The government is now highly vulnerable and the time between now and the vote means May and her cabinet are susceptible to a vote of no-confidence. Conservative efforts led by the European Research Group (ERG) - led by prominent backbencher Jacob Rees Mogg - to rally the 48 letters needed to launch a vote of no confidence against May have so far proven unsuccessful but that announcement could be made any day now.

Plus, the same threat is now being posed by Labour who vowed to challenge May’s leadership should the deal be voted down. With the meaningful vote now up in the air, pressure is mounting on Labour to challenge confidence in May’s leadership. The leader of the Scottish National Party (SNP) and others have said they would support Corbyn should he make the plunge but Labour is aware it will only get one shot and that missing would be a disaster: if May survives a no-confidence vote, then she can’t be challenged for at least one year and the opposition party’s chance of getting into Number 10 has to be put on hold until after Brexit is likely to have happened. If Labour truly wants to change the course of Brexit, then it can’t afford to miss but it’s also running out of time to make its shot.

With so many Conservatives against May’s deal, it may seem certain that the prime minister would be ousted if a vote was cast, but again Labour is aware many Conservatives are against the deal but not against May, and those that are could still flip their support in fear of handing power to the opposition. Plus, Labour is far from united when it comes to Brexit and some members have said they support May’s deal because it reduces uncertainty and stops the UK walking into a no deal, which virtually all the Labour party MPs want to avoid more than anything else. Meanwhile, there are those in the Conservative party who want a no deal and are aware that so long as the rest of the politicians remain divided, that they will get their wish.

Brexit: what would happen if there was a vote of no confidence?

If May was to survive a vote of no confidence then it could be beneficial to the prime minister’s cause. It would show there was support for her leadership but not for the current deal and may force the EU, aware May wouldn’t be going anywhere, to renegotiate a deal or risk a hard Brexit.

If May was to lose a vote of no confidence then the Conservatives are not legally obliged to call a general election. A leadership contest lasting just two weeks would follow and the party would choose its second unelected leader since David Cameron, who called the original 2016 referendum left after the result of the vote was revealed.

According to betting site Oddschecker, the favourites to challenge for the top job in such an event include backbencher and ERG leader Rees Mogg, former foreign secretary Boris Johnson, current foreign secretary Jeremy Hunt, former Brexit secretaries Dominic Raab and David Davis, home secretary Sajid Javid and environment secretary Michael Gove. No one has yet proven brave enough to throw their hat into the ring.

Read more: Brexit secretary Dominic Raab resigns over Irish backstop

Brexit: will there be a general election?

Labour’s official position is that there should be a general election should May lose her job, but even they are aware it would be impossible to oust the prime minister, hold a general election (which they cannot demand) and renegotiate their version of a Brexit deal before the end of March next year. But, as extensions can be made, and nothing being ruled out, it does remain possible. Labour’s position on Brexit would see the UK remain closely aligned with the EU including a permanent customs union, which would spark further debate and disappoint those who believe that relationship wouldn’t deliver Brexit.

However, many have called on Corbyn to formally support a second referendum which, although Labour has toyed with, he has so far avoided. That is important because any chance of a second public vote on Brexit relies on Labour and won’t happen without the party’s backing.

Brexit: will there be a second referendum?

There are growing calls for the UK government to pass this almighty decision back to the public amid the discourse in parliament and the inability for politicians to agree what to do next. A so-called 'People’s Vote' could solve many of the questions that MPs have been unable to answer and provide an updated consensus on what the public wants, but such a decision would come with severe consequences.

It is true that any second vote would be markedly different to the first. Rather than a choice between leave and remain, voters would be presented with three possibilities: May’s deal (whatever that ends up being), no deal or remain in the EU. However, there isn’t even agreement on this as some believe May’s deal should be excluded while others think the option to remain shouldn’t be offered. Again, politicians are failing to agree on the finer details about crucial options and, with the clock ticking down, they risk losing the option altogether.

For those that voted for Brexit and stand by their view today, the threat of a second vote is exactly that: a threat. At the bottom line, anyone calling for a 'People’s Vote' wants to remain regardless of how they disguise it with arguments about the public having the information they previously lacked, the need to form a consensus among the public or because young people who couldn’t vote before should now have a say. Therefore, Brexiteers will never be convinced.

For those that voted Brexit, a second referendum only opens the door to their choice being reversed. Whatever the reasons are in favour of a 'People’s Vote', it can’t be held without undermining the democratic decision of the first referendum or discouraging Brexiteers from participating in democracy in the future (Brexit attracted many voters who had never bothered with general elections).

The debate over whether there should be a second referendum throws up one of the most interesting conundrums of today: there is arguably nothing more democratic than giving the decision back to the public, but there is also nothing more anti-democratic than holding another vote when the first one doesn’t go your way. Both sides of the debate are right, and the issue has caused just as big an impasse in the Brexit debate as the Irish backstop.

Brexit: is the UK sleepwalking into a No Deal?

More twists and turns are coming but only one option remains on the table and becoming more likely by the day. No deal is the only possibility that requires no majority among politicians or the public and will happen unless everyone can agree on any other alternative. The debate is not two-sided either, meaning the division is even deeper. Some are arguing for a hard Brexit, some want to adopt a Norway model, some a Canada ‘plus’ model, and some want to pretend this whole saga didn’t happen and remain.

Brexit: what does this all mean for stocks and business?

The latest Brexit chaos has increased overall uncertainty and raised the likelihood of the UK leaving the EU without a deal next year. This has been reflected by the pound which fell to its lowest level against the euro since the referendum in 2016 following the meaningful vote being pulled by the UK government.

Read more: The value of the pound since Brexit

This has caused the usual rise in the FTSE 100, which includes global firms that get an earnings boost when converting their profits from overseas into sterling, with more domestic-focused stocks not faring as well.

Read more: What is the investment case for Brexit and the FTSE 250?

Businesses are no closer to understanding what they will be faced with next year and the unknowns have only prompted companies to spend huge sums on preparing for no deal. While that is a logical decision, it could end up being an unnecessary one if a hard Brexit is avoided, simply placing cost pressures on businesses already struggling with other Brexit-related issues. But, for industry, no deal is currently the only scenario it can plan for – even if it is the scenario it is most desperately trying to avoid.

Brexit

Find out what Brexit could mean for the markets and how a hard or a soft exit from the EU could affect traders.

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