Brexit: Deal or no deal?

October 18, 2019

There are just over two months left in this decade, and one of the most defining political events that it will be remembered for, is reaching a climax. The question is whether the UK will leave the EU in an orderly fashion on October 31st  or not.

Since the UK’s decision to extract itself from the European Union in 2016, politicians in Brussels struggled to reach amicable divorce terms. In the eleventh hour, it seems that they have finally managed to produce a deal that could be palatable on both sides of the English channel. The British Prime Minister, Boris Johnson, broke the news in a tweet that said:

We’ve got a great new deal that takes back control – now Parliament should get Brexit done on Saturday so we can move onto other priorities…

While the EU Commission President Jean-Claude Juncker tweeted:

Where there is a will, there is a #deal – we have one! It’s a fair and balanced agreement for the EU and the UK and it is testament to our commitment to find solutions. I recommend that #EUCO endorses this deal

Of course, the common thread between these two tweets is that the deal still has to be ratified on both sides. In the UK, the British Parliament will vote for or against it on Saturday. The deal that was agreed between the EU and Theresa May failed to pass through the British Parliament three times, ultimately leading to her resignation. If the UK Parliament does agree on the deal (we will outline why this could be challenging later), it will then have to be signed off by each EU member state.

The new deal sees the Irish backstop removed. This has been a key sticking point all along, as the reinstatement of a hard border across the island or Ireland between the north (which will remain in the UK) and the south (which will remain in the EU) was viewed as undesirable and as a violation of the Good Friday Peace deal.

A new solution to the backstop

While the most of the deal is identical to that drawn up by Theresa May, the key differentiator is the treatment of Ireland. Rather than having a border between the north and south, Northern Ireland would be aligned to the EU single market.  Simultaneously, it will also remain part of the UK’s customs territory, meaning it is part of any future trade deals struck by the UK after Brexit.

How does that work in practice?

Well Northern Ireland would act as an entry point into the EU customs area. Products entering N. Ireland would not be subject to UK tariffs, so long as they are not destined for Southern Ireland. A joint EU/UK committee would decide which goods are at risk of entering the single market and the UK will collect EU tariffs on them on behalf of the EU.

Of course these are very high level plans and the devil will be in the details.

If the deal comes to fruition, the UK will continue to abide by EU rules until the end of 2020, and possibly longer, to allow businesses to adjust, and it will pay an estimated £33bn “divorce bill”. The rights of EU citizens living in the UK, and vice versa, will be guaranteed.

Opposition

Despite headlines stating that we have a deal, nothing is set in stone. In fact, the deal has been opposed by the Conservative party’s coalition partners, the DUP, primarily because goods entering Northern Ireland from the UK, would be subject to a customs check and the DUP believes that “This is not acceptable within the internal borders of the United Kingdom.”

Lawmakers from the main opposition party, Labour, are considering attaching an amendment to Johnson’s deal that would give MPs another chance to try to force the government to hold another referendum. But overall, Labour MPs will be hard to win over, especially considering that voting for the deal could theoretically help hand Johnson a better victory at the next general election.

The below graphic from the BBC Research shows how close Saturday’s vote is going to be:


Whichever way the vote goes, it looks like an extension of Article 50 is the most likely scenario.

Reassuringly, on Friday, a former Conservative MP, Sir Oliver Letwin who seeks to avoid a no-deal Brexit tabled an amendment that would ensure the Brexit deadline is extended until the Brexit deal had passed each step in Parliament to become law. The BBC writes that the amendment is a ‘cunningly-crafted proposition which, crucially, could be voted for by MPs who want a deal, but don’t trust this one, and don’t trust the government.’ At the same time, Angela Merkel, the German Chancellor has said that the UK should be offered an extension if the British Parliament rejects the deal.

As you can see from the graphic above, it is still a coin-flip as to whether this renewed deal will pass in the UK Parliament. We monitor the events closely, but still avoid taking any positional bets in our portfolios, especially while Sterling is moving like the needle on the gauge between deal and no-deal.

Author: Group Investment Office