September 12, 2019
Boris Johnson assumed his role as the British Prime Minister with all guns blazing, promising to deliver Brexit before the October 31st deadline, come what may. According to recently released government papers entitled ‘Operation Yellowhammer’ a no deal departure could result in all kinds of chaos including food and medical shortages.
However, pushing ahead with Brexit in any shape or form, was perhaps easier said than done and it seems that now, the PM has very few options left on the table in order to make this happen. Before being prorogued (I.e. suspended for a five week period – a move which Johnson enforced by obtaining approval from the Queen), Parliament blocked his Brexit strategy and also refused to give Johnson the election he wanted. On Wednesday, Scotland’s highest court ruled that the prorogation of parliament was unlawful, and this matter has been passed to the Supreme Court for a final judgement next week.
Initially, Johnson wished to hold an election mid-October, as polls suggest he would gain a majority, and thereby have more room to maneuver both politically and diplomatically.
In the background, Labour MP Hilary Benn has had his own bill to block a no deal Brexit (an exit without any agreement) approved by the House of Lords and by the Queen. The Benn Bill dictates that if no Brexit deal has been drawn up by October 19th, the Prime Minister must seek an extension of Article 50 by three months to January 31st (unless Parliament votes in favour of a no deal departure).
Nonetheless, Mr Johnson kept up his demeanor, saying: “This government will press on with negotiating a deal while preparing to leave without one… No matter how many devices this parliament invents to tie my hands I will strive to get an agreement in the national interest.”
Now, it seems his main options are to: resign as Prime Minister and hand over the reins to a caretaker government (in doing so he can remain Head of the Conservative party as the Benn Bill says the Prime Minister must request an extension), hold a vote of no confidence in his own party (and thereby force new elections through), ignore the Benn Bill (and potentially be impeached and face jail time) or get back around the negotiating table with the EU.
To reach a deal that is palatable on both sides, Johnson may have to soften his stance with regard to the Irish backstop – this has been the key sticking point in the negotiations all along. In the initial agreement struck between Theresa May and the EU, a backstop was put in place as a last resort measure that would avoid the very controversial issue of reinstating a hard border between Northern Ireland (which will remain in the UK) and the Republic of Ireland (an EU member country). The backstop meant that no customs checks would be enforced on goods travelling across the border that divides Ireland (in order to avoid jeopardizing the Good Friday Peace deal). The Irish Prime Minister, Leo Varadkar, a backstopless deal is equivalent to a no deal, and this is an essential ingredient of the withdrawal bill. However, Brexiteers argued that this defeats the purpose of Brexit entirely by keeping the UK tethered to a customs union. Speaking on Monday, standing by Johnson’s side, the Irish Prime Minister said: “Negotiating FTAs [free trade agreements] with the EU and US and securing their ratification in less than three years is going to be a herculean task for you. We want to be your friend and ally, your Athena, in doing so.” In Greek Mythology, Athena intervened to save Hercules from himself – in seeing that he had gone mad, she struck Hercules down and knocked him out to prevent him causing more damage than he had already done.
There are already whispers that Johnson is considering a re-defined backstop after he mentioned an all-Ireland food zone which would essentially entail a customs border being drawn in the Irish sea between Ireland and Britain, rather than through the island of Ireland.
Johnson faces strong opposition from the DUP – the party which propped up Theresa May’s government – on this proposal. However, what now comes to question is whether losing the support of the DUP changes much for a party which has already lost its Parliamentary majority following the dismissal of 21 conservative rebels, and subsequent resignations (including that of Boris Johnson’s own brother).
If Ireland and the UK manage to patch an agreement of this essence together, Johnson will present it to the EU27 at the EU Council on 17-18 October, with the fact in mind that if it is not ratified, he will have to request an extension on 19th October (as per the Ben Bill). In doing so he would break his promise of delivering Brexit by the deadline on 31st.
While the battle rages on between Brexiteers and Remainers in British political spheres, the economy is feeling the brunt of it. Weakness can be seen across all segments of aggregate demand. The most striking data (and most damaging for long-term growth) is investment. A new study by the Bank of England purports that Brexit-related has left spending on new capital dwindling 11% below where it would otherwise have been. However, 0.3% GDP growth in July (versus estimates of 0.1%) means that mechanically, Britain should manage to avoid a technical recession this quarter.
The Bank of England chair, Mark Carney is optimistic that the UK has adequate fiscal space to counter the global slowdown whilst shunning the idea of negative interest rates as a policy tool in the UK. He has, however, expressed concerns about the volatility of sterling, comparing it to an emerging market currency. The pound ricocheted to $1.32 in May and this month has kissed $1.20.
Author: Group Investment Office