Brexit delay may mean end of May

Six-month extension opens room for more questions than answers

The agreement struck by the European Union on the UK’s Article 50 negotiating period was a difficult compromise. Few onlookers predicted an extension of six months, shorter than the 9-12 months that European Council President Donald Tusk had hoped for, but longer than what French President Emmanuel Macron had been advocating.

Theoretically, six months should be long enough to facilitate change, if the political will exists. UK law-makers could decide to back Prime Minister Theresa May’s deal in its current form, though this still seems improbable. Six months might also be long enough to hold a second referendum – the minimum time to pass the legislation, complete question testing and hold a campaign is estimated at around 22 weeks. However, this assumes law-makers decide to go down this path more or less immediately, which, again, is improbable.

The option most likely to curry favour among members of parliament is a permanent customs union, which the EU has made clear would take minimal time to make the necessary changes to the political declaration. In practice, though, there are many reasons to think the deadlock will not be broken before the 31 October deadline.

Talks between May and opposition Labour leader Jeremy Corbyn are moving slowly. While both leaders might not actually be that different when it comes to their favoured version of Brexit, their respective ministers, backbench MPs and grassroots supporters are poles apart.

If those talks are unsuccesful, May has suggested she will give parliament a voice through further ‘indicative votes’ on different options. But even then, since the deadline has been extended, the immediate pressure has dispersed, reducing the chances of compromise among MPs at this stage.

The other reason to think October could be too early is that the UK might have another prime minister by then. May has hinted she is prepared to resign. She told Conservative MPs that she would step aside if her deal was passed, having also said in fairly strong terms that she couldn’t stay if Article 50 was extended beyond June.

There is little doubt that May’s position has been weakened still further over the past few weeks. It seems likely that she will step down at some point this year, and almost certainly before December, when Conservative backbenchers will have their next opportunity to stage a no-confidence vote.

One possibility is that she chooses to step down to allow a leadership contest to take place over the summer, ahead of the annual Conservative party conference at the end of September. But these contests take time, and unless things get moving soon, the window to hold a leadership challenge before the October deadline could close.

If May were to resign, the chances are her replacement will be more eurosceptic. Assuming that a member of the pro-Brexit European Research Group is one of the two MPs on the ballot paper, it seems probable that grassroots Conservatives would vote them in as leader. If that were to happen, the government would probably try to renegotiate the contentious issue of the Irish backstop. Brussels is highly unlikely to budge on that front, which could see a new Conservative leader simply push for ‘no deal’ instead.

The key question then is whether May tries to tie the hands of her replacement before stepping down. During cross-party talks with Labour, there have been reports that negotiators have been looking at ways of creating a so-called ‘Boris-proof Brexit’, named for the former foreign secretary and vocal Brexiteer, Boris Johnson.

If the landscape doesn’t shift before October, then the perceived risk of ‘no deal’ is likely to rise again. If a new eurosceptic leader is in place, then markets may become more concerned that they could be prepared to take the UK over the cliff edge. Equally, the EU could become more exasperated with proceedings. There is a view emerging among some officials that the costs of ‘no deal’ are lower than allowing the UK to stay half-in-half-out for a prolonged period.

However, the chances of ‘no deal’ are relatively low at this stage. In either scenario, the final decision rests with British MPs. While a new prime minister might be more open to ‘no deal’, most MPs are not.

If law-makers aren’t able to back any deal, we suspect a majority would choose to revoke Article 50 rather than accept ‘no deal’. While this may be viewed as a fairly extreme move, it would probably be spun as a way of stopping the clock to allow time for a rethink on the Brexit plan, rather than opting to remain in the EU.

There is the possibility too of a further extension to Article 50, as Tusk has hinted at. While he may not represent all the views among member states, there is a sense that many in the EU are reluctant to be seen ‘kicking the UK out’ and taking any blame for a ‘no deal’ Brexit. This stance could harden between now and October, but for time being the likelihood of ‘no deal’ remains around 20%-25% – entirely probable, and possibly tremendously dangerous.

James Smith is Developed Markets Economist at ING. This is an abridged version of an article that first appeared on ING THINK.

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