Lost in Brexit purgatory

Thirty-three months after voting to leave the European Union, the United Kingdom remains bitterly divided over how it plans to quit, eventually, the world’s biggest trading bloc. It looks increasingly probable that either Brexit is softening and may be delayed until 2021, or less likely, the UK may still crash out of the EU in the months, or weeks, ahead.

The UK parliament last week rejected for a second time Prime Minister Theresa May’s slightly amended withdrawal agreement. It then voted against leaving the EU without a deal, and on a third day, voted to extend the deadline to at least 30 June. The UK’s parliamentarians will now be asked for a third time to back the withdrawal agreement.

If parliament repeats its rejection, as seems likely, a longer delay or an ‘accidental’ no deal Brexit remain possible. The Prime Minister will probably try to use the threat of a longer extension to try to bounce Brexit’s backers to support her withdrawal agreement, face a possible 21-month delay to leaving, or even risk the whole project in a second referendum or general election.

Markets’ working assumption is that the UK will eventually negotiate a managed ‘soft’ EU exit, allowing a transition period in which the two parties can negotiate the detailed tariff schedules, resource-sharing quotas or access for services. Right now, the only path to a transition period is to back Mrs May’s deal. Last week sterling advanced against the euro and the US dollar as investors interpreted the UK votes as lessening the chances of an economically damaging crash Brexit.

“There are only two ways to leave the EU, with or without a deal,” an EU spokesperson said last week. “The EU is prepared for both. To take no deal off the table, it is not enough to vote against no deal — you have to agree to a deal.” Others were less diplomatic. Dutch Prime Minister Mark Rutte, reportedly, privately said that voting to exclude a no-deal Brexit is “like the Titanic voting for the iceberg to get out of the way.”

"Brextra" time?

Any three-month extension to the 29 March deadline, once requested by the UK, needs the unanimous backing of the rest of the EU’s 27 members, and will probably be discussed at the 21/22 March European Council meeting. Crucially, the process requires the UK to make a “reasoned request” for an extension. In other words, the UK must make a positive case for the delay. Logically, the positive case would be to allow the UK parliament to pass the withdrawal agreement’s legislation.

Unless Parliament backs the withdrawal agreement, “it does not seem very plausible that a request” for a two-to-three month extension “will attract the necessary unanimity from the EU27,” tweeted Eleanor Sharpston, the UK’s Advocate General at the European Court of Justice.

Legally, the only unilateral way for the UK to stop Brexit from happening on 29 March would be to revoke Article 50.

For Mrs May’s deal to pass, third-time lucky, it needs a change of heart from Northern Ireland’s Democratic Unionist Party, a number of Tory Brexiteers and some Labour MPs. Arithmetically that all looks unlikely, given the lack of work the government has put in to win over the different constituencies in parliament and Labour party members in particular.

Worse, in the current parliamentary environment, the Prime Minister’s own Conservative party discipline appears to have broken down, allowing cabinet ministers to vote against their own government. At the 14 March vote on extending Article 50 the government minister for Brexit, Stephen Barclay, spoke in favour of an extension before voting, minutes later, against the delay. Ironically, it will be Mr Barclay’s job to present the UK’s request for an extension to the EU Council (see timetable).

“Why would we extend these discussions?” asked the EU’s lead negotiator, Michel Barnier, last week. “The discussion on article 50 is done and dusted. We have the withdrawal agreement. It is there.” Mitigating that view by the EU’s European Council President, Donald Tusk, who said that a much longer delay, possibly through 2020, may be possible if “the UK finds it necessary to rethink its Brexit strategy and build consensus around it.”

Grating Britain

Meanwhile, the rest of the EU has different priorities. German Chancellor Angela Merkel and French President Emmanuel Macron are both dealing with populist oppositions ahead of the European elections, slowing economies and wider frictions with the US and Russia.

In the meantime, if they continue to reject the withdrawal agreement without a consensus for an alternative, the UK’s parliamentarians may be handing the immediate future of the country to the EU’s leaders.

Whether Brexit goes ahead at the end of March or June, the real risk is that the UK crashes out of the EU without a transition deal and so is unprepared for the economic consequences, which we have already written about in more detail (here and here). Agreeing to a transition period would at least create a little space for a more orderly exit.

Given sterling’s potential downside in the event of a no-deal Brexit, by accident or parliamentary design, our role as a wealth manager is to shield portfolios from volatility. For this reason, we prefer not to take unnecessary risk in portfolios and while we may lose a fraction of any initial gains from a rally before participating, believe that hedging some sterling exposure is prudent.