dennis shen

As 29 March 2019 approaches, either a transitional ‘Brexit-in-name-only’ with an agreement of some kind or an Article 50 extension appears on the cards, according to Dennis Shen (Scope Ratings). Prime Minister Theresa May is currently short of the needed parliamentary majority to ratify her Brexit deal, however parliamentary dynamics will shift to a degree going forward, with the question on whether the extent of the shift is sufficient for Brexit to happen. In a scenario in which a deal cannot be ratified, an Article 50 extension is probable, rather than a no-deal Brexit. So, one way or another, the UK appears set to remain in nearly all institutions of the EU for a period directly after 29 March 2019, whether the UK is a member of the EU in name or not thereafter.

Brexit will feature centrally in coming months as the current chapter ends with the UK’s two-year Article 50 negotiation period concluding on 29 March.

Since August 2017, at the rating agency Scope Ratings, we have assumed that the most likely end-state of negotiations is either a long-run soft Brexit (the baseline) or an eventual no-Brexit ‘Breversal’. In our view, either soft Brexit or Breversal is meaningfully more likely than hard Brexit (the latter defined as the UK exiting the single market and customs union). In the near term, either: i) a transitional Brexit-in-name-only with an agreement (and entry into a near-identical transition period in which true negotiations on the future relationship would begin) or ii) an Article 50 extension (with the UK remaining momentarily inside the EU) is the most probable outcome by 29 March 2019. Either way, in the short term, Brexit-related uncertainty is set to linger well beyond 29 March 2019, increasing a cost on the UK economy already totalling at least 1% of GDP. This cost of Brexit uncertainty is reflected within Scope’s AA/Negative sovereign rating for the UK.

The lead-up to Brexit Day this March will be highly volatile, and the situation before 29 March 2019 could easily get worse before it gets “better”. Although Prime Minister May survived a Tory leadership challenge, the easier route for change in Conservative Party leadership has been if Theresa May in the end were to resign, which is possible were it to become clear the Brexit deal cannot make it through Parliament. In any such scenario, a fresh Conservative leadership election becomes necessary and could present significant, undesirable disruption at this sensitive juncture.

The vote on the deal originally tabled for 11 December 2018 was postponed owing to a lack of parliamentary support, with intentions now for a vote on the week of 14 January. However, it is not at all clear that the draft Brexit deal can pass in Parliament even this month absent meaningful additional clarifications and assurances, including those from the EU – such as on the Irish backstop, an upgraded legal status regarding the non-binding declaration on the UK and EU’s future relationship, and/or a greater role for the UK Parliament in negotiations on future UK-EU relations.

Were the Brexit deal not to pass on an initial attempt this month, the government must present to Parliament within 3 sitting days detailing how it plans to proceed, with Parliament allowed to amend this motion and express backing for alternative Brexit strategies. In the scenario of a deal being rejected in Parliament, and especially were “indicative votes” eventually held – clarifying what form of Brexit, if any, could pass the House of Commons, the question then becomes how willing the EU would be thereafter to respond and tinker further with areas.

The dynamics in the UK Parliament are likely, however, to shift over time, with the critical question only on when and whether it shifts adequately to get Mrs May “over the line”. Parliament’s back is not against the wall yet so to speak with near 3 months still to Brexit, and concerns of even worse alternatives than the government’s deal will only increase as remaining time recedes. There could be a second or even third time around in the House of Commons thereafter were an initial go to fail.

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Whether some version of Mrs May’s deal can make it through Parliament depends in time on if DUP MPs and enough Brexiteers are forced in the end to vote for a less-than-sought-for withdrawal deal out of fear of fresh elections and Brexit being stopped altogether and/or soft-Brexit advocates vote for it out of fear of hard or no Brexit at all. Alternatively, there is, however, a significant possibility that Remainers obtain enough support to block the deal altogether, which precipitates we believe an Article 50 extension scenario (which is the set of circumstances to facilitate the space of time to continue negotiations, if not hold early elections and/or a second referendum).

Implicit here, in the case of there being no ratifiable agreement in the period before 29 March 2019, an extension of Article 50 talks is more probable than a no-deal Brexit from the EU. There are at least five factors that compel negotiators to avoid a no-deal Brexit:

  1. The significant and asymmetric economic impact ‘no-deal Brexit’ would have on the UK;
  2. Far from adequate no-deal exit preparations with limited time remaining, even as contingency planning in the UK and EU has accelerated;
  3. Inadequate UK parliamentary support for a no-deal exit alongside a UK civil society that does not back no-deal;
  4. A no-deal Brexit jeopardises the open border between North and South Ireland, and would increase questions about Scotland’s future in the Union;
  5. Initial UK plans to swiftly enter WTO trading terms in a no-deal scenario are very unlikely, meaning that the UK could enter trading limbo in a no-deal exit scenario.

In one state of affairs in which Article 50 is extended (with the UK still in the EU after March), this could come with an early parliamentary election and/or a second referendum for the period after March. Fresh general elections, for example, could hypothetically bring a coalition of the Labour Party, the Scottish Nationalist Party and/or the Lib Dems, which could be in a position to call a second Brexit referendum – even if Labour leader Jeremy Corbyn has stated his personal opposition to this. But any referendum date is unlikely to be any sooner than six months after it is called – edging the time horizon into late 2019 if not 2020. The case for a new referendum is strengthened by shifts in public sentiment with now those who believe the original referendum result was “wrong” holding an 8-11 percentage point lead. The European Court of Justice ruled that the UK can unilaterally revoke Article 50, and it could do so without altering the terms of membership (i.e. all opt-outs would remain), suggesting a route remains open to Breversal.

Whether Brexit takes place on 29 March or not, the UK appears set to remain in near all institutions of the EU, including the single market and customs union, for a period well after 29 March 2019, lasting at least until end-2020 (and probably long thereafter). As what form Brexit takes, if any, continues to be worked out, the significant costs of Brexit uncertainty, including the impact on long-run growth potential, will continue accruing – challenging the United Kingdom’s economic conditions and creditworthiness.

This post represents the views of the author and not those of the Brexit blog, nor the LSE.

Dennis Shen is Associate Director in Public Finance at Scope Ratings, based in Frankfurt and Berlin. He is lead analyst on the UK’s sovereign rating. Previously, Dennis was a global economist with Alliance Bernstein in London and New York. His research interests include international political economy, global governance and environmental regulation. Dennis graduated from the MPA in International Development from the LSE, and completed undergraduate studies at Cornell University.

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