Today was gonna be the day (it’s being thrown back to the EU…)

29 Mar 2019

Philip Shaw

Chief economist

The UK was originally meant to leave the European Union on 29 March. But after MPs rejected Theresa's May's Withdrawal Agreement for a third time, what happens now, and how have markets reacted?

Until a week ago, 29 March was destined to be the UK’s Brexit date. However, the EU Summit on 21-22 March granted Britain an extension to 12 April, or 22 May if PM Theresa May’s deal had been accepted this week. In what seemed to be a final throw of the dice earlier today, Mrs May put the Withdrawal Agreement (minus the Political Declaration) before the House.
 
This was rejected by 58 votes (344 to 286). 34 Conservative MPs voted against the government, all but half a dozen of them hardline Eurosceptics. The 10 DUP MPs in the Commons also rejected it. The plain arithmetic is that another 30 Tory votes would have pushed the motion across the line.

286

MPs who back Theresa May's Withdrawal Agreement, including five from the Labour benches

344

MPs who rejected Theresa May's deal, including 34 Conservatives and 10 from the DUP

What next for May?

After the vote, the PM stated that the government was coming to the ‘limits’ of the process, effectively conceding that her deal was dead. She added that Parliament would seek to reach a consensus on alternative ways forward on Monday when the Commons will take a further look at the options from last Wednesday’s series of indicative votes. She also stated that the government would attempt to achieve an ‘orderly Brexit’.
 
Where now? We consider Mrs May’s statement to be significant. The term ‘orderly Brexit’ suggests strongly that the government will not countenance a ‘no deal’ exit from the EU. The PM will therefore likely head back to Brussels next week to argue for an extension to the UK’s EU membership beyond 12 April.
 
Significantly EU Council President Donald Tusk announced that the EU would hold an emergency Summit on 10 April.
 

Indicative votes

Monday’s votes now become very important. The PM’s conciliatory tone suggests that she has given the process her implicit backing. We do not believe (at this stage) that the Commons will want to press for a second referendum.
 
The option of the eight voted upon on Wednesday which came the closest to success was (Kenneth Clarke’s) customs union proposal, which (after a recount), was defeated by just six votes. Interestingly, the ‘customs union + EEA’ option (Nick Boles’ so-called Common Market 2.0) failed by a relatively large 94 votes.
 
But here, there were in excess of 160 abstentions, including 35 SNP MPs, 10 DUP MPs and a large number of Labour MPs. We note in particular, that this option would be consistent with an open border between Northern Ireland and the Republic, which would negate the need for the backstop.
 
Common Market 2.0 could, therefore, gain momentum. We will watch the progress of Brexit developments and both of these possibilities very closely.
Supporters of Brexit rally near the Houses of Parliament in London, U.K., on Friday, March 29, 2019. U.K. Prime Minister Theresa May is making a desperate push to get her Brexit deal approved in Parliament to avoid a huge delay to Britain's divorce from the EU, even though she's facing what seem to be impossible odds. Photographer: Chris Ratcliffe/Bloomberg via Getty Images
Leave Supporters gathered near the Houses of Parliament on what would have been the day the UK left the EU

EU elections?

If and when the UK requests a further extension, the EU will impose conditions. The first will be that the UK participates in the EU elections in late-May. A second will probably be that Britain presents a clear roadmap on how it will gain approval for the way ahead. A majority in the Commons via the indicative votes might do the trick.
 
But if parliament still cannot come to a decision, there may be no alternative to a second referendum. To No. 10, this prospect seems even more toxic than participation in the elections to the European Parliament, which may imply support for the indicative vote process.
 
For now, Mrs May remains as PM, as her notice to resign earlier this week was contingent on the approval of her deal. There is talk of a possible General Election at some stage. To our minds, this would fail to solve the Brexit impasse, as did the poll in 2017. But with a febrile atmosphere in Westminster, this is a scenario we cannot rule out.
 

Market reaction

Sterling continued its weakness after the vote, dropping below $1.30 at one stage. However perhaps on the realisation that a ‘softer’ Brexit may be in store,  the UK currency has subsequently regained some of its poise.
 
The perception of the likelihood of the success of Monday’s round of votes may now take over as the key driver of sentiment. The EU’s approach to any UK extension request will also be critical. Unfortunately for business, clarity over the future remains elusive.