Brexit white smoke, but will Parliament blow it away?

17 Oct 2019

Phil Shaw and Victoria Clarke

Investec Economists

Earlier today, lead EU Brexit negotiator Michel Barnier and UK Prime Minister Boris Johnson announced that an agreement had been reached over a new Brexit deal.

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The agreement represents a dramatic turnaround compared with 10 days or so ago when relations between the UK and the Irish Republic (RoI) appeared to hit a new low and a deal looked far from sight. 
 
The details of the new Withdrawal Agreement (WA) are much along the lines of news reports over the past couple of days. These represent a compromise on new arrangements for Northern Ireland (NI), put forward by Mr Johnson two weeks ago. Instead of NI residing squarely in the UK customs territory after the UK leaves the EU, it will find itself in a hybrid arrangement.
 
In brief, goods shipped from Great Britain to NI would need to be customs checked and the relevant EU tariff paid. If the final destination were the RoI, the tariff would be paid to the EU. Were they destined for NI, the importer would receive any rebate due. Arrangements for VAT have also been outlined.
 
This arrangement would come into place as the UK’s transition period concludes at the end of 2020 and would remain in place until any new future trading arrangement took effect. The transition period also has the possibility of lasting one or even two years longer, subject to a joint agreement.
As part of the agreement, NI elected officials do have to give their consent to the post-transition period arrangement continuing. Four years after this enters into force elected NI representatives will be asked to decide whether to continue to apply the rules. Where the decision is reached by simple majority, the decision of whether to retain the arrangement would be looked at again after four years. However were there cross-community support, the period would be eight years.
 
These arrangements differ from Prime Minister Johnson’s original proposal which would have given the Democratic Unionist Party (DUP) an effective veto every four years.
 

Future relationship

 
The Political Declaration (PD) (i.e. the outline of the vision of the future relationship between the UK and the EU, which is not a legal treaty) was also updated. The key change in the new 27-page PD is that it incorporates the widely published shift in the position of the UK Government under Prime Minister Boris Johnson, to seek a Free Trade Agreement (FTA) working towards “zero tariffs and quotas between the EU and the UK”.
 
This is a move away from the framework set out in the previous PD, published under Prime Minister Theresa May’s tenure which instead sought an “ambitious customs arrangement” with the likes of trusted trader programmes and administrative cooperation in customs matters the order of the (future) day. This shift to the FTA will help to bring the more eurosceptic holdouts in to back the deal in the forthcoming vote in Westminster.
UK Prime Minister Boris Johnson speaks to the media at the end of the first day of a two-day summit of European Union leaders on October 17, 2019 in Brussels, Belgium
Prime Minister Boris Johnson has agreed a Brexit deal with the EU, but will it be voted through Parliament?
Other changes to the PD were more minor. For the EU, concerns that the UK might gain a competitive foot-up from its EU exit have been dealt with by what look to be more robust commitments towards a level playing field and open and fair commitments.
 
More eurosceptic MPs might also take note of the change of wording in the role of the Court of Justice of the European Union (ECJ) whereby it is stated that there should be no reference to the ECJ “where dispute does not raise such a question”.
 
The deal will now go for consideration at the EU Summit later today and will presumably get the green light. However, this is not the end of the journey. Indeed former Prime Minister Theresa May also got to that stage in November last year and subsequently lost three votes in the House of Commons.
 
Mr Johnson plans to hold a fourth ‘meaningful vote’ (MV4) in the Commons this Saturday. If Parliament agrees later on today, this will represent the first weekend Commons sitting since the Falklands War in 1982. The question, of course, is whether Mr Johnson has more success than his predecessor in gaining the backing of Parliament.
 
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Crunching the numbers

 
The starting point is that MV3 was defeated by 58 votes on 29 March 2019. Arithmetically this means that a net 30 MPs are required to switch to the government for the motion to be carried. The situation though in practice is more complex given the composition in the Commons has changed given defections, whip withdrawals, and a by-election.
 
In March, the 10 DUP MPs, plus 28 European Research Group (ERG) Conservatives voted against it. If all else remained the same, the support of those 38 would grant the government a victory. So far, the DUP is suggesting that it will not back it, although a favourable renegotiation of the terms of the confidence and supply arrangement with the Conservative Party might provide a sufficient incentive.
 
Furthermore, some of the hardline ERG MPs might choose to hold out, although the ultra-high profile nature of the Saturday sitting will pile the pressure on to back the government. We also do not know how many, if any, MPs previously backing MV3 (including those among the 21 Tories that had the party whip withdrawn from them) will vote for MV4.
 
Its success may depend on how many Labour MPs break party instructions and support it. In March, the number was five. In short, we suspect that the government will win the day on Saturday, but it is impossible to be confident. The direction of the DUP will be critical as it will also determine the decisions of a number of ERG MPs.
MV4 does not provide the legislation necessary to ratify the agreement. This requires the passing of the Withdrawal Agreement Bill (WAB), which could take a couple of weeks to work its way through Parliament.
Sterling rallied sharply on the news, touching $1.2990 and 85.8p against the euro. It has since given up some of those gains, now at $1.2796 and 86.8p. We would expect the pound to gain further ground if MV4 is passed at the weekend. 
 
A couple of final points are worth making at this stage. First, MV4 does not provide the legislation necessary to ratify the agreement. This requires the passing of the Withdrawal Agreement Bill (WAB), which could potentially take a couple of weeks to make its way through Parliament.
 
Furthermore, there are several Brexit related bills that need to be completed as well. This makes an EU exit on 31 October challenging to say the least, but media reports imply that the government remains confident that the timetable can be completed in time. 
 
Second, a major fear of a ‘no deal’ Brexit was gridlock at major ports, especially Dover. This agreement would alleviate such concerns, but only for a year or so, thanks to the UK’s entry into a transition period until end-2020, which would virtually replicate the relationship between the UK and the EU.
 
Even a free trade agreement between the two would not solve this since goods would need to be checked at all entry points between the EU/NI and Great Britain. Today represents a major step forward, but much work remains to be done.