Wednesday 3 April 2019

What do we want? Brexit. When do we want it? Err...

The last few days in British politics have been as tumultuous as at any time in recent history with Brexit opening up unprecedented fissures within the two main political parties. Attempts by MPs on Monday to find alternative solutions to the Brexit crisis failed to yield a majority solution as all four motions on the agenda were rejected – the customs union option falling short by a margin of just 3 votes, which curiously matches the number of Labour MPs who abstained. Such is the parliamentary impasse that the prime minister yesterday requested the support of the opposition Labour Party to secure her withdrawal agreement whilst intending to ask for a short delay to the Article 50 process. Meanwhile there is mounting evidence that uncertainty is beginning to weigh on the economy.

The politics

Turning first to the politics there were four options on the parliamentary agenda on Monday: A customs union; “Common market 2.0”; a “confirmatory” referendum and one designed to assert parliamentary supremacy to prevent a no-deal Brexit, with the ultimate sanction being the revocation of Article 50. All were rejected, but it is notable that across the four votes the Conservatives averaged just 24 votes per motion in favour whereas Labour’s average was 185. When it came to opposing the motions, the Conservative average was 244 versus 19 for Labour. For all the criticism levied at Labour’s opposition to Brexit, it was the Conservative rebels who have on three occasions prevented the Withdrawal Agreement from being ratified by parliament and it was they who blocked MPs efforts to find alternatives to a no-deal Brexit.

Having spent nearly three years appealing to the right-wing of her party, only to be rewarded by constant undermining of her position and a challenge to her party leadership, it should be no surprise that the prime minister finally decided to reach out beyond the Conservative Party to try and find a resolution to what can only be described as a political crisis. The bluster and fury of Conservative MPs suggesting that the destiny of Brexit now rests with Jeremy Corbyn rings hollow in view of the fact that it was their own intransigence that led us to our current position. Typically, the debate tends only to be seen through the prism of Westminster. What MPs have failed to recognise is that their rejection of the Withdrawal Agreement means the destiny of Brexit was long ago handed over to the EU.

The prime minister’s suggestion that “we will need a further extension of Article 50 – one that is as short as possible and which ends when we pass a deal” will not go down well in Brussels. There are two separate issues in this one sentence. One is the idea of a further extension, having already been given one, and the other is the issue of finding some sort of “deal” (I did like the optimistic conditional “when” rather than the more likely “if”). By far the bigger problem is likely to be the reaction in Brussels to the first point.

Speaking today, European Commission President Juncker set an “ultimate deadline” of 12 April for the UK parliament to pass the Withdrawal Agreement: “If it has not done so by then, no further short extension will be possible. After 12 April, we risk jeopardising the European parliament elections, and so threaten the functioning of the European Union.” This makes perfect sense. UK hopes for an extension to 22 May merely risk pushing the cliff edge further out into the future without any guarantee that a domestic political rapprochement will be found. Indeed, the reaction of Conservative MPs following the PM’s plan to reach out to Labour suggests that the political climate could become more, rather than less, dysfunctional.

Thus, unless May is able to go the summit in Brussels next week with a cast-iron guarantee that the UK has ratified the withdrawal agreement, the EU is likely to insist on the UK taking part in the EU elections (if indeed it offers an extension at all). Minister for the Cabinet Office David Lidington (widely known as the de facto deputy PM) has already given local councils the green light to start preparations for the elections. In advice delivered in a letter to local government officers, he wrote “the opportunity to guarantee that the UK would not participate in EP elections has been removed.” The calculation that MPs will have to make is whether they are prepared to back the Withdrawal Agreement in order to quickly remove the UK out of the EU or whether they are prepared to accept participation in the elections in the hope that they will be able to secure a better compromise in the longer-term.

The economics

There are increasing indications that Brexit-related uncertainty is beginning to weigh on the economy. The purchasing managers index in the services sector last month dipped below the critical 50 threshold, below which activity is contracting, for the first time since July 2016 in the wake of the EU referendum: Aside from this one-off, we have to go back to December 2012 for a sub-50 reading on this index. The new business sub-component of the services PMI declined for a third consecutive month. Against that, the manufacturing index spiked up to 55.1 – the highest since March 2018. But this was driven entirely by companies’ inventory building ahead of a potential no-deal Brexit. Needless to say, once the stockpiling process is complete, there will be a sharp decline in the manufacturing PMI. Although we will have to wait another five weeks before the ONS publishes March GDP figures, it certainly looks as though Q1 ended on a weak note.

One of the regular conversations I have been having with clients in recent weeks is whether it would not be better for the economy to face a hard Brexit so that the uncertainty factor is eliminated. My answer is an unequivocal no. It would be far less damaging for a 10% decline in investment to be spread out over (say) 18 months than to occur in the space of three. Continuing to kick the can down the road also avoids the potential for disruption to trade flows. Moreover, uncertainty does not dissipate once a hard Brexit takes place as companies will struggle to figure out how to operate in a post-Brexit environment.

The bottom line

The UK remains in limbo so far as Brexit is concerned, whose main proponents have proven unable to deliver on their promises and they have no one but themselves to blame for the fact that the UK is (still) a member of the EU despite being supposed to leave last Friday. They had Brexit within their grasp and blew it by continuing to vote down the Withdrawal Agreement. Part of me wonders whether this was their intention all along. Brexiteers never had a plan and were concerned they would be blamed if Brexit turned out not to be the promised land. This way at least they can continue to do what they do best: Sniping from the sidelines.

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