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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