David Page, Senior Economist at AXA Investment Managers comments on the latest round of Parliamentary voting on Brexit

  • The government lost the second vote to pass its deal with the EU by 149 votes, larger than expected.
  • Parliament will now tomorrow vote on whether it chooses to leave the EU, without a deal. We expect Parliament to reject this option (repeating the Spelman amendment).
  • If so, Parliament will vote on Thursday to seek an extension of Article 50. We expect it to choose to do so.
  • We are moving through an uncertain political phase, but the default outcome remains that the UK would leave without a deal in a little over two weeks.

 

The UK Parliament voted for the second time to reject the deal the government has negotiated with the EU. The last time this was voted upon, the deal was rejected on an historic scale of 230 votes. The current deal was rejected by 149 votes – a huge rejection by any standards other than comparison to the first rejection. This vote saw 39 more Conservatives support the deal. However, 75 Tories continued to reject the deal against an almost united rejection from the broader House (Labour support for the deal remained just three).

The vote came after the UK secured last minute legal assurances that the Irish backstop would not become a permanent arrangement. However, the government’s case was somewhat undermined by the Attorney General Geoffrey Cox’s legal opinion that the risks that the UK remained tied to the EU “remains unchanged”, despite him also saying that the document did “reduce the risk that the UK could be indefinitely and involuntarily detained in the Irish backstop…”. This assessment failed to provide the legal reassurances required to change sufficient minds over the Irish backstop question.

The Prime Minister made a croaky statement after the defeat where she reiterated that with this deal being rejected, Parliament would proceed to vote on whether or not to choose to leave the EU on 29 March without a deal. Given that Parliament has already voted to avoid a “no deal” exit in the Spelman amendment in January, we expect it to repeat this vote tomorrow. Importantly, Theresa May stated that this would be a free vote for her party – although this may reflect nothing more than an inability to whip the differing factions of the Conservative Party in either direction. If we are right, this would result in a third vote on Thursday asking whether Parliament would want to seek an extension of Article 50 from the EU. Having ruled out both deal and “no deal” by that stage, the only likely path appears to be to delay Article 50, which is how we expect the House to vote on Thursday.

We will see over the coming days if our short-term outlook is correct. If it is, it raises a number of questions. First, how long would such a delay be? Theresa May has previously referenced a short, one-off extension. We consider two to three months likely. However, there are some calls for a longer-term extension, not least from Europe, which will need to ratify any request for extension unanimously. Second, what would the UK do with such an extension? We have argued that the Prime Minister would continue to corral support for her deal between the risks of a cliff-edge Brexit and the rising possibility of long-term delay and a second referendum. This appeared undoubtedly her strategy, but recovery from a 149 deficit on a second vote, looks difficult. Theresa May stated that this left a reduced number of choices, including to leave with “no deal”, revoke Article 50, carry out a second referendum or to leave with a different deal. If Parliament chooses to avoid the first option, a short-term extension could prove insufficient to reach the alternative conclusions.

If our outlook for the next two votes is wrong, we note that the default outcome remains for an exit from the EU on 29 March (or perhaps some months later) without a deal. The risk of this outcome has increased in our minds from the 16% we previously estimated. For now we envisage something closer to 20%, a probability that will be sharply influenced by the ensuing votes either on Wednesday (directly) or Thursday (a vote not to seek Article 50 extension could leave the government rudderless as it rushes towards the impending cliff edge of the “no deal” default outcome”).

The final question is how this affects the outlook for the Prime Minister. She talked of her responsibilities in the next stages of the process. However, many now question her authority after two sizeable defeats on her government’s key policy. While the Tory Party cannot initiate another leadership challenge having seen one-off some months ago, it can bring internal pressure that could see Theresa May resign. The opposition leader Jeremy Corbyn replied to her statement to call for a General Election. Depending on developments over the coming months, the government may again face a vote of no confidence, which could result in an early General Election.

Market reaction was muted. Despite a wide-spread expectation that the government would fail to pass the deal tonight, the loss was towards the wider end of expectations. Sterling rose immediately after the result, but quickly returned to previous levels as the f/x market for once appeared unsure of what the coming day’s developments might bring. 

Contacts

Jamie Wynn-Williams

+44 20 7003 2680

Jamie.Wynn-Williams@axa-im.com

Julie Marie

+33 1 44 45 50 62

Julie.Marie@axa-im.com

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