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

  • Parliament accepted 2 of 7 amendments to the Brexit process last night.
  • One sent the government to renegotiate the Irish backstop arrangement.
  • We think this will ultimately prove unsuccessful, as will any broader attempt to achieve exit without consideration of the border arrangements (the Malthouse compromise).
  • The other amendment was a non-binding amendment to avoid ‘no-deal’ Brexit, having rejected a binding arrangement to delay the process.
  • We interpret this as a mark of intent from Parliament: that further slippage will result in a delay to the process and increased Parliamentary involvement in the direction of Brexit.
  • Parliament returns to vote on 13 February. We expect concrete measures to delay Brexit to be enacted at this point.

 

Last night saw the latest in a round of Parliamentary voting over Brexit. In a somewhat arcane process, Parliament voted on seven separate, but sometimes overlapping, motions with regards to Brexit. It approved two of them: The Brady amendment, a government-backed amendment to negotiate the Irish backstop arrangement for “alternative arrangements”; and the Spelman amendment, a non binding amendment to avoid a no-deal Brexit. Interestingly Parliament narrowly rejected the Cooper amendment, which was a binding amendment to seek an extension to the Article 50 process.

The acceptance of the Brady amendment sees Prime Minister heresa May return to Brussels to try to seek “alternative arrangements” over the Irish backstop agreement. his is despite the UK and EU having spent nearly two years trying to solve this (to our minds irreconcilable) problem of achieving no borders between two states outside of a single market framework. The lack of alternatives has not been for the want of trying. However, PM May is once again “battling for Britain” – perhaps in the hope of gaining further concessions from the EU; or perhaps as an opening gambit towards the so-called “Malthouse Compromise”. This compromise, apparently favoured by 98% of Tories, states that if backstop renegotiations fail, the UK would guarantee EU citizens’ rights and the divorce settlement in exchange for a three year transition to prepare for a managed no-deal Brexit, or a free trade agreement. However, once again, ory agreement is based on something that the EU has already ruled out: this returns to the initial sequencing of talks where the EU offered transition in exchange for citizens’ rights, the divorce settlement, and a commitment to no borders in Ireland.

It is not inconceivable that EU negotiations provide PM May with some succour. However, we think it highly unlikely that the EU will re-open negotiations on the Withdrawal Agreement (or countenance the broader overtures of the Malthouse compromise). First, the EU has laid out a consistent position over the importance of maintaining no borders in Ireland throughout the Brexit process – from the initial sequencing, to the insistence on a ‘backstop’ in case the alternative arrangements already in the Withdrawal Agreement do not pass muster. Second, if the UK intends to use the leverage of ‘no deal’ Brexit on the EU – a process that will evidently do more harm to the UK than the EU – Parliament’s acceptance of the Spelman amendment, to rule out ‘no-deal’ Brexit is likely to suggest that the UK Parliament would not allow government to follow this path , even if Brexit-ultras try to push it that way. As such, the EU is likely to call the UK’s bluff. The EU was swift to respond to last night’s developments, EU President Tusk reiterating that the Withdrawal Agreement would not be re-opened. Moreover, Tusk’s swift response stopped any divergent messages coming from separate EU countries. The EU continues to follow a unified and ‘on message’ approach to these negotiations. As such, we consider the most PM May could hope for in further negotiations is likely some form of politically binding separate reassurance over the outlook for the backstop.

The acceptance of the non-binding Spelman over the binding Cooper amendment was also, we think, telling. Cooper amendment failed not because of Conservative unity, but because 14 Labour MPs voted against it this time, while only 3 joined the government against Spelman. We suggest this was an expression of Parliamentary intent. Parliament was happy not to wrest control from the government at this stage, either letting it try all it can, or giving it enough rope to hang itself. Either way, Parliament has expressed its position against a ‘no deal’ Brexit and it would take a modest adjustment from a few Labour MPs to see this intent switch to a legally binding form. This may have been influenced by PM May’s speech before the voting where she highlighted that MPs would have another chance to make such binding votes when the next meaningful vote comes about on Wednesday 13 February.

What happens next? We suggest that last night’s votes begin to sketch the contours of the path ahead. We do not expect the government to make sufficient progress in renegotiating the backstop to secure Parliamentary (Conservative) support for the current deal; we do not expect the EU to engage in Malthouse compromise discussions; and as such we see the process coming back to Parliament in a fortnight’s time. At this point, we expect Parliament to vote on amendments to delay Brexit (similar to Cooper); and put in place a process that allows Parliament to flesh out where a majority might lie (similar to Grieve). this process will deliver is still unknown. A majority for a Customs Union or Norway could remove the need for a backstop, but comes with their own drawbacks; Parliament might finally support the current EU deal (which will remain on the table), through cross-party support; or more extreme outcomes could come into view, including a People’s Vote. But a process that sees ongoing membership into the summer and a transition that follows thereafter is still our central scenario.

Market reaction, however, appeared to reflect the more pragmatic assessment that the closer the UK gets to 29 March without alternative, the more likely the ‘no-deal’ Brexit default becomes. Sterling fell by 0.7% to the US dollar and 0.8% to the euro after the Cooper amendment rejection but has since recovered about half of that loss. Yields were barely changed at either 2-year or 10-year tenor, although 10-year yields have edged lower closer to 1.26%. To our minds, Parliament has suggested it will work to avoid a ‘no deal’ Brexit, despite government trying to use the option as negotiating leverage. While we thus consider the likelihood of ‘no deal’ Brexit to be relatively low, around 20%, we are mindful that the closer the deadline looms the more the chances of this outcome will rise.

Contacts

Jayne Adair

+44 20 7003 2232

Jayne.Adair@axa-im.com

Jamie Wynn-Williams

+44 20 7003 2680

James.Wynn-Williams@axa-im.com

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