Brexit update

On 14 November, UK Prime Minister Theresa May announced a collective cabinet agreement to progress a draft Brexit deal designed to permit an orderly UK exit from the European Union on 29 March 2019. However, this formal cabinet backing represents a weak indicator of final parliamentary approval of the deal. Plans for future UK-EU relations remain unclear.

Core points of the UK-EU agreement include a UK commitment to pay GBP39 billion in final financial settlements, the assurance of EU citizen rights in the UK and vice versa, and the establishment of a post-Brexit transition period largely mirroring the legislative framework of the UK's current EU member-state status until at least the end of 2020.

The latter can be extended should both sides agree. The most contentious proposal is a backstop to avoid a hard border between the UK region of Northern Ireland and the Republic of Ireland, with termination thereof permitted only by joint agreement.

The draft agreement requires approval from a largely antagonistic parliament; both hardline Brexiteers and pro-EU MPs are very unhappy with the compromise.

Given the hostility to the deal from Northern Ireland's Democratic Unionist Party (DUP), a group of Conservative MPs, and large parts of the opposition, parliamentary consent for the UK's exit deal will hinge on support from rebel Labour Party MPs. Any such rebels would be likely to come from electoral constituencies that supported Brexit or would be MPs hopeful that an orderly exit would enable them subsequently to shape the second and decisive phase of Brexit negotiations on future UK-EU relations. In the context of multiple ministerial resignations over the deal, particularly that of Brexit Secretary Dominic Raab, the government as a whole and May's leadership in particular is weakened, and a leadership challenge seems increasingly likely.

Parliamentary rejection of the deal would significantly increase the risk of the UK leaving the EU without any arrangements in place.

The UK's fallback option then would be the application of "World Trade Organization (WTO) terms", which would have an immediately disruptive impact on UK and EU citizens and both domestic and international businesses. Risks would include supply-chain disruption leading to a rise in consumer costs and temporary shortages of some foods, medicines, and industrial components; difficulties for UK and EU citizens entering and exiting the UK; reduced access to financial services; and wider security concerns.

Other outcomes if the exit deal fails could include attempts to renegotiate some parts of the agreement with the EU, a vote of no confidence in May and/or an early general election, or a deal being put to the wider public in a second referendum.

Neither of these options would guarantee progress and would further complicate current procedures. Given that the UK parliamentary vote on the Brexit deal is likely to be scheduled for early December, all of these pathways would probably require a delay in the UK's exit date to avoid a "no-deal" scenario.

Posted 16 November 2018 by Jan Gerhard, Senior Analyst Country Risk Europe, S&P Global Market Intelligence