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UPDATE: EU balks at May's request for extension, raising odds of no-deal Brexit


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UPDATE: EU balks at May's request for extension, raising odds of no-deal Brexit

Facing a deadline a little more than a week away with no Brexit deal in hand, U.K. Prime Minister Theresa May asked the EU to delay the country's departure from the bloc until June 30, but Brussels said it would grant an extension only if British lawmakers agree on a withdrawal agreement.

In a letter to European Council President Donald Tusk, May said she will attempt for a third time to get her Brexit deal through Parliament. Absent any extension, the U.K. is set to leave the EU on March 29.

While the U.K. parliament also voted last week to rule out a no-deal Brexit, lawmakers may not be able to avoid such an outcome if the EU refuses to grant an extension. Crashing out of the EU with no deal in place would see the U.K. falling back on WTO rules that would push up tariffs and erect non-tariff barriers that threaten to block the supply of goods, including essential medicines.

Bank of England Governor Mark Carney said in November 2018 that the majority of British companies are "unprepared" for a no-deal Brexit, with aerospace and auto manufacturers most at risk. Just under a third of companies polled said they had adjusted their business plans since the 2016 referendum by setting up new legal entities, relocating offices or changing their supply chains.

Late March 20, May briefly addressed the public, saying she would not support a delay beyond June 30 and criticizing Parliament for its inability to coalesce. "So far, Parliament has does everything possible to avoid making a choice," she said.

The British Parliament rejected May's deal twice amid concerns that the pact would keep the U.K. indefinitely tied up with the controversial Irish backstop solution, which seeks to prevent the return of a hard border between the U.K.’s Northern Ireland and Ireland.

U.K. Speaker John Bercow said March 18 the House of Commons cannot vote again on the divorce pact unless significant changes to the deal were made.

In her letter to Tusk, May said she still plans to bring her deal back to the chamber and table a motion "as soon as possible."

"If the motion is passed, I am confident that Parliament will proceed to ratify the deal constructively," said May, who reiterated that a much longer extension would oblige the U.K. to hold European Parliament elections.

EU responds

In response to May's letter, Tusk told a news conference that a short extension to Brexit is "possible" but would be "conditional on a positive vote on the withdrawal agreement in the House of Commons."

"If the [EU] leaders approve my recommendations and if there is a positive vote in the House of Commons next week, we can finalize and formalize the decision on extension in the written procedure," said Tusk, who previously appealed to EU leaders to be open to a long delay, if necessary.

Tusk, who did not specify the duration of an extension, said May's proposal of a new Brexit date has "merits" but "creates a series of questions of a legal and political nature" to be discussed at the European Council meeting March 21-22.

Any short extension to Brexit should last only until May 23, according to European Commission President Jean-Claude Juncker and an EU document seen by Reuters.

EU leaders need to unanimously approve any extension.

Next steps

With the EU unable yet to make a final decision on delaying Brexit, the focus now shifts back to another vote in the House of Commons on a Brexit pact. Analysts at ING Research have said May could find ways of getting around Bercow's recent ruling that her deal cannot be revived.

May's government could stage a series of indicative votes on the different options on the path forward, including a second national Brexit referendum, the Labour Party's proposed permanent customs union with the EU, and a softer Brexit that leaves the U.K. in both the EU customs union and the single market.

"The problem is that it's far from guaranteed any of these options would command a majority," the analysts said.

Meanwhile, Berenberg Bank said the EU could either endorse the U.K.'s request for a delay in principle or ask the U.K. to specify by March 28 or 29 "whether it wants to use the delay simply to finalize and ratify" the Brexit option it chooses.

"The EU could then call a special summit at short notice to formally grant the Brexit delay request," Berenberg Bank chief economist Holger Schmieding said in a note.

If the U.K. cannot endorse any Brexit option by March 28, the delay would have to be much longer, Schmieding said.