Almost two years after triggering Article 50 to leave the European Union, the date circled in everyone’s calendar – 29 March 2019 – may not be the date that the UK leaves the EU. MPs voted overwhelmingly to extend the deadline last night and instructed the government to ask the EU to delay Brexit by at least three months. The result was not a surprise to the market and sterling remains at its recent highs of above $1.32, while the FTSE 100 opened 0.5% higher on Friday.
Parliament voted by 413 votes to 202 on Thursday in favour of extending the deadline, backed by the support of both front benches. Despite a tumultuous week for Theresa May, she managed to gain some control of the narrative again last night and is now expected to bring her twice-rejected deal back to parliament before EU leaders meet on 20 March, most likely on Tuesday. Depending on the outcome of this vote, we will have more clarity as to whether the government requests a short three month extension or something longer.
Will the EU agree to an extension?
The big question now is whether the EU will agree to the extension request. It has been widely publicised that all 27 EU member states must agree to the request in order for it to pass. In addition, the EU has stated on numerous occasions that they will not agree to an extension unless a “credible justification” for extending is presented to them. However, most sources within the EU appear to indicate that they would be open to an extension in order to avoid economic disruption which may result from a “no-deal” Brexit. The European Parliament elections in May add another element of uncertainty, and it now seems that any extension past this point would mean the UK would have to put forward candidates. If May’s deal passes at the third attempt next week it appears likely that they would allow her a few months more to bring forward the necessary legislation. If it does not, Donald Tusk has already expressed his backing for a longer extension in the hope that it brings a material change to the direction of travel being taken. EU leaders attend a planned EU council meeting next Wednesday and this will no doubt be high on their agenda.
What are the next steps?
Theresa May will look to bring her Brexit deal back to parliament early next week. Once again, very little has changed except that Attorney General Geoffrey Cox has updated his legal advice on the Irish Backstop. Whether this is enough to persuade the pro-Brexit Tory rebels or the DUP remains to be seen, but May’s tactic is now to present them with a simple choice: back the deal or risk being stuck in a far longer extension. The 150 vote margin of Tuesday’s defeat could however, still be unsurmountable.
If her deal fails again, a longer extension is likely, which could be as long as two years. In this case we are back to square one. It is also unclear as to whether Theresa May would resign in this scenario, thus far she has given no indications that she is willing to do so, but her position may become untenable. May also promised parliament that they will have the opportunity to take control on 25 March if her deal fails, although this was a tactical move which successfully helped defeat a cross party motion which would have resulted in May losing control of the voting process (the Benn motion).
Despite this, there is still no consensus in parliament on the best course of action to take. Labour has seemingly backed a new referendum but chose not to support it in an amendment vote last night, saying they would prefer to wait for a more opportune moment. The prospect of a customs union type Brexit may also become more likely if Theresa May’s deal is finally no longer an option. If the impasse continues, we may even have to start to consider the prospects of a General Election again.
Provided the EU agrees to an extension, the threat of a “no-deal” will become less likely. The fact that sterling has rallied almost 7% from its lows in December is testament to this. May’s deal passing is likely to be taken positively by the markets, but a longer extension will also bring some relief. In either case we are seemingly closer to a world where UK investors can start looking again at other important global economic indicators and headlines, and consider what is really happening to the UK economy, rather than just the latest news from parliament. This should be a change welcomed by all investors.
Robert Van Kleeck
Senior Fund Manager