On 29 January, the United Kingdom’s Members of Parliament have voted on three important amendments.
- First, the Brady amendment, which states that Parliament would support the Withdrawal Agreement (WA) subject to replacing the Irish border backstop with “alternative arrangements”.
- Second, the amendment to reject a no-deal Brexit “in principle”.
- Third, the Cooper amendment, which sought to mandate Parliament to extend the Article 50 deadline beyond end-March in the absence of a WA.
The MPs voted in favour of the Brady amendment (317 versus 301), rejecting in principle a no-deal Brexit while voting against the Cooper amendment.
What are the next steps?
Prime Minister Theresa May will now try to reopen negotiations in order to persuade the EU’s remaining 27 member states to drop the Irish border backstop and replace it with an “alternative arrangement.” The latter, known as the “Malthouse Compromise,” is intentionally vague.
There is little detail but it looks like a simple rehash of the Brexiteers’ attempts to replace the WA’s backstop with other commitments. These include a commitment to deliver a Canada-style Free Trade Agreement over three years, apply technology to avoid a physical border on the island of Ireland and possibly extend the transition period. This only underlines that a large percentage of British MPs continue to believe in the impossible.
Then, assuming Mrs May successfully renegotiates with the EU (highly unlikely – see below) she will present the agreement to the House of Commons in mid-February and ask Parliament to ratify it. If it does not, we will likely see further amendments letting MPs reiterate their views. Without an agreement, and no request for an extension, the UK will crash out of the EU at the end of March.
One clarification: the House of Commons’ decision to reject the Cooper amendment does not mean that the UK cannot request an extension of the Article 50 deadline. The amendment was designed to empower Parliament to seek an extension. The rejection simply leaves the decision whether to request an extension from the EU27 with Mrs May. In fact, the probability of pushing the deadline beyond the end of March has not changed, and remains the most likely scenario.
Takeaways from Parliament’s votes and implications for sterling
A large number of MPs apparently still do not understand the UK’s (low) bargaining position in the negotiations. There was also speculation that the recent softening in the euro area’s economic activity will somehow increase the UK’s negotiating leverage. We seriously doubt it.
To put it bluntly, there is almost no chance that the EU will agree to the removal of the Irish border backstop. Indeed, shortly after the Parliamentary results announcement, EU officials repeated that the backstop is an integral element of the WA and is not up for renegotiation. As a reminder, the Republic of Ireland, an EU member, recently reminded British politicians that it is opposed to such a possibility.
It is hard to understand, rationally, why the UK keeps pushing an issue that the EU first dismissed at least 12 months ago. Especially when the UK knows that the EU knows that the UK does not want a no-deal Brexit. Of course, there is a (slim) possibility that this is part of Mrs May’s plan. When the renegotiations fail, or fail to even happen, and the PM returns to Parliament in mid-February with the original WA, the timetable will be even more urgent and some MPs may then be more inclined to vote in favour of the agreement.
The most likely scenario remains that Mrs May will have to request an extension of the Article 50 deadline, or the House of Commons accepts the Cooper amendment, because it is highly unlikely to find a solution in time.
Sterling weakened on the news but, apparently, the fact that MPs rejected in principle the prospect of a no-deal Brexit (which was neither a surprise nor very important as it is non-binding), capped losses and GBP is now trading near 1.31 against the USD and EURGBP at 0.8720.
However, if we look a little further, some additional issues pop up. The first is about trust: the EU27 made its intentions clear months ago while the UK keeps barking up the wrong tree. At best, this is tiring, time consuming and frustrating. At worst, it drains trust for UK’s intentions to proceed seriously, which may make the EU slightly less willing to accept a potential deadline extension request. In general, a loss of trust will make any future negotiations more difficult.
Second, even if the UK requests and is granted an extension, there is a change in Parliament’s sentiment. Two weeks ago, the market seemed to applaud Mrs May’s proposal for cross-party discussions to reach a broader Parliamentary approval. Developments since then, and this week’s votes, suggest that Mrs May’s priority is now to keep her Conservative Party intact.
We may now end up with an extension but the House of Commons remains deeply divided. This implies that the deadline extension is more about “kicking the can down the road” without a concrete proposal in place, rather than a means to reach a robust agreement. If so, business and consumer confidence will come under more pressure, weighing on an economy, which is already under the strain of severe uncertainty. The longer an extension period, the worse this impact is likely to be. At the extreme, there is a point at which, instead of postponing investments, businesses simply divert projects away from the UK.
We still believe that for now, GBP rallies will be capped and we do not see GBPUSD rising sustainably above 1.30/31 over the next few weeks. We still see the longer-term trajectory higher under the central scenario of a soft Brexit, but developments will need to be monitored very closely. Politics is indeed unpredictable but the UK’s parliamentarians have taken this to another level.
Vasileios Gkionakis - Global Head of FX Strategy - Lombard Odier