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Why the EU will reset Brexit countdown

Why the EU will reset Brexit countdown

  • 25Oct 18
  • Stephanie Kelly Political Economist, Aberdeen Standard Investments

Negotiating an orderly UK exit remains the best option for both sides, which is why we expect Brussels to acquiesce and extend the Article 50 transition period. But it will likely come with strings attached.

There are good reasons to think that the European Union will extend the deadline for finalising terms on its future relationship with the United Kingdom.

There are good reasons to think that the European Union will extend the deadline for finalising terms on its future relationship with the United Kingdom, not least the risk of severe disruption in the event of a no-deal exit.

From the EU’s point of view, the avoidance of a hard Irish border and the integrity of the single market are not consistent with a no-deal outcome. Extending the Article 50 period is therefore preferable to a no-deal Brexit.

At the same time, the economic and political risks of crashing out of the EU without a deal act as a strong deterrent for the UK. Both negotiating teams remain invested in finding a solution.

Article 50 of the Treaty of Lisbon gives any EU member state the right to quit the bloc unilaterally. Prime Minister May triggered Article 50 on March 29, 2017, giving the UK two years to negotiate an exit.

A withdrawal agreement needs to be agreed and passed by January 2019 to allow time for ratification in national parliaments across the EU by the end of March. If a deal is not reached in time, an extension would be required to avoid an abrupt exit.

But because a withdrawal agreement would not need to set out the exact terms of the future UK-EU relationship, we suspect the most contentious issues could be discussed during an extended transition period, provided terms on the Irish backstop can be agreed.

Political shakeup

However, if the EU agrees to extend the transition, we suspect it would come with conditions. We don’t think policymakers in Brussels would be prepared to prolong Article 50 negotiations only to be derailed by divisions in the Conservative Party at some point in the future.

We suspect the need to break this political impasse increases the prospect that the UK will hold a general election sooner rather than later. The next national vote is not scheduled to take place until May 2022.

The opposition Labour Party has already called for a fresh election. It increases the prospect that any deal Prime Minister Theresa May is able to strike with the EU will be voted down in Parliament, triggering a vote of no confidence in the government, or a new referendum.

We see a Parliamentary veto as the most likely trigger for a general election. However, we suspect the Conservatives would be more likely to pursue a second referendum than a fresh election that they could lose, particularly given the absence of a clear successor to Mrs May.

We would expect a new referendum to comprise three options: remain in the EU; exit the EU with no deal; and retain the existing deal framework being negotiated with Brussels.

Whether Mrs May is able to finalise a deal or not, we would expect her to step down in the near term – either of her own accord, or because her hand is forced by hard-line Brexit MPs from within her own party.

Even though the opinion polls show Labour trailing the Conservatives, continued ruling party divisions over a deal secured by Mrs May could push voters towards the opposition.

A Labour government would almost certainly lead to a repricing of risk assets, especially in the short term. With this is mind, we are working to assess what these market impacts would be.

Here we assign probabilities for Brexit negotiations as we see them from here.

*% reflects our probabilistic assessment of the most likely outcome at each step of the negotiation.

Source: Aberdeen Standard Investments (as of October 2018)