Theresa May’s decision to delay the vote on the Withdrawal Agreement in the House of Commons and go back to the EU seeking more concessions has increased the uncertainty surrounding the UK’s exit from the European Union. This article evaluates the probabilities of various Brexit scenarios that could take place in light of this recent development.
The Current Situation
Last week, Prime Minister May decided to delay the vote on the Withdrawal Agreement that was originally scheduled for 11th December given the lack of support for the existing deal. This delay precipitated a no-confidence vote in her leadership initiated by her own backbench MPs who have grown increasingly frustrated with her Brexit strategy. Having survived the no-confidence vote, she went back to the EU to try and salvage some concessions that would enable her to get the deal accepted in the House of Commons. The vote on the Withdrawal Agreement has now been scheduled for the week beginning the 14th of January. The main sticking point in the agreement is the existence of the “backstop” for Northern Ireland.
If the UK and the EU fail to agree on a future trading agreement, then the backstop would come into effect, which would mean that Northern Ireland would still be in regulatory alignment with the EU and stay in the single market while the rest of the UK would not. This is unacceptable to May’s Northern Irish allies in Parliament, the Democratic Unionist Party (DUP) because it would threaten the integrity of the union of the United Kingdom. The backstop is deemed a necessary solution to avoid a hard border between Northern Ireland and the Republic of Ireland, which would violate the Good Friday Agreement.
In light of these developments, this article gauges the probability of future scenarios and concludes with a risk outlook.
Scenario 1: Ratification of the Withdrawal Agreement
Despite May’s efforts to amend the terms of the Withdrawal Agreement, it is unlikely that the deal gets passed when eventually brought to a vote in mid-January. The DUP seeks legal assurances that the backstop will be time-limited, however, EU leaders have made it clear that while they are ready to provide assurances that the backstop is simply a last resort, they are unwilling to reopen the withdrawal agreement and make fundamental legal changes. Without these legal changes, the DUP, along with a large swathe of Conservative MPs, are unlikely to support the deal.
Moreover, the Labour Party’s official position is to oppose the deal, arguing that it does not protect jobs and the economy in a post-Brexit environment. Apart from a few MPs who supported Brexit and others who serve Brexit supporting constituencies, most Labour MPs are likely to fall in line and vote against the deal.
Therefore, May’s attempt to go back to the EU and seek further concessions is unlikely to increase the probability of the deal getting through. Given the dire parliamentary arithmetic, it is still highly unlikely to get passed.
Scenario 2: General Election
The Labour Party has made it clear that in the event of the deal failing to pass, it would initiate a motion of no-confidence in the government in order to precipitate a general election. However, under the Fixed Term Parliament Act, a two-thirds majority in parliament is required to bring down the government. Whatever their views on Brexit, Conservative MPs are unlikely to support this motion. The Labour Party is committed to staying in the customs union and might even pursue a softer Brexit, given the pro-EU sentiments of its membership.
A soft Brexit would entail Britain staying in both the single market and customs union. This option would minimise disruption to supply chains and maintain the access that financial services firms currently enjoy in the European market. Furthermore, the opinion polls are tight and an election is simply too much of a risk for most Conservative MPs. Therefore, a general election is a highly unlikely scenario.
Scenario 3: Norway Plus
A further possible scenario assuming the Withdrawal Agreement gets voted down is what is being called a “Norway Plus” arrangement. Under this arrangement, Britain would remove itself from the EU’s political structures but remain a member of the single market and customs union like the other members of the European Economic Area (EEA).
However, it is unclear whether this will emerge as a viable fallback option as there are a number of drawbacks to this choice. First, Britain will lose its veto and voting power but will have to accept any changes to EU regulations. It would also have to accept the free movement of people, which is a key red line for the government. Although there is an “emergency break” clause to reduce immigration, this is only reserved for an economic crisis and is unlikely to be enforced to stop regular inflows of workers from the EU.
Given the caveats above, it seems unlikely that this plan would emerge as a credible Plan B. While some Conservative MPs and ministers are warming to the idea, it has yet to gain currency within the Labour Party. Some Labour MPs are wary of the political costs of reneging on ending free movement, while others prefer to hold a second referendum instead. Therefore, a Norway Plus option seems improbable.
Scenario 4: Second Referendum
Assuming the Withdrawal Agreement does not get passed, the probability of a second referendum increases significantly and would be a likely outcome. This is mainly because, as outlined above, there is no majority for the current Withdrawal Agreement, a general election or a Norway-style EEA arrangement. The campaign for a second referendum was once seen as a fringe movement but has now gained significant traction. Even some members of the Cabinet are giving the option serious consideration as they see it as the only way to break through the parliamentary deadlock. The Labour Party has indicated that if its vote of no confidence fails, which is likely, it will support a second referendum. All other opposition parties already support the idea.
Furthermore, several Conservative MPs are veering towards backing a second referendum as a way to resolve this impasse. The EU is likely to be on board with extending Article 50 in order to hold a second referendum. In parliament, MPs have passed an amendment tabled by Conservative backbencher Dominic Grieve that gives them control of next steps if the deal fails, allowing them to put their own proposals forward. Hence, the procedural obstacles to a second referendum have started to fade away too.
Scenario 5: No-Deal
The delay of the vote on the Withdrawal Agreement has raised the probability of a no-deal Brexit too simply because it is the default legal option. Avoiding a no-deal scenario would entail the UK agreeing on an alternative course of action. Given the deadlock in parliament and May’s decision to extend negotiations with the EU, it still remains unclear as to what this alternative end-state is. Even though there is no appetite for a no-deal scenario on either side, this outcome can no longer be seen as a tail risk outcome because the legal departure date of March 29th draws closer and there is still no consensus in the UK about the form of Brexit it would like to pursue.
Brexit Risk Outlook
Out of the scenarios listed above, the probabilities of a no-deal exit and a second referendum have increased in light of recent developments. Both scenarios increase the economic and political risk in the UK.
The prospect of a second referendum injects further uncertainty into the body politic. In the short run, this uncertainty would further hamper domestic and foreign investment. Businesses would find it difficult to make any fixed plans for the future and would have to endure waiting in a holding pattern for longer than previously anticipated. This increase in uncertainty is likely to slow economic growth.
A no-deal exit is likely to significantly increase economic risk mainly due to the risk of volatility in the financial markets, the disruption to supply chains and uncertainty surrounding legal agreements. Having said that, the government along with business associations have urged business to step up their no-deal contingency planning. However, this is unlikely to substantially mitigate the economic fallout of a no-deal scenario.
