Eventually People Will Grow Tired Of This And The U.K. Will Remain

British Prime Minister Theresa May speaks during a media conference at the conclusion of an EU summit in Brussels, Thursday, April 11, 2019. European Union leaders on Thursday offered Britain an extension to Brexit that would allow the country to delay its EU departure date until Oct. 31. (AP Photo/Francisco Seco) photo credit: ASSOCIATED PRESS

Prediction: the politics of exhaustion will play out between now and the new Brexit deadline of Oct. 31 and people will give up on this whole sordid affair. The U.K. will never leave the European Union.

More time to convince a majority in Parliament that Theresa May’s deal with the EU is the way to go is preferred in the market over a hard Brexit. It’s less immediate stress on the economy and for the British pound. But the lack of conditions in granting the extension has weakened the incentives for the U.K. parliament to find a resolution.

It is actually impressive that the majority of EU member states even allowed for this in the first place. Had they not, the U.K. would have crashed out of the EU on Friday. World Trade Organization rules on tariffs would apply. But issues such as visas and the free movement of people across borders, especially between Northern Ireland and the Republic of Ireland would be unresolved.

The Conservative Party, the party which brought us Brexit in the first place through a referendum vote proposed by then-Prime Minister David Cameron, cannot get its act together. So now May has to turn to the Labor Party, led by Jeremy Corbyn.

This brings us to Season III of Brexit Forever, which raises the story question: will May and Corbyn be able to honor democracy? Over a million more people voted in favor of leaving the European Union than staying. Nearly every poll still indicates support for keeping with that original decision.

Yet, it took Parliament two years and they still have rejected every single proposal to leave. Will they pull this off in five months? If so, will the Conservative Party splinter in two? This is a blessing in disguise for the Labor Party, a party that was destroyed by Tony Blair when he “found” Iraq’s weapons of mass destruction.

The Conservative Party’s popularity is now where it was before Labor crushed them in the polls with Blair as their leader. Since March, popular support for the Tories has fallen to 29% from 37%, according to Bloomberg. And why not? They haven’t done a thing their voter base has asked of them.

Pro-Brexit demonstrators wave flags and banners outside Parliament in London, Wednesday, Nov. 23, 2016. Brexit voters have gotten nothing from their leaders, despite beating those who wished to remain in the EU by more than 1.3 million votes. (AP Photo/Kirsty Wigglesworth) photo credit: ASSOCIATED PRESS

Labor has demanded a closer relationship with May’s negotiating team. And May has offered to hold yet another round of indicative votes to see what issues the two opposing parties can agree on so they can ratify the Withdrawal Agreement.

“The likelihood of the talks between May and the Labor Party leading to an agreement is very low,” says Azad Zangana, senior European economist and strategist for Schroders in London.

May recently revealed that she plans to step down from her role once Brexit is complete. This means that the next phase of negotiations could be led by a new Conservative Party prime minister with very different views from May, meaning its one step forward one step back for Brexit.

“We struggle to see what will break the impasse,” Zangana says. “There is a high probability that the June review will demand more urgent action, before another emergency EU summit at the end of October to grant another extension.”

Another extension!?

Yes. It was German Chancellor Angela Merkel who said the Halloween deadline is malleable and could be extended further if necessary.

British MEP Nigel Farage speaks during the launch of the Brexit Party’s European election campaign, Coventry, England, Friday, April 12, 2019. On Friday, Nigel Farage launched the campaign of his newly formed Brexit Party. The former U.K. Independence Party leader said delays to Brexit were “a willful betrayal of the greatest democratic exercise in the history of this nation.” (AP Photo/Rui Vieira) photo credit: ASSOCIATED PRESS

Meanwhile, U.K. politicians will have to put up candidates for the European Parliamentary elections on May 23; a political body they were supposed to have vacated by then.

The new deadline, which is probably not a deadline, signals two things. One, there will never be a hard Brexit. Not only did the U.K. parliament “outlaw” it last week, but Merkel said the EU will keep moving the deadline until there is an agreement. This could take a while.

Second, Germany has become increasingly mindful of Britain’s prominence in the EU economy. With France in political turmoil, Italians one step behind the Brits in terms of their love for Brussels, and Spain watching a massive rise in EU skeptical nationalist political leaders, the damage to EU should the U.K. finally leave is immeasurable. What dominoes would fall? Countries have to prepare for the worst in this case, which could have countries like Greece or Italy saying they want out, too.

“It could represent a mortal blow to the EU project,” Vladimir Signorelli, founder of Brettonwoods Research, wrote in a note to clients yesterday. “The EU can afford to be generous in extending whatever deadlines the U.K. needs to mull and soften or negotiate a new deal.”

What about no deal at all? Postponing just leads to uncertainty. If the market hates uncertainty and if the market has any say in this, then one can surmise that the needled has moved much farther away from hard Brexit and now no Brexit is looking more plausible.

“You might not get one,” says Shan Nair, president of international business consulting firm Nucleus in Naples, Fla. “And no, there will not be mass demonstrations like the Yellow Vest movement in France. The Brits don’t go so emotional about things.”

BNP Paribas increased the probability of the U.K. remaining in the EU by 15 basis points to 35%, with Brexit at 50-50 odds.

“A hard Brexit is less likely, but the path ahead is as unclear as ever,” says Paul Hollingsworth, U.K. economist for BNP Paribas. “The political path to a deal remains challenging.”

Angela Merkel: Brexit Forever, approved. Photographer: Jasper Juinen/Bloomberg photo credit: © 2019 Bloomberg Finance LP

© 2019 Bloomberg Finance LP

Which brings me to the original prediction: no Brexit. Politicians will exhaust the electorate on this until all sides throw their hands up in the air.

Assuming that the migrant crisis led to the referendum two years ago, then perhaps the U.K. can appease Brexit voters by closing its border to migrants or rejecting the quotas set by Brussels for Middle East and North African refugees. So far, this topic does not seem to be on the table because it was always assumed that Brexit would take care of that. But Brexit is on its last legs and Parliament can literally stall forever. It could take years to seal the deal on this one.

In the meantime, business surveys suggest a weak growth environment, with most activity being dominated by inventory building in preparation for Brexit. That could change swiftly as businesses, too, begin assuming Brexit forever means no Brexit at all.

On the other hand, stockpiling could reach its limit and output will start to slow to match the weaker growth in consumption and investment, says Zangana.

The British pound is getting stronger on the prospect of a prolonged Brexit negotiation and the rapidly declining probability of a hard Brexit. Photographer: Yuriko Nakao/Bloomberg photo credit: © 2019 Bloomberg Finance LP

© 2019 Bloomberg Finance LP

As a result of the uncertainty, the Bank of England (BoE) has been held back from raising interest rates due to the Brexit overhang. There is now a possibility that a longer delay means the BoE also assumes Brexit is not happening this year and opts to raise rates next month.

Schroders gives it a 20% chance.

BNP Paribas doubts a rate hike this year, with a stronger pound if investors give up on Brexit.

There is a local election on May 2 in the U.K.  Global investors will be looking to see if pro-Brexit politicians are the ones taking the victory laps.

After EU elections on May 23, the U.K. has until May 31 to agree to a Withdrawal Agreement. The Oct. 31 deadline is moot if the U.K. does not participate in European Parliamentary Elections.


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