Brexit mess: Ungovernable
What a week that was! The Brexit saga continued with three votes in the UK Parliament. At the third, British MPs not only voted down the Withdrawal Agreement for a second time but also voted against taking control of the decision-making process, paving the way for a third Meaningful Vote. MPs voted to support an extension of Article 50; if parliament approves the Withdrawal Agreement, the UK will apply to extend until June 2019, if not, the extension will be longer.
If the Withdrawal Agreement is rejected for the third time, the implication is the UK would ask for a longer extension and participate in European Parliament elections this May. Amendments relating to organizing a second referendum, pursuing “different approaches”, or requiring parliamentary indicative votes were all defeated, allowing British PM Theresa May to retain some authority over the order of business. Any extension to Article 50, including the duration and terms, will need the unanimous approval of the EU-27 countries. This is expected to be relatively straightforward for a short extension, but EU-27 leaders will require some justification for a longer extension. It sets up a potentially ‘interesting’ gathering at the EU leaders’ summit this week (which May will attend), starting on March 21.
Although markets perceive a fall in the risk of a ‘no deal’ scenario, the ‘fog of Brexit’ has not entirely disappeared. Combined with growing headwinds to the global economic outlook, it points to the Bank of England Monetary Policy Committee (MPC) keeping policy interest rates firmly on hold at 0.75 percent. Recent speeches from MPC members reaffirm that they are in wait-and-see mode. Based on the assumption that a disorderly Brexit is avoided, we expect interest rates will be raised once this year, but not until the second half.
Amid the drama of parliamentary votes last week, Chancellor Philip Hammond maintained an optimistic tone at the Spring Statement. Revenues were stronger than forecast by the OBR at the October budget, and, again, conditional upon an orderly Brexit, providing the Chancellor with an increased “headroom” of 26.6 billion pounds over the next five years.
As Observer columnist Will Hutton pointed out, approving May’s deal will end up with Britain having the worst of all worlds – tracking the EU without influencing it while embracing closure.