November 07, 2016
Why UK elections are becoming more likely
The Brexit debates have reached their highest noise levels since the referendum, following the High Court's ruling and the vicious media response to it the next day. The British government decided not to interfere.
None of this probably matters as the Labour Party has now accepted that it, too, will support Article 50. After some confusion, the Labour leadership clarified its position on this matter, asking only for transparency in the process - which if true would be a reasonable request. There is still the possibility of a hold-up in the House of Lords, but the Labour leadership in the House of Lords also said it only wants to scrutinise, not block. May can probably afford a short procedural delay as otherwise Brexit would then interfere with the electoral timetable. There are ways to get around the problem of a stitch-up in the House of Lords. As Jacob Ress-Mogg argued in the Telegraph over the weekend, it is apparently possible for the government would be to flood the House of Lords with 1,000 pro-Brexit peers.
We still find it hard to see a way that which Brexit itself could be stopped. If parliament were to procrastinate, May would find a way to bring about an election - either through a fake confidence vote, or more likely, with the support of parliament itself. It is not probable that an opposition party would vote against elections if offered one. Unless the Conservatives' polling lead collapsed, we would expect them to win a big majority. So, whichever way the Supreme Court rules, Brexit will happen. The difference is that Brexit will get nastier and more hostile the longer the uncertainty lasts.
We see some parallels between the legal debates in the UK in respect of Brexit, and the German constitutional court's arguments about monetary union. If the Constitutional Court had upheld legal principles only, without any political sensitivities, it would have had to pass rulings that would have made it impossible for Germany to stay a member of the eurozone. Mario Draghi's OMT clearly violates important principles of the German constitution. The ESM bailouts are not consistent with the No-bailout rule. The judges accept them only on the grounds that the eurozone would have otherwise collapsed - a pragmatic view, but not one based on legal principles. In the end the court took into account the overriding political support for euro membership in its rulings.
The UK's Supreme Court will be in a similar dilemma after it hears the case from December 5-8. From a legal perspective, the High Court's ruling may be watertight. But the Supreme Court will need to consider that a confirmation of the High Court ruling could well lead to riots and violence because it will be seen - rightly, in our view - as a desperate attempt to hold up the process. This is a point where we side with the Brexiteers. Why did the judiciary not make that point before the referendum? The Cameron administration did not believe that it was necessary to consult the parliament ahead of the referendum. Nor did the Remain campaign highlight that point. We think the wisest decision would be one that allows the government to obtain the consent of the parliament, but without having to table a full-blown bill. In any case, what is there to put into this bill? A negotiating position?
We also picked a discussion on Twitter (see @ShippersUnbound) on whether the government could eliminate the possibility of parliamentary amendment by formulate the long title of the bill in a specific way that makes amendments impossible, as the long title sets the scope outside which amendments cannot go.
George Eaton writes that elections are becoming increasingly probable. The point is not so much that parliament will prevent Brexit, but that it will soften it. The lure of new elections will prove very tempting for Theresa May, especially since both Ukip and the LibDems have failed to gain support since the referendum. The LibDems in particular hope to win the Richmond by-election, triggered by the resignation of Tory MP Zac Goldsmith in protest over the expansion of Heathrow airport. Goldsmith, who is pro-Brexit, is now running as an independent, and enjoys a 23-point lead, despite the fact that Richmond itself voted predominately Remain.
On other Brexit-related news, we noted two articles, both of which are suggesting that the EU is firming up its negotiating position ahead of the Art 50 negotiations. The Financial Times reports that the EU is about to toughen up the rules for regulatory equivalence for third-country financial firms - which allow to them access to the EU's financial market if their domestic regulatory regime is deemed equivalent to that of the EU. The UK hopes to use regulatory equivalence to regain a quasi-single-passport status post-Brexit. The article points out that any move to tighten the rules should be seen as part of the EU's negotiating strategy. They want to yield as little as possible.
Equivalence rules are a somewhat ad-hoc procedure, brought in under Michel Barnier, and they apply only to a small subsection of financial services, notably trading and fund management. One big problem with equivalence, from a UK perspective, is the lack of legal guarantees. The rights gained through regulatory equivalence might be withdrawn at any moment, which makes this an unsuitable regime for London-based international banks.
In addition, Handelsblatt reports that Jean-Claude Juncker is warning EU companies not to do bilateral Brexit deals with the UK government, because otherwise he would get in their way, he said, but without explaining how he would do this.