October 04, 2018
The Brexit Queen’s new dancing clothes
Creating a distraction is the oldest political trick in the book. But, well executed, it can work like a charm. Theresa May’s Dancing Queen overture got the audience to like her, perhaps for the first time ever. The probability of a successful leadership challenge has receded.
But this is it. The Brexit Queen’s new clothes are a mirage. Nothing in substances changed yesterday: the probability that an agreement will be reached is neither higher nor lower; nor is the likelihood that an agreed deal will be ratified in the House of Commons. We still think that is possible, but the last few days have further increased the probability of a no-deal Brexit. The DUP, which supports May’s minority government, said it will not support even the suggestion of a regulatory border in the Irish channel. And the hard Brexiteers are more determined than ever to vote down May's plan. Either they must have persuaded themselves that a Brexit reversal is impossible, or they are no longer afraid of it. We doubt that Boris Johnson will ever be the Tory leader, but he is big enough a political beast to deny May a majority. With the current majorities, she will need the Labour Party, or at least a sufficient number of Labour MPs, to get her deal through. This is not impossible, especially once the choice narrows down to deal-vs-hard Brexit, which won’t happen until right at the end.
Another scenario is that the vote fails and then succeeds at a second time, perhaps with new elections in between.
European newspapers took a great deal of interest in the Tory party conference, especially May's dancing, a spectacle as alien to your average continental observer as the game of cricket or a British dog show. What is useful to the Brexit process is a widening recognition that May is the only partner the EU has in this process.
The next critical step will be to find out how the EU reacts to May’s revised offer, which essentially keeps the UK in the customs union for a limited period until the technology for a border infrastructure is in place - which could be a long time. We assume there will an overall time limit. This would solve a number of problems simultaneously: there would no need for complex customs facilitation or regulatory checks at the border, at least not during that interim customs-union phase of the Brexit process. The hope is that new technologies will eventually take care of these specific concerns later. And May will also agree to address the non-issue (in our view) of a competitive advantage that could, in theory, accrue to UK companies. But she will be unrelenting about wanting a skills-based immigration policy. We find it hard to see how the EU can accept that, judging for instance by Guy Verhofstadt’s furious response to this idea in the European Parliament. Immigration is what started the whole Brexit thing. It might end up killing a deal.
We agree with the judgement by James Blitz in the FT that the last few days increased the chances of an extreme outcome - no Brexit at all or a hard Brexit. Our own most-likely scenario as of now is that a deal will be agreed - with further concessions by May - followed by an initial rejection in the House of Commons. We see an early election as the most likely outcome then. Our sense is that May could win this election with an enhanced majority. But stalemate, hung parliaments, or a Labour victory could throw the entire process wide open. Johnson cannot topple May now. His only chance to become leader is for May to fail. That is why the eurosceptics will vote down the deal. And Corbyn, who will be 70 next year, cannot have elections early enough. The chances for a second referendum would be highest in case of a genuinely hung parliament. But we should not take it for granted that the EU will prolong the Article 50 deadline in this scenario. If they did, they risk triggering a Ukip triumph at the European elections, with all that this implies for Brexit as well as for the EU’s own political balance.