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April 09, 2019

What can go wrong now?

The European Council will meet tomorrow. Should we expect any surprises? 

In our view the chances of a no-deal Brexit remain as high as ever, but it will not happen this week. We expect the European Council to discuss two options, a short extension and a long one. We believe that the odds must favour a short one ending sometime between the European elections and the start of the parliament: end-May to end-June. The two long extension options are end-December this year or end-March 2020, but by the latter date the UK will have a new prime minister. Even end-December would stretch things out a bit too much. If Theresa May were still prime minister by then - which we think unlikely - she would for sure be challenged in December.

The talks with Labour are proceeding, but not about to conclude. May is preparing her party, very slowly, for the inevitability of having to compromise with Labour on the customs union. There is a risk that a large majority of the party would reject that option, so May has to tread carefully. She will need to carry at least some 120-150 of her own MPs to get over the line. The European Council will accept the talks with the Labour Party as sufficient cause to extend Brexit, but we struggle to see how a process that is likely to be concluded one way or the other in two or three weeks should give rise to a long extension.

There has been a lot of uninformed talk in the UK about Emmanuel Macron's position. Like anyone else, Macron is driven by self-interest. We think he will push for a short, and possibly final, extension to end some time before the beginning of July. He has no reason to accept a long extension. A long extension is therefore also not our main scenario.

Under a short extension, the risk of no deal would increase because the EU would then find it harder to extend again, except if the UK decided to hold general elections or a second referendum. We fail to see either. The Tories cannot afford to hold elections before May has left. A second referendum is also becoming increasingly unlikely. So far only a dozen Tory MPs have supported it in two indicative, multiple-choice votes. A group of 25 Labour MPs have written to Jeremy Corbyn to drop the second referendum pledge. For so long as the number of Labour opponents of a second referendum exceeds the number of Tory proponents, there is no majority for that option. It is possible, of course, that such a majority could materialise on the eve of a no-deal Brexit, but even this is far from guaranteed. The Cooper-Letwin bill, which last night received Royal Assent, is entirely irrelevant. All it does is force a prime minister to ask for an extension. May has already done so.   

Under a short extension all would depend on whether May and Corbyn could reach a deal. Caution is in order. We agree with Michael Heseltine’s assessment, which he gave in an interview with Lionel Barber in the FT: opposition parties do not bail out governments. Everybody plays their part. Nobody wants to be blamed. But agreeing to a deal with May would create internal strains for Labour that could more easily be avoided if the UK were to crash out without a deal.

Another strand of the story to watch out for is the Tory party’s slow-motion heart-attack. Can May really govern against her parliamentary party and the grassroots? There will be local elections in early May and European elections in late May - two occasions where the Tories might get hammered. Or not. Is it possible, as Barber tweeted this morning, that pro-EU parties pick up votes in the European elections, and that this changes the political dynamics? We believe it would. But even gains for Labour would not really fit that description, since Labour would still run on a pro-Brexit platform.

There are attempts under way to persuade May to step down early. The European Council will need to take this into account when deciding on a short vs long extension. May will probably survive for so long as the talks with Corbyn persist, but what if they were to fail? Will she perhaps hang on and switch towards supporting a second referendum? What we know is that she will go to extremes to get her Brexit deal approved, but we see no chance that a second referendum pitching her deal against any other option would achieve that. We also do not agree with the political consensus in the UK that it would be possible to have a two-way referendum between Remain and Deal, given the large number of people who support no deal. We believe the eurosceptics would support Remain in this case, topple May in December, and trigger Brexit again if they were to win an election, with an explicit commitment to a no-deal Brexit. That election would override the second referendum, just as the second referendum would have overridden the first.

The euro crisis taught us never to bet against the European Council kicking the can down the road. But the obstacles along the road are more visible because they are political, rather than economic. And the interests of EU leader are less aligned.

If May's talks with Labour were to fail, it really is hard to see a positive outcome. All a long extension would do is accelerate the change of leadership in the Tory party, get Boris Johnson Johnson into Downing Street and a snap election followed by a hard Brexit. A short extension, not renewable, is not guaranteed to deliver ratification of the withdrawal agreement. But it still stands a better chance than the alternative options.

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