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September 20, 2018

The long Brexit endgame has started

Theresa May seemed to have shocked EU leaders yesterday when she said there won’t be a delay to Brexit. One of her ministers recently shocked a German news magazine when he said there won’t be a second referendum. It was front page news. Brexit has the potential to create a major accident precisely because people fail to understand each other’s position. 

At a dinner with EU leaders in Salzburg, May formally rejected the newly improved proposal by Michel Barnier as it would still include an invisible customs border between the UK and Northern Ireland. This is May’s ultimate red line, over which she cannot jump. This is a point still underestimated by the EU. 

Barnier’s proposals are nevertheless important because they can be turned on their head. If it is possible to have a technical solution for a hypothetical UK/NI customs border, the same argument could be applied to an inner-Irish border. On this specific issue of the Irish border, we remain optimistic that a technical compromise is feasible.

What complicates the Brexit process massively is the multitude of triangular games: there are three competing positions in the House of Commons, none of which commands a majority on its own: May’s Chequers’ Plan; a eurosceptic Canada-style Brexit; and Labour’s plan for a customs union. Everybody is playing the same game: as we reported yesterday Labour does not want the spectre of a second referendum to scare eurosceptics in the Tory party into supporting Chequers. The British government is playing the converse game. A treasury minister yesterday upheld the possibility of a second referendum for precisely this reason - to scare the eurosceptics into supporting Chequers.

Both strategies cannot logically work simultaneously. When, or if, it comes to the vote the eurosceptics will - each on their own - come to a conclusion about how much they should fear a second referendum. Currently they do not. They, too, may be misjudging.

There is, as of now, no majority in the House of Commons for a deal based on Chequers. We do not expect May to give much ground in the negotiations in Brussels for so long as this political situation persists in the UK. We noted an interview with one of her erstwhile strongest supporters, Sir Michael Penning MP, who had just joined the eurosceptic European Research Group. His take is that May will not be able to get the support enough of them for a majority. Her only hope is to enlist the Labour Party into her scheme. We don’t see this as likely, but there may be more Labour rebels than Tory rebels in the end. 

A further complication arises from the plots to replace May as Tory leader. A memo was circulating in Westminster yesterday listing possible alternative names. Of all the various scenarios we still fail to see how the eurosceptics will get the required 158 votes among MPs to trigger a leadership election in the current parliament. 

It is possible that May steps down after Brexit. It may well become part of a deal with the eurosceptics. It is also possible that she chooses to defeat them - both on the leadership and on Brexit. She could seek the two-thirds majority in the parliament required to trigger new elections. These elections would be a quasi referendum - on her Chequers’ plan versus Labour’s customs union. She could also trigger elections right after she negotiates her deal, possibly even before a vote in the Commons. We think it would be more attractive to trigger elections based on the positive news of a deal rather than on the negative news of a ratification failure. 

Such a move would also foil any leadership challenge. Once an election is triggered and parliament dissolved, there is no mechanism for the Tories to change their leader. If she were to win with an enlarged majority, and if the agreed deal were to be passed by the new parliament, it would be much harder to replace her afterwards. If Labour wins the elections, there could be a second referendum. Either way, the eurosceptics lose. They will need to find a way to prevent elections.

We think that a second in-out referendum remains unlikely because both the Tories and Labour would self-destruct if they agreed to it. We could see a referendum between two different versions of Brexit, or deal versus no deal. 

As ever all we can say with certainty is that, beyond the hypothetical rejection of a deal, many scenarios are possible whose likelihood will depend on events that have yet to unfold.

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