Why a ‘no deal’ Brexit is unlikely but not impossible

This week PM May unveiled a last-ditch attempt to get her Brexit deal over the line, by announcing she will bring forward the so-called ‘Withdrawal Agreement Bill’ – the piece of legislation required to translate the Brexit deal into UK law.

By promising extra guarantees on the environment and workers rights, along with a commitment to a parliamentary vote on the final Brexit deal, she hoped to persuade a greater share of Labour MPs to come on board.

But within an hour of announcing the details of the bill, it became clear that the parliamentary arithmetic had not swung in favour of her deal – and in fact, the numbers have moved backwards.

Conservative Brexiteers were alarmed by the prime minister’s promise of a parliamentary vote on a second referendum and temporary customs union. At the time of writing, Buzzfeed News estimates that 42 Conservative MPs who voted for the deal in March, have said they won’t do so now.

Faced with another defeat, the prime minister may decide to pull the bill entirely to avoid another unnecessary loss. But either way, a new leadership contest within the Conservative party now looks like a question of ‘when’ rather than ‘if’.

The process, which could take two to three months to complete, would have two stages. Firstly, the field of nominees would be whittled down to the two most popular among Conservative MPs. Those shortlisted are then put to the party’s membership to vote for their favoured candidate – and if recent polls are correct, former foreign secretary Boris Johnson is miles ahead of the competition.

It is widely perceived that he – as well as some of his competitors – would be much more open to a ‘no deal’ Brexit than Theresa May. This is one of the reasons why sterling has come under renewed pressure over recent days.

In reality, a new eurosceptic prime minister would face the same Brexit hurdles as Theresa May.

Regardless of the Brexit stance of the new leader, we presume the first act of any prime minister would be to return to Brussels to attempt a renegotiation. Given that a new leader may not be in place until September (assuming the process rolls on for a couple of months), their first act may ironically be to ask the EU for more time to facilitate these fresh talks.

Either way, it’s unlikely that new negotiations would achieve a vastly different deal. Don’t forget that the majority of the withdrawal agreement relates to so-called exit issues. That’s things like the UK’s financial commitments and citizens’ rights, neither of which are obvious candidates for renegotiation. Where the agreement does consider future trade – the Irish backstop – the EU has been clear this is not up for discussion.

A new eurosceptic prime minister would face the same hurdles as Theresa May

At some point then, talks are likely to break-down and at this point, a eurosceptic leader may decide to push for a ‘no deal’ exit. But given that there is no majority in parliament for this, we suspect lawmakers would do all they can to avert it. This is assuming that parliament continues to lack a majority for a different route – for instance, a second referendum or customs union – then the path of least resistance would be to try and trigger an election.

The leader of the opposition, Jeremy Corbyn, could initiate a vote of no-confidence in the government. This has happened before, unsuccessfully, but if ‘no deal’ began to look increasingly inevitable, then it’s possible that some of the more moderate Conservative MPs could leave the party and get behind the no-confidence vote. After all, given the government has such a slim working majority, it wouldn’t take many MPs to do so.

With MPs so against a ‘no deal’ Brexit, it’s tempting to conclude that this scenario is only a remote possibility. However there are two reasons why we think the risk of the UK going over the cliff-edge in October is still around 20%.

As things stand, the general consensus is that European leaders would probably allow another extension – particularly if the extra time is to facilitate a 'democratic event' such as an election. According to the Centre of European Reform, some EU officials think another extension could only last until June 2020 - any later and the new EU budget may not be approved in time for 2021.

A further delay remains our base case for the time being, and this also appears to be the stance taken by markets. Six-month sterling risk-reversal contracts, which gauge the direction investors think the currency will have moved by then, are much less negative than they have been over the past eight months or so.

However, there's a risk the EU's stance gradually begins to harden. France, in particular, has been highly resistant to allowing the process to go on for much longer without resolution. If the wave of UK MEPs from the newly-formed Brexit party seek to disrupt the process of appointing leaders to the top Brussels jobs over the next few months, there is a risk that this hardline stance towards further Brexit extensiond could broaden out to other member states.

If MPs fail to trigger an election, they may still prefer to revoke Article 50 altogether rather than exit without a deal. While that may sound unthinkable, it could be spun as a ‘revoke to stop the clock and regroup’ rather than to remain permanently. Don’t forget that 191 MPs voted to revoke Article 50 back in late March.

The problem is that if the government of the day is determined to go for ‘no deal’, then the legislative means of stopping it appear relatively limited. Earlier in the year, lawmakers managed to find a way of seizing control of the parliamentary agenda, which culminated in the ‘indicative votes’ process. However, an interesting new report from the Institute for Government suggests that such an option may not exist this time around - and in fact, there is probably very little parliament can do to block 'no deal'.

Political pressure still matters of course, even if the legislative options are limited – another reason why an eleventh-hour decision to trigger an election would remain quite likely.