Brexit: Endgame part II

The government’s European Union (EU) Withdrawal Agreement was rejected for the second time in parliament yesterday. James Illsley gives his opinion on what happens next.

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Mar 13, 2019
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To read part I, please click here

The government’s European Union (EU) Withdrawal Agreement was rejected for the second time in parliament yesterday (12 March).  Theresa May’s deal was rejected by 391 votes to 242, which is an improvement from the January vote, but is still a resounding defeat. After the Attorney General, Geoffrey Cox, delivered his legal opinion that the UK could theoretically still be trapped in a customs union with the EU indefinitely, the rejection of the deal was probably not a surprise.

Reflecting the view that a rejection of the deal was expected, markets are relatively sanguine this morning (13 March). Using sterling as a barometer of market sentiment, the currency now sits at USD 1.315, up 0.6% on the day and about 1% on the week. Key bellwether domestic sectors, such as housebuilders and banks, have not reacted significantly (as at 8.40am). Berkeley Group is down 0.3%, Taylor Wimpey down 0.9%, Royal Bank of Scotland is flat and Lloyds Banking Group is down 0.4%, for instance.

What next?

The vote on a “no-deal” exit is expected to be defeated comfortably in parliament today (13 March), then MPs will vote on Thursday (14 March) to ask for an extension to Article 50, which mandates that the UK leaves the EU by 29 March 2019. Again, expectations are that this vote will be passed comfortably.

Assuming the vote to extend Article 50 is passed, then the prime minister will relay that request to the EU. Any extension to Article 50 requires unanimous approval of the EU’s 27 member states. Again, the assumption is that the EU will grant this request but clearly there must be some uncertainty. The EU Council meeting on 21 March is the likely forum in which any request to extend Article 50 will be discussed and potentially approved. Importantly, however, the duration of the extension granted is uncertain. It could be a short extension (say three months), which limits the options and also bridges the date of the next set of EU parliamentary elections beginning on Thursday 23 May, in which the UK is not due to participate. As indicated previously, the possible outcomes from a short extension could include:

  • An eventual passing of the Withdrawal Agreement

  • A “softer” Brexit, such as a customs agreement

  • Revoking Article 50 (the European Court of Justice has guided that the UK could unilaterally take this step)

  • Accepting a no-deal exit

A longer extension to Article 50 could require the UK to take part in the EU elections, but it would increase the options available to include a general election or a second referendum.

It should be noted that the default legal position as the situation currently stands is that the UK leaves the EU on 29 March. Something would need to change to move that date. The UK would have to seek an extension and the EU agree to it, or the UK would need to revoke Article 50.

More to follow!

Sources: Bloomberg, BBC, Exane BNP Paribas. 

 To read part III please click here

James Illsley is the portfolio manager for the JPM UK Equity Core Fund

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Go to the profile of James Illsley

James Illsley

Fund Manager, JPM UK Equity Core Fund and JPM UK Equity Plus Fund, J.P. Morgan Asset Management

James Illsley is a portfolio manager of the JPM UK Equity Core Fund and the JPM UK Equity Plus Fund within J.P. Morgan Asset Management's UK Equity team.

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