View from Dublin: A Brexit 'fudge' on the way in British politics
In the aftermath of the six-month extension to Article 50 in April, European Council President Donald Tusk had pleaded that the UK parliament should not waste the additional time. However, political developments show this is the UK parliament is highly likely to do so.
Sterling gained ground, the exchange rate falling below 85p against the euro ahead of planned 'crunch' talks between the Conservatives and Labour Party, apparently intended to finally settle on a cross-party consensus for a 'temporary customs arrangement', and supposedly taking on extra impetus from both parties' local election losses.
Not surprisingly, agreement between the parties has not been forthcoming. With the Government now admitting the UK will have to participate in EU elections, the pressure for a deal has ameliorated. The next official target date is now August 1, which will almost certainly slip.
In any case, Jeremy Corbyn was never likely to commit to a cross-party deal, under pressure from Keir Starmer and John McDonnell to press for a permanent customs union. Up to two-thirds of Labour party MPs back a second referendum - and would likely revolt, were Corbyn to attempt to strong-arm a Brexit deal through parliament.
And of course the split in the Conservative party remains. A 'temporary customs arrangement' wouldn't negate the need for the backstop, ensuring opposition from the DUP and hardline Brexiteers in the European Research Group.
Meanwhile, Theresa May becomes ever less credible as Prime Minister with every passing day. The 1922 Committee of backbench Conservative MPs has put off a rule change to allow an early leadership challenge. However, they are probably keeping their powder dry until after the European elections.
Perhaps a three-year stint is the minimum of amount of time May sees as a respectable period in Downing Street. Repeated efforts to force her deal through now look like stalling tactics, merely intended to take up time until the third anniversary of her premiership in July.
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Hence, moves to finally force May to out of Number 10 look likely to come to fruition during the summer, allowing time for a leadership campaign, with Michael Gove, Jeremy Hunt, Sajid Javid, Dominic Raab and Boris Johnson all in the running, before the clock ticks down to October 31.
Our consistent view in Davy Stockbrokers has been that a 'fudge' of some sort on Brexit was always likely, keeping the UK inside the EU single market so that tariffs would not be imposed on April 1. This scenario has been borne out, with the six-month article 50 extension. The question is, will the UK manage to fudge again in October?
In hindsight, the shape of the UK cabinet and parliament meant a 'no-deal' Brexit on March 29 was never likely. It was only a matter of time before more pragmatic members of the cabinet such as David Gawke and Amber Rudd forced May into committing to a parliamentary vote to extend article 50. Once they had, May's strategy of running the clock down to secure further EU concessions was entirely discredited.
However, it is now possible that a 'pro-Brexit' candidate for the leadership could run on a 'no-deal' ticket - committing to Conservative party members, the UK will leave the EU in October, whatever the circumstances. A leadership contest could be concluded by July or August - giving UK civil servants only limited time to impress on the new prime minister the dire consequences of a rash exit.
That said, any new PM will soon appreciate his or her tenure will come to an abrupt end in a no-deal exit, given the chaos that would inevitably ensue. That Theresa May provides a convenient scapegoat for another article 50 extension, coupled with a healthy sense of self-preservation, should ensure that even a pro-Brexit candidate such as Boris Johnson or Michael Gove will eventually decide to kick to touch.
Meanwhile, there is no doubt the chaos in Westminster is weighing on the UK economy. Some of the pain of the uncertainty may have been put off by companies spending to build up inventories ahead of the March 29 deadline, fearful of tariffs and trade disruption.
However, business investment continues to contract, employment has slowed and surveys such as the Purchasing Manager Indices suggest growth will slow through 2019. So it's hardly surprising Bank of England Governor Mark Carney struggled to convince investors rates should rise faster than the one 25 basis point increase markets had priced in over the next couple of years.
One vulnerability could be the housing market. Once again the vast majority of estate agents in April's RICs survey reported falling prices, a net balance of -23%, with London, the south east and south west reporting the sharpest falls. According to Rightmove UK, house price inflation is already in negative territory.
This could eventually convince UK consumers to tighten their purse strings, removing the key support of household spending from GDP growth. That said, given the immediate threat of no-deal has been eliminated business and consumer sentiment could bounce back.