Where the Brexit process may end up leading

By Conor Lambe, Chief Economist at Danske Bank

It is now just over eight weeks until the UK is scheduled to leave the European Union. But despite there being so little time left between now and 29 March 2019, there is still no clear path by which the UK’s exit will occur. The Prime Minister’s draft withdrawal agreement – the result of 20 months of negotiations between the UK and the EU – was overwhelmingly rejected by the House of Commons and no clear alternative has, as yet, emerged. For businesses all over the UK, this lack of clarity around Brexit remains a significant challenge.

Despite there being no agreement on how the impasse should be resolved, there are a number of possible scenarios that could come to fruition over the coming weeks or months. While not an exhaustive list, some of the main options are a no-deal Brexit, a general election, moving towards pursuing membership of the European Economic Area (EEA), a second referendum or a variant of the draft withdrawal agreement eventually being approved.

At present, a no-deal Brexit remains the default option. If nothing else happens between now and the end of March, then the UK will leave without a deal. However, I think that such an outcome is unlikely and it seems clear that there is no majority in the House of Commons for a no-deal Brexit.

The Prime Minister has so far refused to rule out ‘no-deal’ as an outcome, possibly because she feels that the option of defaulting to this scenario, which would be detrimental to both the UK and the EU economies, strengthens her hand ahead of the upcoming discussions. The problem is, however, that given the disruption and the chaos that a no-deal Brexit would lead to in the UK, it doesn’t really look like a credible threat.

Another possible option would be to hold a general election in an attempt to break the parliamentary deadlock on Brexit. However, this too seems an unlikely scenario. The Government recently survived a vote of no confidence in the aftermath of the vote on the draft Brexit deal, and would probably survive another one if triggered.

The Government could move towards pursuing membership of the EEA as the long-term, future relationship between the UK and the EU in an attempt to win backing from MPs who support a soft Brexit or who voted to remain in the EU. This is often referred to as the Norway-option. It would see the UK remain in the single market meaning the freedom of goods, services, people and capital would continue to hold, the UK would continue to follow single market rules (though without a direct say in deciding them) and would still make some contribution to the EU budget. It is also suggested that the UK could seek membership of a customs union alongside EEA membership. However, if Brexit were to result in such a close relationship with the EU, it would beg the question, would it not just be better to remain a full member?

There have also been calls for a second referendum. We know that there is not currently a majority in Parliament for the draft withdrawal agreement as it stands now and it seems that there isn’t a majority for ‘no-deal’. But what we don’t know is what there is a majority for, if anything. Therefore, there is an argument that if MPs can’t reach an agreement on how Brexit should proceed, then the question should be directed back to the electorate. However, a second referendum would present challenges. It would take time to set up and it isn’t immediately clear what the question would be.

That leaves us with a variant of the draft withdrawal agreement eventually being approved which, in my opinion, is just about the most likely outcome. In the days and weeks ahead, the Prime Minister looks set to go back to the EU to try and make some changes to the draft agreement. These discussions are expected to resolve around the Northern Ireland backstop and the political declaration on the future relationship between the UK and the EU.

There is no doubt that these discussions will not be easy but the two sides are likely to reach some agreement in an attempt to move the Brexit process forward. With Parliament set against a no-deal Brexit, there seeming to be little appetite for another election or a second referendum, and little point in opting for a Norway-style Brexit over full EU membership, it’s quite possible that the House of Commons and the various factions within it will decide to approve an amended version of the draft withdrawal agreement as the only viable, and least unappealing, option.

One thing which I haven’t mentioned yet is the possibility of an extension to the Article 50 process. If we were to find ourselves in one of the second referendum or general election scenarios then the Article 50 process would have to be extended in order to allow time for that to happen.

Also, if a variant of the draft withdrawal agreement is to be approved, there is a possibility that, given how little time there is between now and the end of March, that an extension will be needed to give enough time for the UK and EU to engage further on the draft agreement and for it to go through the full ratification process. However, it’s not clear whether such an extension would be for a few weeks to finalise the approval process, or for a longer time period to allow more time to discuss the draft deal. It’s also important to note that an extension requires unanimous support from the EU.

As has been the case for some time now, the only thing we can say with any certainty on Brexit is that there is still a lot of uncertainty. While some of the options discussed above are more likely than others, they are all possible outcomes. This prolonged lack of clarity is a real challenge for businesses, and it is important that they keep monitoring the process closely and working on their Brexit preparations.

With a vote on the Prime Minister’s intended way forward, as well as a number of amendments, set to take place in the House of Commons on Tuesday, let’s see what this week brings in this highly uncertain Brexit process.     

This article was published in The Irish News on 29th January 2019.

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