PAUL KRAKE - Brexit: Impasse to be crystallized

Paul Krake

Brexit: Impasse to be crystallized

(this is the first half of the Weekly Blotter. We will publish the latter half tomorrow)

I would highly recommend that everyone listen to the podcast in the weekend Financial Times about the current state of play regarding Brexit. (Listen here). The reason I bring this up is because Sebastian Payne of the FT described the last week as “Hell Week” for the Conservative Party where nothing got done. I think this sums up Brexit negotiations perfectly as we have seen discussions between EU and the UK meander along, where any compromise between the two parties tends to only broaden the divide within Prime Minister Theresa May’s own ranks. This makes the outlook for a deal that can pass the UK House of Commons next to impossible.

This impasse has always been there. Since the Chequers Plan was announce back on July 7th, there has been distain for the proposal from all sides, but the reality is that completely incompatible interests of hardline Brexiteers, the Northern Irish Democrat Unionist Party (DUP) who is holding Mrs. May’s minority government together and EU have been in effect since the referendum and there has been practically zero compromise.

As we stand today, the chances of a deal between the UK and EU by Wednesday that can pass the UK Parliament are next to nothing.

Where do we stand today?

There is an EU Leaders’ summit on Wednesday. Prior to this, there is an expectation of “a complete draft withdrawal treaty, defining the terms of Britain’s departure from the EU in March 2019, a proposed 21-month transition period, and a solution to Northern Ireland’s border conundrum”. (FT Oct 13th).

This appears to be wishful thinking for a variety of reasons.

  1. As you are all aware, Northern Ireland remains the sticking point for all sides. The DUP will object to any arrangement that leave Northern Ireland in the Customs Union while the rest of the UK is not. They are also adamantly against a hard border in the Irish Sea. This in itself appears to be a divide that cannot be bridged.
  2. There is no way that the hardline Brexiteers will accept and extension of the Customs Union for an indefinite period, in order to avoid a hard border between Northern Ireland and the Republic of Ireland. This would mean that the UK would not be able to negotiate its own trade deals. The issue is that the EU is never going to accept an agreement with an end date because we would be facing the exact same issues we face today but at some time down the track. While an extension of the transition period, from 21 months to something greater could occur, we will still face the same basic issues about a hard Irish border at some stage in the future.
  3. At the most basic level, the European negotiators are well aware of the political machinations in London and they will not agree to a deal that they are convinced wont pass the UK Parliament

At the end of the day, Mrs. May is trying to negotiate a band-aid solution that no one will be happy with. Fundamentally, if Northern Ireland looks like it is being treated differently from the rest of the UK and there is no firm date to leave the Customs Union, Mrs. May has serious problems.

These issues are confusing to all of us, but the following from the weekend FT summarizes the Irish problem:

The further the UK moves away from membership of the EU, the harder it will be for it to fulfil the commitments it has given regarding Northern Ireland. Say if Theresa May’s government decided to quit the EU but to stay in a customs union, the Irish border questions would be minimised. But the government rejects this because it hopes to make better trade deals with non-EU countries. Or if the UK government decided to leave the EU but join the European Economic Area, this would also minimise the Irish border issues. Mrs May rejected that because it would have meant continued free movement of people from the EU. In each decision, maintaining close relations with Ireland is given a lower priority than the supposed benefits of trade agreements with faraway places, and curbing immigration.

In my opinion, there is simply no way to appease the strident concerns of the DUP (No border on land or on the Irish Sea) and the hard-line Brexiteers with their demands for end dates on a Customs’ Unions, immigration controls and the ability for forge new trade deals. Either way, unless one of these groups completely backs down from their prevailing stance, the chance of a deal passing the House of Commons, Mrs. May surviving as Prime Minister or her minority government surviving until 2022, seem remote. It seems, that with deadlines approaching, that this could all come to a head within weeks and it should start in the next few days.

Beware of headlines announcing a deal because any deal that the EU are happy with, is a deal that either the Brexiteers or the DUP will not be. The most likely scenario this week will be as follows:

  • The November 13-15 EU leaders Brexit summit in Brussels where the final deal on the withdrawal treaty was meant to be approved by members, will be postponed. This is Pound negative
  • Mrs. May announces no deal has been reached. Pound negative
  • Mrs. May announces a deal that instantly gets shot down by either the DUP, hardliners or both. Cabinet resignations follow. Pound negative after an initial spike.

(Tomorrow we will address why markets will start caring about Brexit this week.)

On Monday, Japan Industrial Production and US Retail. Tuesday, Chinese CPI and PPI, UK Employment data, German Sentiment, and US Industrial Production. On Wednesday, UK CPI and PPI, EU CPI, US Housing data, and FOMC minutes. Thursday, Australia Employment data, and the BoK meets. Friday, China GDP, Canada CPI, and US Home Sales.


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