Although this defeat was expected, the scale was larger than Number 10 had hoped. May gambled by delaying the vote to January to try and win more support – that has proven to have been futile. There are now less than 80 days until the UK is set to leave the EU on March 29th 2019, and another month has been wasted with the British position no clearer than it was last year.
Following her defeat, Theresa May acknowledged that she will now have to engage in cross-party talks to try and amend the deal so that it can pass with sufficient parliamentary backing. May will spend the rest of the week trying to hammer out a position that alters the current parliamentary arithmetic before heading back to Brussels next week to try and win “concessions” from the EU. This is a seemingly impossible task.
We recommend watching Labour MPs – as they offer the best potential (though shaky) lifeline to Theresa May. There are 25+ Conservative MPs who will vote against any Withdrawal Agreement, regardless of its shape. So Theresa May can’t win without Labour MPs supporting her. May will spend the next few days trying to peel off some Labour MPs who accept they were elected on a Brexit manifesto, but won’t risk a ‘no deal’. It is not likely to work, but it is the only play May has left.
But first, the Prime Minister will have to endure another test this evening as the leader of the opposition, Jeremy Corbyn, has tabled a vote of no confidence in the Government. The Government will most likely win this challenge as both DUP and Conservative MPs have indicated they will vote in support of the Government (even if all/many of them are not backing May’s deal.)
At odds with the EU, the DUP, Labour and her own party
Prime Minister May faces a quandary in that the EU has already indicated that a wholesale renegotiation of the agreed Brexit deal is not on offer. While both European Council President, Donald Tusk, and European Commission President, Jean-Claude Juncker, have indicated that they are at the disposal of Theresa May in Brussels – any re-opening and changing of the Withdrawal Agreement, will require another EU emergency summit attended by all 27 heads of state.
We foresee a situation where the EU can offer Theresa May minor tweaks to what has already been agreed, but there is a limit to what it can and is willing to do.
Thus it is difficult to see how Theresa May will be able to bridge the gulf between what constituent groups in the UK want and what is on offer. The DUP and many Conservative MPs, for example, want nothing short of a legally binding guarantee that the so-called “backstop” on the Irish border will not be activated. This is a non-starter for the EU.
Meanwhile, Labour’s position on Brexit is that the UK remains a member of the Customs Union, with close ties to the Single Market. That clashes with the Government’s self-drawn red lines on maintaining an independent trade policy and ending free movement of people. Theresa May has already indicated that she will continue to uphold these red lines. (If she were to move closer to Labour’s position, she would risk losing even more of her own Conservative MPs.)
On all sides, the space for manoeuvre is virtually non-existent.
What happens next?
The way out of the current predicament is still not clear, but it is evident that the paralysis that has seized British politics will continue. Broadly, however, there are still three options on the table – and as leaving day gets closer, something will eventually have to give.
They are as follows – in order of likelihood as we assess them:
- Theresa May’s deal or another ‘off-the-shelf’ model: Some iteration of Theresa May’s deal passes with amendments through the House of Commons on the second or even third attempt. The caveat is that there will be no wholesale renegotiation by the EU, so any changes to the deal with be cosmetic. Alternatively, the UK explores another “off-the-shelf” model like the so-called ‘Norway’ or ‘Turkey’ options – but this would require the Government to agree to move on its own red lines. Fundamentally, there will be no new bespoke negotiation.
- No deal: The default option is that the UK is to leave the EU on March 29th 2019 with or without a deal. This process can only be reversed if the EU asks (and the EU-27 unanimously agree) to extend Article 50, or if the UK unilaterally revokes Article 50. While the EU will likely extend Article 50 to avoid a no-deal Brexit, there is a limit to the conditions under which they will allow this to happen – for example, it cannot be used to secure an ad infinitum negotiation extension – but would be permissible if there were a new general election or a second referendum. While we understand that an Article 50 extension is certain now, it is a finite lifeline. Considering the division and paralysis in British politics, it is still and increasingly possible that the UK sleepwalks out of the EU without a deal.
- No Brexit: As the parliamentary paralysis continues, calls for a second referendum will get louder. Jeremy Corbyn (who is opposed, but under pressure from his parliamentary party) may back a second referendum. If there were a second referendum, Brexit could be, hypothetically, overturned in a second vote. While this is a possible outcome, we believe it is not likely. The leaders of both parties are currently opposed to a second referendum, and even if a second vote was held, it is not clear what the question would be or that public opinion has shifted decisively for a Remain win. The latest average of six polls from 4/12/18 to 14/01/19 puts ‘Remain’ just above ‘Leave’ at 54% to 46%.
Expect a lot of cloak-and-dagger drama in British politics in the coming weeks (starting with tonight’s vote of no-confidence in the government); a potential general election or second referendum; or an 11th hour extension of Article 50 — but the fundamental choices on the table remain the same: the UK will have to decide on the deal (broadly along the lines of what Theresa May has negotiated), no deal or no Brexit.
- Bolster and continue contingency planning for no deal – though not our base case, it is a clear possibility.
- Keep an eye on the British Parliament arithmetic – especially Labour MPs.
- Consider that an Article 50 extension will be a time-limited option – the hard deadline will be July 2nd when the next European Parliament holds its constitutive session.