Brexit : Four paths Boris Johnson can follow

16/09/2019 -

Since his first steps as Prime Minister, Boris Johnson has been determined to put no-deal Brexit on the negotiation table with the EU. This strategy, showing serious strength and determination
about leaving on the 31st of October, has one goal: remove or tweak the Irish backstop policy.

The Irish backstop is to prevent the return of a hard Irish border if no free trade agreement between the UK and the EU has been reached at the end of the transition period. . Under the original EU plans, Northern Ireland would remain part of EU’s single market and customs area, bypassing the need for checks on trade with Ireland. However, the rule would have created new checks with mainland Britain.
The Irish Backstop is a sensitive inflexion point since a hard no-deal Brexit could threaten the peace process between London and Dublin and force the return of checks to protect EU customs union and single market. Eurosceptic Conservatives oppose the policy because of concerns that it could eventually lock the UK in a customs union with the EU in perpetuity.

Trajectory alteration

Boris Johnson © PRUAFP

However, last week Parliament pushed back and passed a legislation to effectively remove no deal from the table, leaving Mr Johnson without his favourite weapon. MPs went a little further and sunk the Prime Minister’s plan B by blocking his call for a snap election. From Westminster perspective, things look truly complex. Cabinet members (including his brother Joseph Johnson) are resigning, some of the biggest names in the Conservative party are being expelled.

MPs from both sides are combining their voices to block the Prime Minister from leaving the EU without a deal on October 31st and to deny him the election he is pushing for.

According to his preferred fighting talk, Boris Johnson would prefer to « Die in a ditch » than abide by the new law requiring him to seek another delay to the Brexit. Today, this leaves him with a non-compelling choice : comply or resign.

The only way out for the Prime Minister would be to secure a deal by swapping the all-UK backstop for one that only takes into account Northern Ireland. That would free the rest of Britain from EU control at the price of a hard customs and regulatory border in the Irish Sea.

Leo Varadkar / Boris Johnson. © Charles McQuillan/Getty Images

On Monday, the British prime minister softened his hard stance on the Irish Border, the contentious provision in his predecessor’s withdrawal agreement with the EU. He is willing to leave agriculture and food in Ireland based on EU rules after the Brexit.

 

During his first face-to-face talk in Dublin with the Irish Leo Varadkar, Johnson said: « The landing zone is clear to everyone. We need to find a way to ensure the UK is not kept locked in the backstop arrangement and there is a way out for the UK while giving Ireland the assurances it needs ».

This is a significant shift from his weeks-long posture about the need to scrap the backstop from the agreement. In July, he said «A time limit is not enough. If an agreement is to be reached it must be clearly understood that the way to the deal goes by way of the abolition of the backstop».

Thus, Downing Street said Boris Johnson does not intend to extend this principle to other sectors such as manufactured goods. British officials also stressed that the arrangement on “agrifoods” represents « at best one-third » of the commercial traffic across the border.

 

So, where does Brexit go next?

Four distinct scenarios appear to be possible:

  1. Boris Johnson gets a deal: Even if the Prime Minister gets his deal and the EU agrees on the new Irish Border backstop proposed by Downing Street, it seems that getting it through Parliament can be a tough task. To do so, Boris Johnson would need to dramatically reduce the number (28 as of today) of pro-Brexit conservatives who never accepted a deal.

  2. Boris Johnson goes for a no-deal: Even if last week’s law that forces Johnson to seek an extension of the Brexit is a huge win for the Labour Party, the government’s legal experts found a loophole in it. The Prime Minister could hypothetically still find his way out of this law or persuade the EU to reject his request for an extension. The UK leaves the EU by October 31st, and Johnson would be able to call an election.

The outcome of such a scenario and the re-election of Johnson is very uncertain and depends heavily on how the Brexit delivers. Either the disruption to Britain is minimal and the Prime Minister could present himself as the man who delivered on peoples’ wish, or the election will be fought in a backdrop of blocked roads, shortage of food and medicines and factory closures, leading to a somewhat humiliating return to EU’s negotiation table.

  1. Boris Johnson requests a delay: The Prime minister could also back down on his hard Brexit stance and obey the law forcing him to ask for a delay to the exit. Under these circumstances, the Parliament, with the agreement of the opposition Labour Party will hold its first December election in 100 years.

  2. Boris Johnson resigns or is forced out: Prime Minister Boris Johnson could also stand by his saying « Die in a ditch rather than abide by the new law », leading him to either announce his resignation or go for a no-deal Brexit but lose a vote of confidence and be forced to quit his seat.

 

Business impacts

These developments will likely lead to a shift of EU capital markets from the UK, historically the biggest financial hub of the continent with more than 300 asset managers, trading platforms, banks and insurers.


France and Germany appear to be the biggest winners as they will probably benefit from a “duopoly” in most of the financial activities like derivatives and FX trading, banking or venture capital. However, the EU is expected to lose 7% of the global capital market share, shrinking from 21% to 14%.

The business sentiment is dragged down by the uncertainty over the Brexit outcomes and the slowdown experienced by the European market.

The Manufacturing sector (PMI at 47.4 in August) is already in contraction, driven by the German manufacturing slowdown and uncertainty, and Services (PMI at 50.6 in August) are weakening due to squeezed margins since January and growth projections at their lowest since July 2016.

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[The IHS Markit PMI (Purchasing Managers’ Index) – a monthly complied index providing insights into key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories – is widely used by investors to assess economic health and conditions and to project where the economy is headed. A reading above 50 reflects an expansion of the sector, while a reading below 50 shows a contraction.]

 

The Pound also took a hit since the announcement of the Brexit, falling at record-low levels against the major currencies.

 

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Achraf Lançar
Cross-Asset Structurer Assistant at Marigny Capital