May’s deal isn’t dead yet

Reports that Theresa May’s Withdrawal Agreement is dead and buried are greatly exaggerated.

If you can’t beat them…

…just call off the vote so you can’t be beaten!

That’s not a saying. But it might become one after yesterday.

Prime Minister Theresa May called off the Commons vote on her Brexit deal with the EU, which was scheduled to take place today.

May has been advised to postpone the “meaningful vote” on her Withdrawal Agreement in order to avoid a spectacular defeat.

No vote means no defeat. Clever!

Except calling off the vote is already a defeat. And it follows three other defeats she suffered in parliament last week.

In any case, the markets took May’s attempt to avoid a spectacular defeat as – you guessed correctly – a spectacular defeat.

The pound plummeted. Investors abandoned domestic stocks in favour of international ones. And demand for “safe haven” government bonds shot up.

Though it’s been called the “worst of all worlds deal” by the Leader of the Opposition, Jeremy Corbyn, some believe that the stock market will force the Withdrawal Agreement through parliament.

How realistic is that scenario still?

Markets caught off guard

Let’s walk through a theory that’s doing the rounds in the Houses of Parliament…

The scenario that has some Conservative MPs thinking the stock market will help push the Withdrawal Agreement through the Commons.

Here’s how that would work…

Parliament is supposed to vote on the exit terms Prime Minister Theresa May has agreed with the EU.

Parliament rejects what May calls the “best and only deal on the table”. The pound sells off and the market goes into a tailspin.

A superficial renegotiation of the deal takes place with some token concessions. Meanwhile confidence in the UK economy drops dramatically.

Politicians panic. They don’t dare vote down the Withdrawal Agreement a second time.

The markets would basically lend May a hand and “scare” British parliamentarians into voting “aye” to her deal with the EU…

I wouldn’t call it a flawless theory.

After all, investors (and everyone else) expected the deal to be voted down on the first try. For this reason, a rejection of May’s deal in parliament was largely priced in.

What the markets didn’t expect, however, was May cancelling the vote.

In doing so, investors concluded that May would have suffered an embarrassing defeat (why call it off if you’re expecting the outcome to be close?).

As a result, the pound fell sharply against the dollar and the euro on the news.

The stock markets reacted with investors selling housebuilders and retailers (which focus on the UK’s domestic market) and buying companies with lots of revenue overseas (a weaker pound makes their earnings more flattering).

Many other investors shifted their money towards government bonds. Yields on 10-year gilts have fallen due to increased demand. It’s a sign that investors are reducing their appetite for risk.

You’d think that all of this sounds like bad news to the MPs, however few they may be, who were hoping the Brexit deal would survive parliamentary scrutiny.

I’m not so sure. Yesterday’s events might actually help May and her deal after all.

Under pressure

The markets, which seem to dread a no-deal Brexit, are understandably worried.

May’s plan to rush her Withdrawal Agreement through parliament has come crashing down.

The PM thought she could get her deal approved by giving MPs very little time to scrutinise it and by publishing none of the Brexit impact studies.

Like an estate agent who forces you to make up your mind about a flat on the spot, May thought MPs might vote in favour of her deal if she gave them no time to think it through.

But MPs saw through her wicked plan. Last week May suffered three Brexit defeats. The government was even found in contempt of parliament.

Now May is going back to Brussels to renegotiate. That’s unlikely to reassure the markets because the EU has already told the UK they’re not in the mood to sit back down at the negotiation table again.

European Council President Donald Tusk has said a rejection of the Withdrawal Agreement can only mean “no deal” or “no Brexit”. Commission President Jean-Claude Juncker backed this up by saying there’s “no room whatsoever” to renegotiate.

So of course the markets don’t like where this is headed…

But this is textbook politics. Publicly politicians tell us nothing is negotiable, privately they say everything is negotiable.

May visiting the European mainland probably means she has had “sufficient assurances that she will not be made to look ridiculous going, like Oliver Twist, to Brussels to ask for more,” as FT columnist Robert Shrimsley puts it.

It doesn’t mean we can expect any major treaty changes.

But the right kind of tweaks, for example on the Irish border backstop, could go a long way to appease Northern Irish coalition partner DUP and Tory Eurosceptics fearing the UK will be stuck in the EU’s customs union forever.

Add to this that the closer we get to the Brexit deadline of 29 March 2019, the markets and the economy really could play on the minds of MPs.

Recent government forecasts claim the UK economy will be 9.3% smaller after 15 years if the UK leaves the EU without a deal. The country will be bombarded with similar figures as it nears the deadline.

The markets are unlikely to keep their nerve. The pound could weaken substantially while investors may very well flee UK stocks en masse.

All of this will put more pressure on MPs to either grudgingly accept May’s deal or put the question to the people once more in a second referendum.

The past weeks the media has had a field day calling Theresa May’s deal “dead on arrival”, “dead in the water” and “dead as a dodo”. But those reports may have been greatly exaggerated.

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