We have long held the view that, ultimately, the most likely outcome of the UK negotiations on its future departure from the EU this year would be a last-minute extension of the negotiations and another general election. We have had this view for a year, or even more, and things have unfolded as expected so far. However, we now increase the risk of no deal to a very meaningful 30% probability.
Yesterday, EU Council President Donald Tusk publicly remarked that he wonders what the special place in hell is like for those that have put forward Brexit without having prepared a plan for it. This is unusually strong language for Mr Tusk, and clearly reflects the frustration of the EU towards the UK’s strategy of waiting for the very last minute to extract concessions. Alas, usually, when a senior foreign official takes a bold stance on a big electoral decision, the response of the electorate becomes more entrenched to the opposite side. To be clear: Mr Tusk’s remarks, de facto, are likely to make people more willing to tolerate a no deal scenario.
The second concern we have is that, according to the opinion polls, people’s trust in Labour leader Corbyn is falling on the back of his ambiguity on Brexit. According to a YouGov survey conducted at the end of January, 71% of voters distrust the Conservatives on their ability to handle Brexit, but 83% distrust Labour on the same issue. This strengthens our view that, if early elections were to take place soon, the Conservatives would still be the most likely leaders of the next government, even though Labour and the Conservatives both have the same level of support in the normal opinion polls.
In our view, the risk of no deal is rising because the positions of the political parties are, we believe, gravitating towards no deal. The lobbying of the business sector at this juncture is not strong enough to alleviate the deep philosophical distrust towards the EU, and the conditions are not yet visible for early elections.
All-in-all, we would still see an extension of the negotiations as the most likely scenario – we would see a 70% likelihood that the negotiations are extended by a year. However, the likelihood of no deal is now 30%, in our view: much higher than our assessment even up to last week, and much higher than what the financial markets seem to be implying, particularly given the recent strengthening of the sterling.
What to look out for in the weeks remaining until 29 March. We expect to see zero progress on the negotiations for the remainder of February, as the UK does not have a sufficiently clear alternative plan that would be acceptable for the EU, in our view. The key period, we believe, will be the first three weeks of March. If internal support for PM May begins to weaken visibly, and the majority of parliament is willing to accept that the most desirable outcome is to demand an extension of the negotiations and to call elections to achieve a fresh mandate, then Brexit will be delayed by a year, at least. If parliament does not turn against PM May, then no deal becomes the central scenario and this implies a majestic hiccup in global trade and serious repercussions for all of the EU. We also note that, in the event of no deal, our best guess would be that no viable new solution will be found with the EU for a year and maybe more.