May Achieves Cabinet Support For New Brexit Deal
But The Risk of Parliamentary Rejection Remains High
Following months of intense negotiations, it seems that there is finally some light at the end of the tunnel for Theresa May.
After a long meeting held yesterday at Downing Street, May’s new draft Brexit agreement was approved by Cabinet.
With Cabinet having signed off on the deal, the draft agreement will now be submitted for approval at a summit to be held between UK and EU leaders on November 25th.
Following this, May will then need to achieve a “final meaningful vote” in parliament to have the deal passed.
While Cabinet has approved May’s new draft withdrawal agreement, it has not come easily, and May has already suffered her first ministerial resignation with Brexit secretary Dominic Raab stepping down following the meeting.
What Is In The Agreement?
The draft withdrawal agreement is a 585-page document covering the “divorce” issues between the UK and the EU. Of these, there are three key areas:
1 – The financial settlement the UK has agreed with the EU to be paid upon exit
2 – The post-Brexit rights of EU citizens in the UK and of UK citizens in the EU
3 – A mechanism designed to avoid a hard border on the island of Ireland
The document also contains a shorter 7-page political declaration from both sides highlighting what their desired future trade relationship is to be, though this remains to be fully negotiated and is not legally binding.
How Has The Issue of Northern Ireland Been Dealt With?
The “Irish backstop” issue has been the most difficult hurdle over the course of negotiations. The UK has been adamant that it will not accept a hard border in the Irish sea, while the EU has said that it cannot allow the UK to gain a “competitive advantage” by maintaining access to the single market.
Ultimately, and to the dismay of her Brexiteer colleagues who fought against it, the agreement now outlines that the UK as a whole will remain in a “level playing field” single customs union until the UK and EU agree on a trade deal.
However, if talks fail, the agreement outlines that the backstop will kick in (establishing a hard border in the Irish sea and the need for physical checks on goods and infrastructure crossing the border).
Furthermore, if a deal is not in place by 2020, the provision can either be extended or the backstop will kick in.
Deciding how best to deal with the issue has been the most difficult task for May. On the one hand, the fragile nature of the peace process in Northern Ireland and the stability of the coalition between the Conservatives and the DUP needed to be considered, while on the other, May had to bear in mind the consensus within her party where a great deal of Brexiteer MP’s are against remaining in the single customs union, even on a temporary basis.
What Happens Next?
The withdrawal agreement has now been submitted for review by all 27 EU member states and will then be approved or rejected at the EU summit on November 25th.
If the agreement is approved as is expected, it will then be submitted in UK parliament where MPs will vote on whether to ratify it.
This final UK vote presents a great deal of risk and EU leaders are publicly concerned that the very fractured state of UK politics will ultimately undo the hard work that has been done so far.
It is thought that May will need the support of around 50 hardcore Brexiteer Tory MP’s in order to secure a majority and have the agreement passed.
Given the division within her own party, this seems a daunting task and May will also be looking to win over a portion of Labour MPs. However, Labour leader Jeremy Corbyn has vowed to block May’s Brexit deal which he calls “half-baked” and the result of “two years of bungled negotiations.”
If May’s deal is turned down, it is highly unlikely that she will have the time to make another revision and go through the process of approval again, in which case the most likely outcome will be a no deal Brexit.
GBPUSD has moved lower over the day as the details of the agreement have been publicized. The failure of the government to properly deal with the border issue as well as temporarily remaining in the single customs union have greatly increased the chance that parliament will turn the deal down.
For now, GBPUSD continues to trade within the descending triangle pattern which has framed price action over the last few months. The 1.2690s level has underpinned the move for now though with price continuing to find resistance along the bearish trend line; we could see another test of the level shortly. Alternatively, if we see price break above the trend line, traders will be looking at a break of the 1.3299 level next to confirm a breakout.