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However, the EU already rejected technological solutions
when initially proposed and we expect they would do so
again - the EU Withdrawal Act rules out any new controls
or infrastructure post exit day. Technology might help
mitigate the impact of checks and controls in future, but it
seems highly unlikely it would be able to avoid them all
The compromise plan then says if the EU fails to agree to
this proposal, the UK will seek a managed no deal – ie
continue to seek the extended implementation period,
and use an obscure WTO article (GATT XXIV) to secure
tariff-free access thereafter until a free trade agreement
could be concluded. But this would only apply if the UK
and EU had a concrete plan for a comprehensive free
trade agreement.
Moreover, it would have to apply to the whole UK, not just
the Northern Ireland/Republic of Ireland border. Other
WTO members would also have a say. We therefore
expect the EU to reject this plan if May presents it in the
coming days.
Our base case remains unchanged. We expect a poor
signal to noise ratio in the short term, as May tries to
obtain changes to the backstop from Brussels. We think
these talks will ultimately fail, although we wouldn’t rule
out Brussels offering something on the backstop – we
just wouldn’t expect it to be enough to convince a
majority of MPs to support it.
Accordingly, when May brings her deal back to the table
for the 14 February vote, we expect the options will be
exactly the same as today: Leave with the deal, leave
with no deal, or extend Article 50. In that regard, tonight
has changed little, other than to run the clock down a bit
more. We see an extension as almost inevitable now,
even if a deal is eventually passed. We leave our
probabilities for various outcomes unchanged at:
No deal 20%. Deal 30%. Second referendum 35%.
General election 15%.
Cooper amendment failure doesn’t mean no deal.
The most surprising development of the night was
that the Cooper amendment, often referred to as the
‘delay Article 50’ amendment, did not pass. However,
as we noted in Brexit – Reasons to be cautiously
optimistic, even if the amendment had passed, it
would have faced significant obstacles before an
Article 50 extension became automatic. One could
argue that the fact that it didn’t pass gives Prime
Minister Theresa May more leverage in forthcoming
negotiations. However, that supposes that ‘no deal’ is
a credible threat.
GBP crosses weakened by around 0.6% in the
immediate aftermath of the Cooper amendment
result. While the result suggests there is no majority
to postpone and/or remove a no-deal Brexit outcome,
we expect the market impact to remain limited as the
vote split was close (Table 1), and May has
announced that the deal will be voted on again on 14
February, providing another opportunity for MPs to
prevent no deal.
Note also that a majority of MPs voted in favour of
Caroline Spelman’s amendment, which rejects
leaving the EU without a deal. That doesn’t bind the
government to do anything to prevent it, but it shows
there is a willingness by MPs to avoid it.
Graham Brady’s amendment calls for the
improbable. This simple amendment gives tentative
approval to the negotiated withdrawal agreement, as
long as the backstop is replaced with “alternative
arrangements”. The market reaction to this result was
fairly neutral. Previous rhetoric from Europe and the
immediate reaction from EU Council President
Donald Tusk that the backstop is not up for
renegotiation suggest any changes will be difficult, ie
the amendment could be considered a non-starter.
However, on the face of it, the fact that it passed
means that May was able to turn a defeat of 230 on
the Brexit deal into a slim majority (317-301). This
could give the impression that May now holds a
stronger negotiating hand, which might mean a small
retracement of the GBP depreciation following
Tuesday’s vote.
However, the amendment does not specify what
alternative arrangements would be acceptable. This
is where the ‘Malthouse compromise’ comes in:
Malthouse compromise: Technically speaking, this
is not an amendment but a proposal which was
circulated ahead of the vote and has gained support
from pro-EU and eurosceptic MPs alike. It proposes
first to attempt to rescue the withdrawal agreement
by extending the implementation period by one year
and replacing the backstop with alternative
arrangements – like the Brady amendment. A paper
by the IEA is referenced, which has pushed for
technological solutions to be implemented for checks
and controls.
Parliament says no to backstop and no to ‘no deal’
MARKET ECONOMICS | G10FX | EQUITY & DERIVATIVES | G10 INTEREST RATES
Amendment For Against
Labour (a)
Customs union / 2nd referendum 296 327
SNP (o)
Extends A50, rules out no deal 39 327
Grieve (g)
Indicative votes 301 321
Cooper (b)
Extends A50 (with a bill) 298 321
Reeves (j)
Extends A50 290 322
Spelman (i)
Rejects leaving without a deal 318 310
Brady (n)
Replaces backstop 317 301
Table 1: How MPs voted on Brexit amendments
Paul Hollingsworth, UK Economist | Parisha Saimbi, G10 FX and Sterling Rates Strategist | BNP Paribas London Branch
Ankit Gheedia, Equity Derivative Strategist, BNP Paribas London Branch | Antoine Deix, Equity & Derivative Strategist , BNP Paribas Arbitrage。