Brexit: will the revised deal be enough to pass?

May returns from Brussels – will it be enough?

UK Prime Minister Theresa May has managed to do the impossible and secure the EU’s consent to a compromise on the Northern Ireland backstop. We await the advice of the Attorney General and the decision of the Democratic Unionist Party (DUP), but for now some things can be noted.

What has changed?

Essentially, the language of the backstop has been toughened up so that the UK now has a recourse to an arbitration panel if it believes the EU is not acting in good faith. If London believes Brussels is attempting to keep the UK in the backstop through obstinate negotiating practices, then it can appeal to the panel for a ruling. Of course, if that happens, the EU will also appeal that UK is not acting in good faith either.

The second elements adds a ‘joint statement’ that commits both sides to replacing the backstop with an alternative by December 2020, although the EU privately believes that this is highly unlikely given the limited time available.

Finally, and this is perhaps the oddest part, the UK has added a ‘unilateral declaration’ (UD). This allows for the UK to begin the process of leaving the agreement. However, it would then become subject to arbitration, so it is not clear whether the UK could follow through on this. It looks like the UD, as some in Dublin have said, is just ‘the UK talking to the UK’ about what it might try to do. The key word is ‘unilateral’, i.e. May couldn’t get the EU to agree to it, so had to leave it as a UK-only document.

Will it pass?

Maybe.

This is difficult to tell at this stage. The Attorney-General (AG), Geoffrey Cox, has to provide a ruling on whether it meets his legal requirement that the backstop must not become permanent. On the surface it seems to, but if the UK/EU are trapped in arbitration then it might drag on anyway. If the AG gives it the nod then it will depend on the DUP. They will be worried about Northern Ireland being separated off, but if they think the new agreement meets the conditions (and the AG says it meets his requirements) then they might give it the nod.

As a result, most Tory MPs might back the deal, and the hardline Eurasian Resources Group (ERG), Jacob Rees-Mogg etc, might split, with some still voting against. In this way the Parliamentary arithmetic might shift towards the PM and her deal.

A reminder – last time the deal was defeated by 230 votes. The PM will need 10 DUP MPs, around 65 of the 110 in the ERG, 4 independents and around 40 Labour MPs whose constituencies voted Leave and who will be worried about being seen to block Brexit if they vote against.

Interestingly, some hardline Remainers like Dominic Grieve have said that they will vote against the deal. Their whole approach was premised on the idea that the EU would not budge, and that the UK would have to go for an extension that might lead, eventually, towards a second referendum. Now the EU has budged. The sight of these Remainers voting against will boost the idea that it is ‘this deal or no Brexit’ potentially bringing some more Tory MPs round to supporting the deal.

Labour have said that they would vote against the deal, but as noted above some Labour MPs (tough to say how many) might defy the party whip and vote with the government.

It is not certain that it will pass however, but if she loses by around 100 votes or less then she can go to Brussels to ask for a short extension (EU sources say only until late April in order to avoid getting involved with the May elections) and then have another vote that might bring the requisite number of Tory MPs on side.

What about the markets?

We have already seen GBP rally on the news, on hopes that this will get the deal through. Some of these gains might be given back if the vote fails tonight, although if it is only a small defeat then hopes of a short extension and Meaningful Vote 3 might help prevent too much downside. Cable already looks to have bottomed out, barring a no-deal scenario, and GBP/EUR continues to surge, helped along by euro weakness.

Meanwhile the FTSE 100 has dropped on the open, and further GBP strength will act as a drag, but the index has found solid support around 7080, as it did on Friday, providing hope that the renewed move higher in the US will support equities here too. A deal removes some of the uncertainty over the UK, potentially seeing the general underweight position on UK assets among fund managers begin to reverse, although this will be a slow process.