Brexit moves from ‘Snakes and Ladders’ to cricket

The Brexit debate had appeared to be a simple game of Snakes & Ladders till now.  The Leave campaign landed on the ladders that led to its goal of No Deal, whilst the throw of the dice left Remain on the snakes, tumbling down towards irrelevance.

Yet today, at the very last minute, there are signs that we might instead now be starting to play the far more complex English game of cricket where captaincy is all-important, as one famous Australian cricketer has remarked:

“Captaincy is 90% luck and 10% skill. But don’t try it without that 10%”.

The Brexiters should certainly have won by now, if we were playing Snakes & Ladders.  They landed on a ladder early in the game when premier May set 29 March 2019 as Brexit Day.  By default, this meant the UK would then leave the EU without a deal – unless a Withdrawal and Transition Agreement could be finalised before then.

No Deal is, of course, the Brexiter dream as the leading Brexit economist, Prof Patrick Minford, argued in May when suggesting its result would be:

“Plus £651 billion ($875bn) for the UK versus minus £507bn for the EU: it could not be more open and shut who least wants a breakdown.“

As I noted in The pH Report at the time:

“Even if May can somehow achieve a deal with the DUP (the Democratic Unionists on whom she depends for her Commons majority), she would still have to agree it with the Leave enthusiasts in the Conservative Party. They are convinced that the real cost of Brexit will be borne by the EU27…. 

It therefore seems unlikely May can find a deal that is acceptable to the Leavers, given their belief that a “hard Brexit” represents the best negotiating strategy for the UK.

Today, it is clear that the DUP and the Tory Leavers will indeed vote against May’s Deal next week.

So by now, the Leavers should be celebrating.  But they aren’t.  Somehow leading Leavers such as Boris Johnson, David Davis and Dominic Raab all managed to land on their own personal snakes by resigning from the Cabinet at critical moments.

THE LEAVERS HAVE FAILED TO PRESS HOME THEIR ADVANTAGE

In life, as in cricket, one has to seize the advantage when it comes your way.  This is where the 10% of skill is all important, as it tells you when to grasp the moment.  Clearly Leave, led by the former Foreign Secretary Boris Johnson, has so far failed to hit the all important ball to the boundary and secure victory.

In cricketing terms, Remain may therefore have just managed to avoid an innings defeat, giving them the chance to go into bat again.  Skillful captaincy will then be all-important.  The next few weeks will therefore be the most critical period for the UK economy in recent history as competing visions of the future battle it out:

  • Prof Minford told the UK Treasury Committee in October that the UK auto industry needs to disappear: “You are going to have to run it down … in the same way we ran down the coal industry and steel industry. These things happen.”
  • Yet it is not clear that UK’s industrial heartlands who gave Leave its majority share this vision.  They, after all, were told at the time that Brexit would simply mean giving the National Health Service “the £350m the EU takes every week

3 Scenarios therefore seem possible over the next few weeks.

SCENARIO 1 – MAY LOSES NEXT WEEK’S VOTE, AND LOSES A NEW VOTE IN JANUARY
A week is a long time in politics, but it seems relatively safe to say that May is unlikely to win next week’s Commons vote on her Withdrawal Agreement. Her aides, however, have been busy playing up the likely size of her defeat, suggesting she could lose by 100+ votes.  And so, politics being politics, they will likely spin this as a success if she now loses by “only” 50 votes.

In turn, this would probably enable her to defeat a motion of No Confidence, and then bring a slightly modified version of the Agreement back for a new vote in January.  At that stage, it would be too late for any new deal to be agreed with the EU27.  So if she then loses this second vote, the Brexiters will win by default.  No Deal would become almost inevitable on 29 March.

SCENARIO 2 – MAY WINS A NEW VOTE IN JANUARY
UK politics is tribal, as I have been told many times over the past 2 years by leading MPs from all parties.  As such, it is very, very difficult for a Tory MP to vote to bring down their government.  So if May does “only” lose by less than 50 votes next week, then it is also possible that the Christmas break would provide time for reflection and give her a small majority in a second vote.

This, of course, would still mean the UK exiting the EU on 29 March.  But in cricketing terms, it would essentially be a draw – where neither side could claim victory, due to the Irish “backstop” (originally a cricket term).  In today’s Brexit version, it means that the UK would be bound to the EU unless and until the 27 agreed that the nightmare of a hard Irish border had disappeared.

SCENARIO 3 – MAY LOSES THE VOTE(S) BY A LARGE MARGIN AND THERE IS A NEW REFERENDUM

Scenario 1 is clearly the most likely outcome.  But the current row over the legal advice being given to the government gives Remain the chance to build a solid opening stand in the battle for a new People’s Vote.

It is a complex legal area, as the timeline from the House of Commons Library confirms, which is why skilful tactics by the Remain captain, Sir Keir Starmer, will continue to be critical:

  • Remain go in to bat this week to secure the detailed legal advice given to the government
  • By resisting this move, May risks alienating the moderate Tory MPs that she needs for her survival
  • If they vote against her on the issue of Parliamentary privilege, they might feel emboldened to do so again
  • But this would still represent an extraordinary development as it has only happened twice before in recent history
    • After premier Eden was forced to resign after the humiliation of the Suez crisis in 1956
    • After the disastrous Norwegian campaign in May 1940, when Churchill replaced Chamberlain

In the background, however, is the key fact that an overwhelming majority of MPs voted to Remain.  It is therefore not impossible that they could force a new referendum – particularly as the first was only “advisory”.  Remain would then have to campaign positively on the issue of peace and prosperity – as I argued here in May 2016.

But then, at least, the British people would have a real chance to decide on the future they wanted for themselves and their children.

Brexit vote will hit UK, Eurozone and global economies

Brexit Mar16Slowly, but surely, a UK vote to leave the European Union is becoming more likely.  In any referendum, the Yes campaign (in this case called Remain) have to argue a positive case.  But  this is not happening in the UK – and the vote is less than 3 months away.  Unsurprisingly, therefore, as the poll above from the Daily Telegraph shows, voters are currently evenly divided on the issue.

The Leave campaign have an easy job in these circumstances.  They simply have to argue it will be “business as usual” after the vote for the UK, Europe and the global economy.  But a moment’s thought makes it hard to imagine anything less likely, given the weakness of political leadership across the continent.

1. NOBODY IS ARGUING THE CASE FOR THE UK TO STAY
UK voters need to be given positive reasons to vote “Yes”, as happened in the 1975 referendum.  Yet, so far, nobody seems capable of doing this, and so the Leave campaign is gaining momentum:

  • The Cameron government is too scared of its Eurosceptic supporters to put forward the benefits of membership, and the Labour leadership are too busy fighting each other
  • This means the Leave campaign is free to claim that voters have nothing to lose by voting to leave

Another problem is that the two major parties – Conservative and Labour – no longer command the same confidence with voters.  In last year’s election, they won only 2/3rds of the vote between them.  By comparison in October 1974, ahead of the 1975 Referendum where the UK confirmed its EU membership, they won 75% of the votes.

Equally important in 1974 was the fact that the 3rd party – the Liberals – won 18% of the votes and also argued for a Yes vote.  But in the 2015 election, the Eurosceptic UK Independence Party came 3rd with 13% of the vote.  So voters are no longer being given a consensus view by politicians whom they trust.

2. OTHER EUROPEAN GOVERNMENTS HAVE SIMILARLY LOST THE VOTERS’ TRUST
We can see the same issue with other major EU governments:

  • The 2 main French presidential candidates won only 56% of the first round vote in 2012; even in relatively stable Germany, the 3 main parties* only won 75% of the vote in the 2013 election
  • By comparison, the 2 main French candidates won 75% of first round votes in 1974, and the 3 main German parties won over 90% of the vote in 1976
  • Equally significant is that today, as in the UK, the 3rd party in both countries (National Front in France, Alternative für Deutschland in Germany) are Eurosceptic
  • The impact of this political fragmentation can also be seen in Spain, Portugal and Ireland, where recent elections confirm the practical difficulties of even forming governments today

This lack of political consensus would make it very difficult to have a quick Treaty renegotiation to maintain the status quo if the UK did vote to leave – in fact, it might prove impossible for the other 27 countries to agree anything at all.  As former EU senior diplomat and NATO Secretary-General Javier Solana warns:

“Brexit would deal a major economic blow to the UK and the EU. But that is not all. It would also weaken the security, foreign policy, and international standing of both parties.”

3. SCHENGEN’S COLLAPSE HIGHLIGHTS THE PROBLEMS AHEAD
One example of the potential chaos ahead can be seen in the continuing collapse of the Schengen Agreement, as I warned in my BBC interview last summer,  This used to allow borderless travel across large parts of the EU – but even the town of Schengen itself now has border controls on the German side.

According to the European Commission, Germany, France, Austria, Denmark, Norway and Sweden have all re-introduced border controls as a result of the Syrian refugee crisis and the bombing tragedies in Paris and Brussels. Already, therefore, Europe has moved away from “business as usual”.  Few people now expect the Schengen deal to survive.  And as the Commission’s President warned 3 months ago:

“A single currency does not exist if the Schengen fails.

Against this background, it is very hard to believe that politicians would sit down calmly to develop new arrangements which basically preserved the status quo with the UK.  A Leave vote is far more likely to make the UK the scapegoat for all of the EU’s current problems. It would also create major problems for European financial markets themselves, as I argued last month:

  • How high would UK interest rates have to rise, to persuade investors to buy its large and growing debt?
  • How high would Eurozone interest rates have to rise, to compensate investors for the risk of buying the debt of increasingly unstable governments?
  • And in the worst case, what would be the impact on an already uncertain global economy, if financial panic were to hit the UK and EU economies?
  • How would a new US government, under President Trump, or President Cruz, or President Clinton or President Sanders react?

None of us can know the answer.

We can of course hope that all these problems will magically disappear.  But the risks are already much higher than even 3 months ago.  And yet at the same time, there is widespread complacency about the likely outlook.  It is a classic case of an outcome being so painful, people prefer to simply ignore the potential for it to happen.

It is hard to avoid the conclusion that we are living in a very uncertain, and potentially very dangerous, times.

 

* Germany’s Christian Democrat party is allied with Bavaria’s Christian Social Union party, with the main opposition party being the Social Democrats

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 61%
Naphtha Europe, down 58%. “Demand for naphtha continues unabated amid a relatively light spring cracker turnaround schedule in Europe”
Benzene Europe, down 51%. “One factor to consider with regards to the price volatility in Europe is the growing lack of liquidity in recent years”
PTA China, down 41%. “Demand from the downstream polyethylene terephthalate (PET) and polyester fibre industries are expected to peak in the April-June period”
HDPE US export, down 34%. “Expectations of tightening supply because of the onset of the plant turnaround season.”
¥:$, down 11%
S&P 500 stock market index, up 4%