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Brexit Update – Hurdle is Still High in the Parliament

Hopes of a Brexit deal have once again lifted sterling. The latest optimism came after the “breakthrough” meeting between UK PM Boris Johnson and Irish PM Taoiseach Varadkar. The latter suggested he saw a“pathway to a deal” which could be achieved by the end of the month. Meanwhile, EU chief negotiator Michel Barnier suggested that an agreement before EU summit on Thursday was “very difficult but still possible”. While these developments suggest that the chance of no-deal Brexit has been diminished, the proposed deal has not resolved the contentious Irish border issue. Indeed, the substance is not materially different from the one proposed by former PM Theresa May. We expect it will be rejected by the UK parliament in as soon as Saturday, leading to further extension of Article 50.

News reports indicate that the breakthrough probably came from the idea of a “customs partnership”. Under this model, goods headed across the Irish Sea from the UK would pay the EU’s tariff. If the goods are eventually sold in Northern Ireland, the seller would be eligible for a refund. This signals that there will be no customs checks between Ireland and Northern Ireland, while giving Northern the opportunity to participate in any future global trade deals reached by the UK after Brexit.

While Barnier remained open for a deal, he is skeptical about the above arrangement, mainly in terms of implementation and approval by UK parliament. Indeed, similar arrangements were made about the Irish backstop last year. Recall that the EU offered an all-UK customs union back then. Yet, the proposal was still rejected three times in the UK parliament. It would be prudent for the EU members to ensure the plan will have sufficient support before they commit.

We believe that the parliament remains the biggest hurdle. Sammy Wilson, DUP’s Brexit spokesman, has raised concerns about the plan to keep Northern Ireland in the EU customs union for practical purposes. He also raised the issue of compensation for businesses in the province that could lose out as a result of EU regulations. He noted that that there must be consent from both unionists and nationalists in the Northern Ireland assembly in the arrangement. Indeed, besides getting support from All conservatives and the Northern Irish DUP, Johnson will have to secure votes from some Labour MPs. We believe this would be challenging as some view the current plan is a “harder” Brexit deal than the one proposed by Theresa May. Meanwhile, it is reported that Labors has planned to support an amendment – second referendum- for the deal.

According to Benn Act, the government would have to apply for further extension of Article 50, i Johnson’s proposal is rejected in the parliament by Saturday.

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