Could A Brexit be Reversed? Broker TD Securities See a Possibility That it 'May'


Broker TD Securities calculate a one in three chance Brexit could be reversed, severely watered down or even that another referendum may be called

brexit exchange rates 2

The die has been cast, the votes have been counted, over 17 million people in the UK wanted to leave the European Union, for those who wanted to remain it’s time to admit defeat.

Well, not exactly, says Richard Kelly, Head of Global Strategy at Broker TD Securities, who, in his latest note “Brexit – Ifs and Buts” thinks there is a good chance the decision to leave the European Union (EU)is not a done and dusted deal.

“The events over the weekend suggest to us investors the probability of a new referendum or new election over the next 12 months which reverses this decision to about one-third.”

Kelly argues that there is an elevated chance of a second referendum. Firstly, the referendum is not legally binding, second the law for leaving the EU, article 50 of the Lisbon treaty, is too vague to help clarify the current uncertainty, and thirdly, the fluctuating political landscape in the UK adds further uncertainty into the mix, which could potentially derail or reverse the decision to ‘Leave’.

Indeed his last point may be particularly germain, given one of the front-runners to replace David Cameron is Teresa May, who supported the Remain campaign albeit softly, and could, if she became Prime Minsiter have a legitimate claim to holding a general election to decide the matter.

Her main rival, Boris Johnson, however, has not stated catagroically, that if he is elected as the next Pricme Minister he will not hold another general election to supprot his mandate, severly reducing the possibility of a Brexit U-turn if he wins.

Both in polls of tory members, and in polls of the general public Johnson and May are running neck and neck at about 29%.

How could Brexit be Undone?

Ultimately the decision to exit the EU must be ratified by parliament to have any real legality, however, given over two thirds of MP’s – or 479 - support ‘Remain’ they could, theoretically, block a Brexit.

Apart from a straight refusal to vote a Brexit through, another way it could be prevented would be via a vote of no-confidence in the government, which would require a vote of 326 MP’s.  This would provide a 14-day window of opportunity for a new government to form which was more aligned with the values of the ‘Remain’ camp.

Another way of blocking Brexit would be to vote in favour of holding new elections, which would require the support of 434 MPs.

A vote for a snap general election would essentially result in a single issue campaign on Brexit, with parties aligning themselves along ‘Brexit’ or ‘Remain’ lines.

Kelly notes, however, that neither of these possibilities are likely to materialise given lawmakers would be highly unlikely to want to go against the “will of the people.”

It is also possible an election could lead to an embarrassing win for Nigel Farage’s UKIP party – or if not a substantial increase in the number of seats for UKIP – in an act of defiance from the public.

Boris Reconsiders

Kelly and his team argue that probably most likely chance of a partial or full repeal of Brexit, would come after a period of a year or so, during which time the public would begin to see the negative, particularly economic, consequences of leaving the EU, and therefore might be led to reconsider their original stance:

“Once leadership contests are completed and some of the negative repercussions start to materialize, it is possible the UK electorate starts to more vocally question the benefits of leaving. “

He further suggests a possibility that Boris, in his new position as Prime Minister might ‘engineer’ a second referendum, especially likely if some of the negative consequences started to manifest themselves:

“Even if Boris Johnson and Michael Gove currently succeed as expected in taking over leadership of the Conservative party, as their plans make clear an inability to deliver on savings from the EU and controlling immigration, and add additional costs to the fiscal side and consumer’s costs for food and other imported items, it is possible Boris could engineer a second referendum.”

Kelly points out that the idea to use a referendum as a tool to renegotiate Britain’s position in Europe was in fact floated by Johnson himself, in his earliest discussions on Brexit:

“The UK should have a referendum only to suggest its intention, and then use that to renegotiate terms with European leaders.”

As far as the chances of such a ploy working go, Kelly remarks:

“Perhaps the pragmatists like Merkel would be willing to offer some further concessions that more clearly demarcate Eurozone versus non-Eurozone economies or offer more broad controls on immigration across the region for a time. “

He continues:

“Boris could then say that he does not want to leave such an important final decision to just a few elected leaders and once again put a plan for leaving the EU with more details which will not allow the vague support Leave enjoyed this time around to persist, or else accept a deal with even further concessions from the EU.”

This final scenario seems the most likely way of ‘reversing Brexit’ given it would require no new elections and only a change of leadership in the Conservative party, which is inevitable now anyway.

Brexit Headwinds

Despite raising the possibility of a second referendum, Kelly and his team are also aware of some conspicuous risks to such a possibility, which could threaten not just a ‘second chance’ for the electorate, but also make a Brexit divorce even messier than it might be.

Both France and Germany have elections in the next 16 months and Kelly thinks that because of this neither will be disposed to renegotiate a softer alternative for the UK, as this would make them appear weak, and potentially encourage anti-European groups in their own countries. Therefore, if a second referendum was held in a year’s time it would be unlikely to offer renegotiated terms.

The other risk is that the UK could provide the EU with an excuse to trigger Article 7, which allows the EU to eject a member state for breaking an EU membership rule. Kelly says this might happen if, for example, there was a surge in immigration in the immediate future due to EU migrants trying to ‘get in before the door is shut’. If this happened and the UK took unilateral action to prevent it, it would be in contravention of the freedom of movement covenant, and provide the EU with the excuse to trigger Article 7.

Similarly, EU competition laws require that UK banks divest themselves of shares they bought during the banking crisis by 2017, however, if they did that they would make a huge loss, just before leaving the EU. Nevertheless, to not do it would be sufficient cause for Brussels to invoke article 7.

If the UK tried to begin trade negotiations with other foreign powers before leaving -  that is before triggering article 50 - so as to avoid a gap between closing current arrangements with Europe and opening new ones with other countries this might pose a legal problem as it would be debatable whether any new arrangement would have legality, given it is debatable at what point in the divorce the UK was completely ‘single’ and therefore ‘eligible’ for union again.

Two further related issues would also be whether the EU would see any courtship by the UK of ‘another’ as a de facto admission of Brexit and article 50 being triggered in spirit before fact; and secondly would the EU decide to stonewall the UK’s new trade companion and therefore essentially taint any deals the UK might try to make with other potential partners?

Is two years long enough?

Another major concern raised by Kelly is whether the statutory two year timeline for a country to leave the union once article 50 had been triggered would give the UK sufficient time to replace all tis European laws with new UK laws.

“But on the UK side, Parliament is going to have to pass hundreds of new laws to replace all the EU laws, starting with repealing the European Communities Act of 1972. There could easily be a situation where the two-year timeline runs out on the EU side, but UK Parliament isn’t anywhere near finished replacing EU laws with domestic equivalents, and UK laws may in fact not allow the UK to technically exit the EU without Parliament approving some of the new laws.”

Kelly ends his note underlining the prospect of a potential period of legal ‘limbo’ should a situation arise where membership had been fully removed but the UK had not properly replaced all the EU laws it depended on.