The United Kingdom and the European Union (EU) have signaled that a Brexit deal is still possible, with signs of a potential compromise over the Irish border starting to emerge. Although the prospect of reaching a deal before the 31 October deadline does exist, time is running out. Even if UK Prime Minister Boris Johnson were to strike a deal with the EU, he still needs the backing of the UK Parliament, which remains highly uncertain. This makes an extension the most likely outcome, in our view, potentially followed by an early election. However, calling the outcome of an election is incredibly difficult, for the reasons we set out below.
Is a Deal Still Possible?
We believe there is strong political will on both sides to agree to a deal. Johnson would be seen to deliver Brexit as promised while EU Commission President Jean-Claude Juncker may be keen to ensure a deal is reached by the end of his term in November 2019. The Irish border has long been a key sticking point in negotiations. Johnson has strongly opposed the inclusion of a backstop arrangement, which former Prime Minister Theresa May had been willing to accept. While the backstop would avoid additional border checks between Northern Ireland and the Republic of Ireland if the United Kingdom were out of the EU, it would keep the United Kingdom in a close trading relationship with the European single market and unable to strike trade deals with countries outside of it.
Johnson has proposed a “technology-led” border solution that would keep Northern Ireland aligned with the EU’s single market, thus eliminating the need for regulatory checks when goods cross into the Republic of Ireland, while ensuring it remains in the customs territory of the United Kingdom. While this would result in a customs border between Northern Ireland and the Republic of Ireland, Johnson asserts it would not necessitate a physical border as the proposed customs checks would be carried out at traders’ premises or other points along the supply chain. EU officials believe this to be a complicated proposal—one that requires further discussion before it could be considered a solution—but have not yet ruled it out.
If an agreement on the customs border is reached, this would likely significantly reduce the risk of a no-deal outcome. The United Kingdom leaving the EU without a deal would arguably be the worst outcome for Ireland more so than for the remaining 27 EU countries. Ireland has the highest exposure to the United Kingdom in terms of its total exports and it has been estimated that it would suffer the biggest hit to its gross domestic product.
Any agreement reached between Johnson and the EU still requires backing by the UK Parliament. The Democratic Unionist Party (DUP)—which is in a confidence-and-supply arrangement with the Conservative party and effectively keeping the government afloat—has previously opposed subjecting Northern Ireland to different customs rules than those imposed on the rest of the United Kingdom.
The preceding is an excerpt from Brexit: The United Kingdom’s Departure Deadline Looms. Read the full paper to learn about the investment implications for the “deal,” “extension,” or “no deal” scenarios.
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