More on the campaign in the UK to hold a second Brexit referendum

I haven’t waded into the Brexit debate a lot in the last year or so. But I think now is as good a time as any to update you on my thinking of what is occurring there. And that’s because of a recent Sky News poll that Simon Nixon alerted me to on Twitter. Here’s what Simon tweeted:

Sky data poll: 78% of UK voters think Brexit going badly, only 14% expect government to get a good deal; 50% back second referendum (vs 40% opposed); in a straight choice, 59% voters prefer no Brexit to no deal (41%). https://t.co/jX5xB0YSWj

— Simon Nixon (@Simon_Nixon) July 30, 2018

The part that caught my eye was the bit about people wanting a second Brexit referendum. Sky News, for their part also tweeted numbers showing extreme dissatisfaction with how Theresa May is negotiating Brexit.

BREAKING: Confidence in the government’s negotiating of #Brexit has plummeted, new polls from @SkyData find.

10% say @theresa_may‘s administration is doing a good job, compared to 23% in March.

78% say it is doing a bad job, compared to 55% in March. pic.twitter.com/pCYfSp5eDM

— Sky News (@SkyNews) July 30, 2018

A lot of this has to do with the increased likelihood of a ‘no deal’ outcome and the angst associated with that. The obvious question then is whether Brexit will even happen.

Revisiting the Brexit vote outcome

So let’s look back two years to when the vote was held. What we saw then was a lot of doom and gloom about the British economy and the likelihood of an immediate recession. Days after the vote, I saw that talk as biased and misplaced and wrote about it:

Now that we have a little distance between the vote and the market outcomes, I feel it is a good point to start talking about longer-term repercussions. Let me say at the outset here that the EU referendum is more of a political outcome than it is a financial or economic outcome. And it has driven some very partisan political commentary as a result. Most of that commentary can best be described as motivated reasoning, which is not objective, and therefore is not particularly helpful in discerning what medium- or long-term economic outcomes are likely to be…

Having said that, I look at the Brexit vote as having introduced tail risk…

My base case scenario is that there are minimal medium-to longer-term impacts on the economy or earnings. I don’t foresee a massive move lower in the UK’s exchange rate or higher in US exchange rates. I also do not see a huge decline in shares going forward. For the UK, a lower currency actually aids the Bank of England in its fight to boost inflation toward target. And it might also have some mild boost to exports and tourism as evidenced by this Bloomberg article on tourism.

Overall, then, the base case here is one in which the Brexit vote has a limited impact on the UK economy and the EU economy, and therefore even more of a limited impact on the global economy. And with that the impact on markets will be equally muted. The whole sturm and drang about economic catastrophe is mostly an emotional and exaggerated sense of doom that comes from the confirmation bias of those of us who expected ‘Remain’ to win. It’s not coming from the ‘Brexit’ side because they have always downplayed the tail-risk scenarios.

So, no market implosion, no currency implosion and no recession, just political bickering and increasing division. I think that prediction holds up fairly well in the two years since I wrote it.

The campaign to hold a second Brexit referendum

Here’s the thing though. The next day I speculated on “Why Britain might not leave the EU and the next Prime Minister could be female“. We know I got the first part right. But now, given Sky’s poll we have to revisit the first part of that headline. Here’s what I was saying then:

This is a quick run through of the post-Brexit vote decision tree. The opportunities and constraints after the UK vote to leave the EU are now coming into view. It is clear that the UK is likely to leave the EU given not only statements by Prime Minister Cameron but also the Home Secretary Theresa May, both of whom campaigned for ‘Remain’. But it is also clear that the EU will not broker formal or informal discussions with the UK until the UK has invoked Article 50, which can only be done by an act of Parliament. Below, I want to run through some of the constraints in order to build a few scenarios that I see as possible now that we are a week into the post-Brexit era…

if you run through the decision tree here on these points, the first question is whether the new Prime Minister campaigns to go out. And Theresa May is telling us even ‘Remain’ Prime Ministers will lobby to get Britain out because that would be following the will of the people. This does not mean the UK parliament will vote out. It means that the next Prime Minister will put forward a vote to invoke Article 50 and individual MPs will have to vote their conscience and suffer the consequences. So it is still possible that Article 50 does NOT get invoked – and we will then have to see if this occurs whether general elections get moved forward.

We now know this was wrong. The UK parliament did invoke Article 50.

But the reasoning is still directionally correct in that, as I wrote then, “the UK could just get out of the single market altogether and be done with the whole thing. This would be a clean break, and, therefore, the easiest one to sell regarding immigration. The angst regarding trade would still be there because it is clear the EU would try to make it difficult on the UK in some fashion, so as to make leaving the EU seem onerous.”

This is where we are – interminable negotiations to leave the EU, with the clock ticking down. The only fallback the UK has is a ‘no deal’ Brexit. And people are scared to death of that outcome. Hence the Sky poll where voters want another crack at the Brexit vote.

The second referendum idea is now playable within the Conservative party

But let’s be honest. The prospect of a second Brexit referendum has been with us for quite some time. I wrote about it in January of 2017. I think a ‘no deal’ Brexit introduces so much tail risk that people would rather have a second referendum and halt the Article 50 process.

My understanding here is that the EU has no legal right to kick the UK out of its membership. The UK has to vote out. And if it invokes Article 50 and decides to withdraw that invocation before the 2-year deadline has passed, effectively it is back to where it was before Article 50 was invoked. In essence, a second referendum would override the first. And the whole Brexit trauma would be short-circuited.

Former Tory cabinet minister Justine Greening, who was turfed out of Theresa May’s cabinet in an earlier shuffle, is taking up the second referendum torch within the Tory party.

Justine Greening has said the prime minister’s Brexit plan is “already dead” and called for politicians to take their heads of out the sand, as she backed The Independent’s campaign for a second referendum.

The Tory former education secretary said Theresa May’s Chequers agreement would lead to a “disastrous decade of continuing division” and instability as it lost the support of the public, the Conservative Party and even members of the cabinet.

She said that many MPs, including senior Conservative ministers, agreed that a new vote may be the only way to break the Brexit deadlock, as Theresa May’s wafer-thin parliamentary majority leaves her vulnerable to hardliners on both sides.

It comes after The Independent launched its Final Say campaign for a public vote on whatever Brexit terms emerge, which garnered the support of more than 350,000 people in its first few days.

Ms Greening, writing for The Independent, said: “The difficult truth is that the prime minister’s Chequers deal is already dead. It’s time we stopped pretending otherwise.

“It doesn’t have the support of the public, my party or even those ministers who spent two years negotiating on behalf of Britain. Parliament is at stalemate and the sooner we deal with it the better.

“The prime minister should finish her EU negotiations, but it’s inconceivable that in our democracy any government could then believe it was sensible or right to press ahead with its route on Brexit without knowing it had clear public support, especially when all the indications are it does not.”

She added: ”It is an unacceptable state of affairs and must change … A referendum on the final deal is the only responsible course ahead.”

I now believe this is where the UK is headed.

Final thoughts

How exactly this second referendum vote happens is not clear. But what is clear is that Theresa May has lost all credibility in her negotiation of Brexit.

A ‘soft Brexit’ is an idea that no longer has validity. And increasingly, Theresa May’s loss of face makes a ‘no deal’ Brexit look as likely or more likely than a ‘hard Brexit’.  That is a terrifying prospect to most Remain voters and to a large swathe of Leave voters as well. Therefore, the closer we get to a deadline with a ‘no deal’ Brexit looming, the greater the outcry for a second referendum will become.

It could just be MPs that get to vote in a ‘second referendum’, effectively signing off on Brexit in whatever fashion the UK government has been able to deliver it – hard or no deal. Or it could be the Greening idea of yet another plebiscite, putting the Brexit idea to the people yet again, under the pretext of deal negotiation hindsight making the tenor of the second vote incomparable to the first.

However you look at it, Britain will be locked in a divisive political situation for years to come. I believe that makes Sterling weaker, it also lowers capital investment and economic growth in the UK. And it makes the Bank of England more reluctant to raise rates.

Let’s see how my predictive powers hold up over time.