A general election is really the only way out

Wednesday, 23rd October 2019 10:38 - by Shant

After the euphoria of a deal being struck between the UK and the EU, we are back in familiar territory as the level of gridlock resurfaces in the wake of the 2 votes passed last night.  There was some cold comfort in that the second reading of the Withdrawal Agreement Bill was passed by a vote of 329 to 299 - this is the first hurdle in getting the deal to committee stage.  However, given the deadline of 31st October, the subsequent bill to push the legislation through was rejected by another slim margin - 322 to 308 - and therefore rendered the bill 'inactive' or 'in limbo' as some MPs called it.  There was an inevitable tinge to the latter result, with opposition MPs arguing that 3 days were not enough to scrutinize the deal and that more time was needed.  

As such, the UK is at the hands of the EU once again, as the extension request still needs to be agreed by all member states.  However, in light of the disruptions a no-deal Brexit would cause, it seems unlikely that the hitherto EU-27 would break ranks to cause any further ructions at this stage.  In all probability, the extension looks set to be set for the end of January next year, and this will give the UK ample time to run an election, which will effectively be a de facto second referendum given the pressing matter in focus at present.  If the extension is indeed agreed to the above timeframe, the PM has said that he will call a general election, and given the constant squabbling in the House of Commons, is/was there any other way that this could have been settled.  

When you consider comments from the French government, that no further extensions will be granted - only words I know - it is clear that the persistent delay in proceedings in the UK is wearing patience thin on all sides.  Uncertainty is the enemy of economic prosperity and some of the recent data has been showing the strains.  However, the rise in the Sterling exchange rate is also showing relief that a no-deal will indeed be avoided due to the passing of the Benn Act which required the PM to send a letter to the EU asking for the latest extension.  Boris Johnson was clearly making a statement in not signing the letter, but criticism of this is churlish in itself as parliament really has more pressing matters to get on with at present. 

In the meantime, the government will be considering an amended timetable in order to reinstate the momentum gained since reaching the agreement with the EU. This will require a shorter extension, but at present, this looks unlikely and will perhaps be facilitated by what some are calling a possible 'flex-tension'.  This largely becomes a redundant option if the PM calls an election in the event that the EU grants a 3-month delay stretching to the end of January next year.  

Some consider the current deal is inferior to that agreed by Johnson's predecessor, but in ending the 3 and a half year impasse, it will be a welcome step towards getting the second stage of the negotiations.  Yes, let's not forget that this is only the first step - exiting the EU.  We also have to consider the to and fro in negotiations regarding the future relationship with the EU, and this will soon dawn on markets once the actual exit is completed - if at all.  Running a general election clearly carries some risk that there may be no Brexit at all, as it is now firmly established that the SNP (as they have from the outset) and the LibDems, will run on a campaign aimed at reversing the decision of the 2016 referendum.  

Not that this will necessarily have a positive impact on the markets.  Should a reversal come to pass, then there is little doubt that investment would pick up in the UK, and fresh capital inflows would resume, making UK stocks shine once again.  However, during an election, there is the oft-forgotten Brexit party to consider, and who have been noticeable by their absence in proceedings, but they are there, waiting in the wings and ready to spring into action if or when an election is called.  Much as I hate to say, but there are more twists and turns to this than even I imagined, though a more robust stance by Theresa May would have perhaps got us to this stage back in March/April.  In that, there is some merit in PM Johnson's push to hurry things along, but this contentious issue refuses to go away, so we watch the economic data in the meantime.  The prospect of a general election into the Christmas period was the last thing we would have considered some months ago, but alas, it looks very much like we are headed that way.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.