Latest Brexit proposal consistent with softening of Brexit, says Scope Ratings

Prime Minister Theresa May secured Cabinet backing on a new softer Brexit strategy at the cost of high-profile resignations, evidence of deep discord within government. A soft Brexit or no Brexit remain the most likely scenarios, says Scope Ratings.

The resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson have cast a dark shadow over the Brexit process if nothing else, signalling potentially more lasting change in the government’s negotiation strategy.

While many Brexiteers are dissatisfied with the latest proposal, their dilemma remains whether they can: i) bring about a change in Conservative Party leadership, even if they force a confidence vote; and ii) even if they are able to, wouldn’t a new Prime Minister face the same lack of a parliamentary majority for anything except soft Brexit?

Ms May’s revised proposal seeks to maintain the status quo in the single market for goods along with a ‘Facilitated Customs Arrangement’ with the EU, intended to remove the need for a hard border in Ireland. However, the proposal opens to greater divergence on services, meaningful for a (services) sector that accounts for 79% of the UK economy and 45% of UK exports.

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“On the one hand, the plan may be interpreted as a move that increases the chances of a deal, especially should the UK now be willing to sign on to the EU’s ‘backstop’ on the Irish border (which effectively would ensure the whole of the UK remains in the customs union),” says Dennis Shen, UK sovereign analyst at Scope. “On the other hand, the distance between the EU and UK remains wide.”

The latest strategy, details of which are due to be published in a white paper, is unlikely to represent a workable arrangement given the implicit division of the single market between goods and services, ending free movement (though the UK proposes a ‘mobility framework’), the proposal for an independent arbiter (rather than sole reliance on the European Court of Justice) and concerns still around the practicalities of the customs proposal. In addition, the UK reserves the right not to incorporate EU rules into the UK’s legal order, so membership of the single market for goods could balance on a knife’s edge.

Scope outlined its view in August 2017 that the most likely end-state is either an eventual soft Brexit (Scope’s baseline) or a no-Brexit (‘Breversal’) scenario, rather than hard Brexit. This owes to the inherent complexity of the exit negotiations that hinders a successful ‘hard’ Brexit under any near- to medium-term horizon, as well as meaningful pressures stemming from parliament, the devolved administrations, the EU, UK civil society and business for a softer approach.

Importantly, despite lingering differences with the EU, the UK has currently just to conclude a legally binding divorce deal, which is almost there except for the Irish border issue, plus a non-binding agreement on what the two sides envision in a future relationship. Here, the primary test now to exiting the EU on March 29, 2019 (and entering a near-identical transition) is on whether a common vision on a future relationship can be agreed on that simultaneously convinces both the UK Parliament and European policy makers. And if, alternatively, such an acceptable arrangement cannot be found before March 2019 and/or political instability accentuates in the UK, an extension of Article 50 (and the UK’s status inside the EU) is on the table (which requires the unanimous decision of the EU-28), even if it would be hard to digest.

“In any case, uncertainties surrounding Brexit will endure well past March 2019,” concludes Shen.

Scope assigns an AA rating with a Negative Outlook on the UK. Scope has outlined that the rating implications under each of three core scenarios – soft, no and hard Brexit – depend on the path of Brexit negotiations, how much uncertainty is generated prior to any end-state, and how much policy regression occurs meanwhile. Scope’s next review date on the UK’s sovereign rating comes on 10 August.

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