It was perhaps inevitable that the Brexit endgame would be a flurry of ultimatums, as the supposedly immutable deadline of March 29 has yielded to a deadline of April 12 for a no-deal Brexit and May 22 for a Brexit following the plan hashed out between London and Brussels.
Sterling remained steady against the dollar after EU national leaders set the terms of their ultimatum last week, partially due to initial dollar weakness in the wake of the Federal Reserve’s dovish tack.
But commentators worried that currency traders are too optimistic about a benign outcome of the current chaos, with their apparent expectation that Prime Minister Theresa May (or her successor) and the British MPs will cave and seek a longer extension, or at the very least accept the deal on the table.
According to the terms set by the EU, any extension beyond May 22 would entail British participation in European elections, which start on May 23. That, for many, would mean that Brexit in any meaningful sense is doomed. This seems to be the outcome currency markets are expecting in holding sterling steady, though a long extension would probably also see a strong rally for the pound.
But rational minds expected British voters to reject Brexit in 2016, and they were wrong. Such supposedly rational expectations stand a good chance of being wrong again.
The week ahead in any case is full of imponderables. May will submit her EU deal to another vote, if the speaker allows, replete with its different deadlines—or not, if she feels it is doomed to a third defeat.
Parliament will decide whether it wants to grant itself a vote on possible alternatives. According to The Guardian:
MPs are due to vote on Monday night on whether to take control of the parliamentary agenda and hold a series of indicative votes on alternative options, including a customs union and a second referendum.
May could also conceivably just throw in the towel and step down, though it’s hard to see at this point how her Conservative Party could possibly agree on a new leader even though they want to avoid a snap election at all costs.
Two wildcards that few predicted are disproportionately shaping the course of events—the so-called Irish backstop, trying to reconcile the irreconcilable positions of preserving border-free trade between the Irish Republic and Northern Island while not binding the UK as a whole into the customs union, and the European elections, with Brussels insisting Britain must take part if it is still officially a member.
There are only two ways to avoid the European vote: a disorderly exit on April 12 or a May 22 exit under May’s deal, ushering in a transition period through December 31, 2020. This would keep UK-EU relations pretty much the same as they are now, even as details of the post-Brexit relationship are hammered out.
This would also mean accepting EU assurances in good faith that the Irish backstop would not permanently bind the UK to the customs union, though what the final compromise would be is difficult to see. However, for all its imperfections, the deal must be starting to look pretty good to Brexiteers in the Conservative Party and their allies in Democratic Unionist Party in Northern Ireland. There would be no Irish backstop in a no-deal Brexit.
A million-some people reportedly took part in London demonstrations Saturday urging a second referendum. But the margin in favor of Brexit in the 2016 referendum was nearly 1.3 million and London voted to remain by a 60-40 margin, so it is far from certain that the protest in the capital, massive as it was, reflected the will of the people.
Perhaps currency traders are right. Despite all the Sturm and Drang that brought us to this moment, Britain will go along with the deal on the table or get an extension that will lead to a softer version of Brexit or no Brexit at all.
Oddsmakers, however, have shortened the odds on a no-deal Brexit, giving it a 25 percent chance with odds down to 3/1 from 5/1. However, they were also wrong about the original referendum vote.