Brexit’s Next Act Has Its Cast, but the Script Is Still Missing

Tuesday morning, one tiny piece of UK politics got a touch clearer: Boris Johnson (BoJo)—former Foreign Secretary and London mayor—took 66% of the vote in the Conservative Party’s leadership contest, meaning he will replace Theresa May as Prime Minister. While this sheds a little light on the cast of characters in Brexit’s next act, it adds little clarity beyond that. How the UK/EU relationship will look post-Brexit remains unknowable. Many speculate his victory means no-deal is more likely, but we think this is a vast oversimplification. Though we wish his election cleared the Brexit fog, it doesn’t, in our view.

Johnson was one of Brexit’s chief flagbearers prior to 2016’s referendum and is generally considered a “hard liner” on the EU. He touted a “do or die” approach to Brexit, claiming October 31 would be the final date Britain is in the EU—deal or no. Johnson even hinted at doing an end-run around Parliament to accomplish this. Naturally, given the hyper-focus in Europe on Brexit, this stole most headlines tied to the campaign.

But this speculation overrates political rhetoric by a wide margin, in our view. For one, Johnson said a lot of things on the campaign trail. Yes, he occasionally toed a hard line on the EU—necessary for him to win euroskeptic Tories’ support. He also said he thought the odds of a no-deal Brexit were “a million-to-one against” in late June. Perhaps that is also politicking. (It was also when Johnson’s opponent, Jeremy Hunt, said similarly contradictory things on Brexit.) As the old joke goes: How do you know when a politician is lying? Simple—their lips are moving.

Bigger picture, the Conservative Party—like most British political parties—is a conflicted mess over Brexit. Monday night, on the eve of his ascension to 10 Downing Street, Johnson faced a mini-revolt from within his own party, with some openly contemplating a confidence vote if he pushed a no-deal Brexit too hard. Several ministers, including Chancellor of the Exchequer Phillip Hammond, Justice Secretary David Gauke and Education Secretary Anne Milton, resigned this morning. More are rumored to follow. The Tories’ minority government needs the support of Northern Ireland’s Democratic Unionist Party to hold power. Even with that, its edge in the House of Commons is razor thin—it could be as little as two seats if they lose August 1’s special election in Wales’s Brecon and Radnorshire constituency. The idea Johnson could ram a no-deal Brexit bill through Parliament is laughable.

Johnson knows this, too. That is probably why he discussed suspending Parliament to enact a no-deal. Yet Parliament has since passed legislation banning this move—which likely would have faced many legal challenges anyway—effectively outflanking Johnson’s end-run around a vote.

Hence, Johnson needs to find another route. Maybe he successfully renegotiates an exit deal everyone can live with. Maybe he fails to, pushes no-deal Brexit too hard and is ousted in an early fall confidence vote, as some members of Parliament are already threatening. Maybe everyone remains so deadlocked and indecisive that no-deal happens by default. Maybe, perish the thought, politicians get together and delay Brexit beyond Halloween to May Day (or whenever). Maybe a confidence vote spells snap elections. The fact BoJo is the new PM doesn’t answer any of these questions.

We wish it did! As we have documented here often, we don’t think it is the specter of no-deal that haunts Britain. Rather, it is British businesses’ and investors’ having no idea how the outcome will look. They have planned for multiple outcomes but don’t know which to pursue, freezing deployment. In that vein, getting on with Brexit—however it looks—is likely the key to moving forward. Whether it is idyllic or not matters less. Businesses will likely adapt quickly to whatever post-Brexit scenario occurs.

Meanwhile, the doomsday forecasts garnering so many headlines are likely baked into British markets now, given weak UK market performance in recent months. If, as seems likely to us, reality isn’t as bad as feared, Brexiting should bring a relief that washes over markets. But we will have to wait and see what happens in the coming weeks and months to know when we will get it. Oh, and whether BoJo is even in office when it comes.