UK politics remain poisoned , as PM Theresa May tries to find a final compromise in her Cabinet to unlock the negotiations with the EU. The ambition was to have a full draft withdrawal text ready early this week but the decision may be postponed further, as May's proposal is under fire. As the withdrawal text is 95% done, there is still no agreement on the backstop solution to the Irish border (i.e. how does one avoid a hard border between Ireland and Northern Ireland if the UK and the EU fail to reach an agreement on the permanent future relationship during the transition, which removes the need for a hard border). PM Theresa May is trying to downplay the importance of the backstop, as she says it would never come into force anyway. She argues the deal on the future relationship will remove the need of a border but it is still causing a lot of trouble politically.
While some media have reported that the UK Cabinet is close to reach a compromise on the UK's backstop proposal, we warn against being too optimistic. First of all, we have been disappointed before. Politicians usually do not give in until they really feel the pressure and while the pressure is increasing, it may not be heavy enough just yet. Secondly, PM Theresa May's supportive party DUP from Northern Ireland is very upset and has threatened to vote against the deal. Also she is under pressure not only by hardliners but also increasingly by moderate, pro-EU Conservatives. Thirdly, even if the UK Cabinet finds common ground, we still do not know whether the EU can accept it . EU has been very clear they still want a 'backstop to the backstop' if the UK wide backstop is only temporary in nature.
Our base case is still that the EU and the UK will reach an agreement in December but that negotiations may slip into early January . We still expect a decent Brexit (75% probability) but think one should not rule out a 'no deal' Brexit (15% probability), see Brexit Monitor: Final deal unlikely before December , 18 October.
In our view, the real test is not whether PM Theresa May can sign a deal with the EU, but whether it can pass the UK House of Commons. Brexit hardliners have said they will vote again any deal, which in their view is too soft. This number is probably not below 25 but could easily be higher. And now the DUP threatens to vote it down as well (10 seats), see The Times . Remainers are also smelling blood after the resignation from pro-EU Jo Johnson (brother to ex-foreign secretary Boris Johnson, one of the leading Brexiteer). PM Theresa May will need support from Labour MPs to pass the deal . The question is whether she can persuade enough?
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