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Johnson’s Broad Appeal Could see him Successfully Revive May’s Dead Deal: Berenberg’s Pickering

Johnson in front of the press

Image © Bundesministerium für Europa, Integration und Äußeres

- Johnson has better chance of getting deal approved

- 'No deal' approach invites no-confidence vote

- 'No deal' Brexit odds rise to 35%

Boris Johnson may have the broad political appeal to get the whole of his party to unite behind the existing Withdrawal Agreement in another attempted vote through Parliament, says Callum Pickering, an economist at Berenberg Bank.

If he were successful, it would lead to a rebound in Sterling as ‘no deal’ risks fell away.

In the past analysts have suggested the Pound might rise to roughly 1.20 versus the Euro and 1.35 versus the Dollar under such a scenario.

The chances of the EU renegotiating the withdrawal agreement, or any aspect of it, such as the Irish backstop, is “pretty slim” says Pickering.

This leaves Johnson with two choices: either a 'no deal' Brexit on October 31 or an attempt to get the already negotiated deal voted through.

Pickering argues that because Johnson is not an ideologue wedded to the idea of Brexit and because he would prefer to avoid causing or being held responsible for causing the economic chaos succeeding a hard Brexit, Johnson is likely to want to choose the second option.

The Withdrawal Agreement has however been rejected on three separate occasions but Johnson may have the wide appeal - to both the right and left of his party - to get it over the line, says Pickering.

"Our bet is that he will try to get MPs to vote for a slightly altered version of a May’s deal – unchanged Withdrawal Agreement (WA) but with changes to the declaration on future trade. Unlike May, he probably has the pro-Brexit credentials to convince the Eurosceptic wing of his party that he would see to it that the UK does not stay in the EU customs union after the transition period," says Pickering.

Johnson has said in a number of interviews this week that he believes there is a slim chance of the UK leaving the EU without a deal on October 31. "It is not where I want us to end up, it's not where I believe for a moment we will end up," Johnson said of a 'no deal' in a BBC interview.

For Johnson, much of the emerging Brexit strategy rests with one prominent plan that would see the UK leave the EU on October 31, but keep trading conditions more-or-less unchanged while a trade deal is negotiated.

A provision for such an arrangement could be made under the General Agreement on Tariffs and Trade (GATT) - specifically Article 24 of GATT - allowing the UK and EU to avoid tariffs until such a time a free trade deal is secured.

Critically - and Johnson does acknowledge this - the plan does require both the EU and UK to sign up.

The entire strategy will ultimately fail if the EU stick to their message that they are not open to renegotiating the existing deal, and that the only deal available is the deal already agreed.

According to Pickering, Johnson is "intelligent enough to realise” that the EU is unlikely to open talks of a future relationship unless the UK approves the Withdrawal Agreement first.

In the last vote on its deal, the government lost by 344 votes to 286, a margin of 58 votes, leaving Johnson with a considerable task to win a majority.

Yet he may have the wide appeal - across his party at least to stand a chance.

“I see both Remainers and Brexiteers alike pinning their hopes on Boris Johnson. Remainers think he is actually a soft-Brexiteer at heart and he’ll try to avoid a hard Brexit just like May did, and Brexiteers that he is a genuine hardliner,” says Pickering, in an interview on Bloomberg News.

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Probabilities of a Hard Brexit Rise

It is still possible Johnson may fail to get a deal through and as a consequence, the UK ends up leaving the EU without a deal. This has increased the probability of a 'no deal' Brexit on October 31.

“I think we have a 35% chance of a hard Brexit. I increased that probability just a couple of weeks ago,” says Pickering.

A shift in the stance of conservative leadership candidates to a more pro-Brexit stance is responsible for the rising chances of ‘no-deal’.

The conservatives are fearful of losing more voters to the Brexit party who poached many in the recent EU elections and this has caused a ‘lurch right’.

“What I notice is that the conservatives are sliding badly in the polls, the Brexit party are absorbing almost all of that slide, the Brexit party did well versus the conservatives in the European elections. This is now introducing a new element into the Conservative debate: new leaders think that it makes sense to take a hard line on Brexit. That on its own raises the hard Brexit risk, keeping in mind that it is the default option at the end of October,” says Pickering.

A 'no deal' Brexit still remains an unlikely outcome, however, because a third possibility is that Parliament ousts the government in a vote of no-confidence, should it see the UK coming perilously close to a ‘no-deal’ Brexit.

“It is a pretty big bet to say some Conservatives would bring down the government, if the UK were heading for a hard Brexit,” says the economist.

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