British PM May Resigns, Brexit Takes Unexpected Turn

Last Thursday I wrote that it looked likely that the British Prime Minister would shortly be forced out of office, and that her governing Conservative Party would receive an historically bad result in last Thursday’s election for British members of the European Parliament. My first prediction, about Theresa May, came true very quickly – she will be gone in a few weeks, once the Conservative Party chooses a new leader. My second prediction about the election result can’t be judged until later tonight, as all the results across Europe must be released at the same time and the final day of voting was today. However, I am very confident that the Conservative Party received something like 10% of the vote which is a shockingly bad result.

The interesting thing about all this is that although who the Prime Minister is shouldn’t change the facts of the situation, i.e. that there is no majority in Parliament for any kind of Brexit deal or a no deal Brexit, it seems probable that somehow it will. This is because the early favorite is Boris Johnson, one of the leaders of the 2016 Brexit campaign, and he has explicitly stated – plausibly – that he would be prepared to leave at the end of October without a deal. It seems that there is a stronger chance that May’s successor will, unlike May, believe in Brexit, and not reluctantly support it because of the mandate from the 2016 referendum.

This is reflected in the fact that Goldman Sachs and other interested pundits have stated that a no deal Brexit has become more likely. Goldman Sachs now see this outcome as having 15% probability.

Despite a Brexiteer being the front-running candidate, Conservative Party leadership elections have historically tended to be notoriously unpredictable. The initially favorite candidate never seems to win, and it is quite possible that there will be a new leader who will take essentially the same line as May. However, I think that a pro-Brexit candidate will be elected, because the Conservative Members of Parliament will surely choose at least one Brexiteer from the field of candidates. The choice will then go to the 160,000 members of the Conservative Party. This membership has been pro-Brexit for a long time and over recent weeks and months has become even more so. This is partly due to pressure from Nigel Farage’s Brexit party, which since its launch just a few short months ago has gobbled up Conservative members, voters, and activists. This pressure from the no deal side of Brexit has shifted the center of gravity within the Conservatives towards Brexit and will put more Conservative MPs in fear of losing their seats if they do not take a pro-Brexit line. There is widespread fury amongst the Conservative Party membership that 3 years after the country voted to leave the European Union, not only is the country still a member of the E.U. it is even holding new elections for the European Parliament!

I also pointed out last Thursday that a new Prime Minister could enforce a no deal Brexit at the end of October without requiring the consent of Parliament or any active vote whatsoever. A no deal Brexit is already the default legal position on 31^st October 2019.

This could put Parliament in a tricky position as the legal deadline approaches in October, should the government appear ready to leave without a deal. Would enough Conservative parliamentarians vote against their own government in a confidence vote to stop Brexit? It would only take six such switchers to bring down the government in a vote. Under U.K. law, if a new leader could not emerge and win a new confidence vote within 14 days, a general election would then take place. If a pro-Brexit prime minister were brought down, could the Conservative Party then unite around another candidate, or would a few Conservative parliamentarians perhaps support a compromise candidate to form some kind of “national government” to stop Brexit? The answer to this question might be worth two thousand pips in one day. The fact that the GBP/USD currency pair has not plummeted to new lows already tells you that even though a pro-Brexit leader looks likely, Brexit is far from a sure bet.