After months of back and forth between Brussels and Downing Street, a withdrawal agreement has finally been negotiated paving the way for a number of Brexit scenarios.
Just this week, EU leaders approved the proposed deal, after concluding that it proved “best and only deal possible”.
However, for Theresa May, the uphill battle continues, as in the coming days, she seeks to convince MPs to back her Brexit deal.
As well as traditional opposition from Labour, the SNP and DUP to count a few, May also has to win over her own party, with the Conservatives proving more divided on the issue of Brexit than ever before.
What is Theresa May’s deal?
The 585-page withdrawal agreement document centres around three key issues.
1) Citizens’ rights
The deal protects the rights of over 3 million EU nationals residing in the UK, as well as the more than 1 million UK citizens living in EU countries.
Theresa May wanted to limit the protection to those citizens that had arrived prior to 29 March 2019, however, the final deal will include the transition period, which may last until as long as 2022.
2) The UK’s bill
The deal also deals with settling the amount that the UK needs to pay the EU as part of withdrawal. The UK’s exit bill is set to be around £39bn to cover its contributions to the European Union until 2020.
3) Irish border
The most contentious issue however, has proved the question of the Irish border. Under the proposed agreement, the so-called ‘backstop’ will be enforced should no customs arrangement be reached between Brussels and Downing St by the end of the transition period. The backstop will mean that the whole of the UK remains in the customs union, with Northern Ireland remaining within the single market.
Here are some of the possible Brexit scenarios that may emerge in the coming weeks:
Parliament approves the deal
On the 11th of December, Parliament is set to vote on the deal proposed by Theresa May.
Should the deal be approved, it will be enforced as it is – an outcome the PM will certainly be pushing for in the next few weeks.
Alternatively, MPs may approve the deal alongside suggesting some additional amendments, which would mean another round of re-negotiations.
Conversely, If MP’s vote to outright reject the deal, a range of potential scenarios could arise, meaning uncertainty surrounding Brexit is only set to worsen.
If parliament were to pass May’s deal the likely scenario would be a rally in the pound and a mildy negative decline in the FTSE 100. The deals avoids much of the widely feared hard Brexit the market has reactive negatively over the past 18 months.
A strong negative correlation between the pound and the FTSE 100 is likely to see London’s leading index underperform as the pound embarks on a relief rally.
Re-negotiations
If MPs reject the deal or recommend certain amendments, the PM may have to head back to Brussels to re-negotiate.
This option however, seems unlikely given that EU leaders have already accepted the deal.
An attempt by May to return to Brussels to thrash out a new deal will not be taken well by the market. Donald Tusk has said it was the current deal or no deal meaning May is likely to be unsuccessful leading to the sharp decline in the pound and a wider risk off move in markets.
Vote of no confidence
Should May fail to convince MPs, this may trigger a vote of no confidence.
Thus far, Jacob Rees-Mogg has already encouraged Tory MPs to send letters to trigger a leadership challenge. At least 25 MPs have submitted letters, including former London Mayor candidate Zac Goldsmith.
If the vote of no confidence proves successful, this will trigger a leadership contest within the party, but this may not necessarily lead to a general election.
However, if May survives the vote, a leadership challenge cannot be mounted against her for another year.
Whilst it may prove difficult to survive such a challenge, anything is possible. Jeremy Corbyn famously stayed on as Labour leader despite having lost a vote of no confidence back in 2016.
A Vote of no-confidence opens the door to an array of market reactions, all of which likely to be negative for sterling apart from a quick decision for doubtful second referendum. The initial reaction to a no-confidence will ignite fears of No-Deal and potentially a general election.
General Election
In a brave move, Theresa May could opt to call a general election herself, in a bid to secure backing from the general public to push through her deal.
Given her markedly lacklustre performance during the 2017 election, campaigning is not necessarily her forte, proving an equally unlikely option.
Alternatively, Labour could also force a general election. According to the Fixed-term Parliaments Act, following a successful no confidence motion, the opposition would also be granted two weeks to form an alternative government. Accordingly, Labour could opt to form a grand coalition with SNP, Green and Lib Dem MPs. If however, they prove unable to do so, a general election could be triggered.
A second referendum
Alternatively, The Prime Minister could turn directly to the people, through the means of a second referendum.
The second referendum may be simply vote on the specificities of the deal, or it could, controversially, also include an option for remain.
Nevertheless, both Theresa May and Jeremy Corbyn have repeatedly dismissed talks of a second vote.
A second referendum is likely to prolong or reduce any negative impact to the UK leading to strength in sterling in the short term.
A no-deal Exit
If the Parliament votes down the deal, the UK could also come crashing out of the EU without a deal.
If this happens, there would no longer be a transition period. Businesses would have to act immediately to address the changes that would arise as a result of withdrawing from the EU. This uncertainty would be particularly damaging for the UK economy.
The Bank of England Governor, Mark Carney, has repeatedly warned on this outcome, suggesting it could be as damaging as the 2008 financial crisis.
A no-deal exit would cause the most uncertainty and lead severe volatility in sterling, the FTSE 100 and UK government bond market.
In a no-deal scenario one would expect the pound to retest some of the lowest levels since the vote to leave the EU.