Bank warns that the terms of any Brexit deal could depend on a new government in Westminster
By Lucy McNulty
Morgan Stanley has said there is a “modest” chance the UK will not exit the European Union in 2019 — and warned that the terms of any Brexit deal could depend on a new government in Westminster.
In a 29-page report, economists and strategists at the Wall Street bank wrote that the UK’s ruling Conservative Party’s failure to secure a parliamentary majority at the June general election had resulted in a softening of the country’s views on Brexit over the summer months.
In that context, a U-turn was possible, though the report’s authors — led by economist Jacob Nell — conceded those chances remained small: “We put the chance of reversal as only a modest circa 10% tail risk,” they wrote.
More likely, according to Morgan Stanley, was a “realignment” of the UK’s exit from the bloc with the government now “somewhat more likely” to push for a less complete, or so-called soft, Brexit.
The report’s authors wrote: “The Conservatives failed to win a majority in parliament in the June election for their manifesto, which prioritised sovereignty – taking back control of laws, courts and finance.
“With a majority in parliament supportive of close ties with Europe, we think that the minority government will struggle to pass the legislation for a ‘sovereignty-first’ [or harder] version of Brexit.”
Commentators have already seen evidence of such a shift in a series of papers published in August outlining the positions of the UK government on matters ranging from judicial cooperation with the EU to data protection. In those, the UK government acknowledged the possibility of an ongoing role for European judges after the UK leaves the EU, something pro-Brexit politicians had previously been opposed to.
But the report’s authors excepted some political casualties on the path to a less complete exit.
A Brexit “crunch point” was likely to hit the UK government during a “turbulent and weak” 2018 and likely trigger early elections, they predicted.
“We expect the EU to force a choice between a soft or a hard Brexit which divides the government, likely triggering early elections, a growth standstill and a debate on easing policy,” the report said.
The ultimate Brexit outcome will depend on the outcome of a future election, it said, adding “recent UK elections have delivered unexpected results”.
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