The aftermath of today's surprising decision by a UK high court to rule against the government's Brexit stance, pushing a Parliamentary vote to ratify Article 50, may have major consequences for the political landscape of the UK according to Deutsche Bank. As DB's Oliver Harvey writes, the court’s decision today reduces odds of a “hard Brexit” and weakens PM May’s position, which makes a 2017 election now the German bank's most likely scenario.
Here is a recap of what happened for those who missed it, and what Deutsche Bank thinks will happen next:
UK High Court Rules against government prerogative
This morning the High Court ruled against the government in a judicial review brought to prevent the triggering of Article 50 without a parliamentary vote. The judgment, which can be found here, concluded that:
‘it has been established for hundreds of years that the Crown – i.e. the Government of the day – cannot by exercise of prerogative powers override legislation enacted by Parliament,’ and that ‘the Court expressly accepts the principal arguments of the claimants…[that]…the Government does not have power under the Crown’s prerogative to [trigger Article 50]’.
What happens next?
The government has chosen to appeal the High Court’s decision. This appeal is likely to be heard at the Supreme Court on 7th and 8th December and the government has the right to withdraw it before the hearing.
The decision to appeal the decision may turn out to be a high risk approach. First, the seniority of the judges hearing the decision at the High Court, including the Lord Chief Justice and Masters of the Rolls, and the unequivocal nature of the judgment, which “expressly” accepted the arguments of the claimants, may reduce the scope for the Supreme Court to overturn the decision. Second, if the government loses the appeal, it reduces the time available to enact legislation to trigger Article 50 before the deadline of end-March 2017. In the event the appeal fails, the government will need the support of both the House of Commons and House of Lords, with the latter particularly problematic.
2017 election base case scenario
We believe that the decision today is significant and, all else equal, has reduced the chances of hard Brexit. First, if the government’s appeal is not upheld, the government will have to seek parliamentary approval for starting the Brexit process. It is unlikely that either the House of Commons or House of Lords block the process outright, but both are likely to want to attach conditions to the government’s negotiating stance, such as greater emphasis on Single Market access, as a quid pro quo for support.
Second, if the government’s appeal is upheld, today’s judgment still hands ammunition to pro-European MPs that wish parliament to have greater input in the Brexit process. By contrast, it will enrage Euro-skeptic MPs who demand a hard Brexit. In sum, it has weakened PM May’s Brexit position further and makes a new general election next year our base case scenario, either before or after the triggering of Article 50. May’s very small parliamentary majority (15), will make it very hard to balance competing interests on Brexit in her own party and in the wider House of Commons, without a larger mandate to conduct renegotiations.
We took profit on our short GBP recommendation two weeks ago based on the risk of a ruling against the government and think the move higher in GBP may have further to run in the near term, particularly with short positioning still extensive. We retain our bearish medium-term forecasts next year based on a deteriorating macro backdrop and a challenging political backdrop for Brexit negotiations.
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Meanwhile, the local reaction, especially from Brexit supporters, is one of substantial displeasure. Case in point, former - and interim - UKIP leader Nigel Farage, who spearheaded the Brexit movement, warned fellow politicians that any attempt to block or delay Britain's exit from the European Union will be met with untold anger from the public. In a statement released after the historic High Court ruling on Article 50 the interim Ukip leader said he fears a Brexit "betrayal" is on the horizon, the Mirror reported.
After the High Court ruling was announced on Thursday morning Farage said: "I worry that a betrayal may be near at hand. Last night at the Spectator Parliamentary Awards I had a distinct feeling that our political class, who were out in force, do not accept the 23rd of June Referendum result."
"I now fear that every attempt will be made to block or delay the triggering of Article 50."
He crptically added that "if this is so, they have no idea of the level of public anger they will provoke."
Meanwhile, UKIP millionaire donor Arron Banks accused the "legal establishment" of "declaring war on British democracy". He added: "Parliament voted six-to-one in favour of letting the people decide. They didn't get the answer they wanted, and now they're going to use every dirty trick in the book to try to sabotage, delay or water down Brexit."
Other Euroskeptics piled on, with UKIP leadership hopeful Suzanne Evans blasting the judges and said the court ruling "undermines democracy". She wrote on Twitter : "How dare these activist judges attempt to overturn our will? It's a power grab & undermines democracy. Time we had the right to sack them."
"Article 50 is an EU trap we must not fall in to. It will tie us into the EU for years. The government must appeal. People power must win."
Others took the opposite side, with labour Leader Jeremy Corbyn saying: "This ruling underlines the need for the Government to bring its negotiating terms to parliament without delay." He added that "Labour respects the decision of the British people to leave the European Union. But there must be transparency and accountability to parliament on the terms of Brexit."
"Labour will be pressing the case for a Brexit that works for Britain, putting jobs, living standards and the economy first."
Finally, Liberal Democrats Leader Tim Farron welcomed the ruling. He said: “Given the strict two year timetable of exiting the EU once Article 50 is triggered, it is critical that the government now lay out their negotiating to Parliament, before such a vote is held."
In short, the chaos that has marked much of UK political life over the past 6 months is only set to accelerate.