Markets, especially currency markets, are being fooled by a Brexit red herring. Ever since British Prime Minister Theresa May’s deal was voted down a second time, the pound has surged against the dollar and the euro on the assumption that a no-deal Brexit will now be ruled out by the British Parliament. In reality, such a vote is nothing more than a request for an extension to Article 50, the legal Brexit clause in the European Union's constitution.
The truth is that “no deal” is not really a choice or a vote in and of itself, but simply the logical consequence of the United Kingdom leaving the European Union without a deal. Parliament can’t simply vote to rule out no deal. The only way to rule out no deal is to actually vote to approve a deal. Otherwise, there is no deal by default.
This was made clear by Tory Brexiteer MP Jacob Rees-Mogg, chairman of the European Research Group of 80 Eurosceptic MPs. Rees-Mogg voted against May’s deal on this very logic. He rejects the notion Britain has lost Brexit now that May's deal has been defeated because the country has already voted to leave the EU and Article 50 of the organization's treaty has already been triggered. So Brexit, he says, is now EU law and cannot be reversed without the EU's consent.
Essentially, then, what Parliament does now is irrelevant. The only thing that matters now regarding a potential no-deal Brexit is what the EU decides regarding an extension to Article 50. Parliament can certainly vote to request an extension, but that doesn’t mean an extension will actually be granted.
So how can an extension actually be granted? The answer is not that easy. According to EU law, it must be a unanimous decision of the 27 heads of state that make up the organization. A single dissent would mean no extension, and back to the default of a no-deal Brexit on March 29 regardless of how Parliament votes on the issue.
There have been clear indications from many in the EU that an extension to Article 50 would be pointless without a clear purpose. Michel Barnier, Europe’s chief negotiator on Brexit, for example, has already ruled out any further talks, which means there are only two possible purposes to an extension request. First, from a practical standpoint, in order to prepare for a no-deal Brexit and second, to prepare for a second referendum on Brexit itself.
This is the question that markets should watch out for in determining if a no-deal Brexit will happen or not, because this is what actually matters, not Parliament's vote. If the reason for an extension request is to prepare for a no-deal Brexit, then markets can expect it as a near certainty.
If, however, the reason for the request is to prepare for a second referendum on Brexit, then Parliament would have to vote on that once again. If a second referendum takes place, only markets can expect the British people themselves to be given the very narrow choice between May’s original deal, or to reverse the decision entirely. Only then would a no-deal Brexit truly be ruled out.
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