Brexit Bulletin: Threat to the Union

(Bloomberg) -- Today in Brexit: May will call on her successor to protect and strengthen the union. That means avoiding a messy divorce.

What’s Happening?

Theresa May will call on her successor as prime minister today to protect the union of the United Kingdom, in what looks like a stark warning to avoid a no-deal Brexit.

As Boris Johnson and Jeremy Hunt prepare for a leadership contest event in Scotland on Friday, May will remind them of their responsibility “to strengthen the Union,” to govern “on behalf of the whole United Kingdom,” and to “ensure that we can go on facing the future together, overcoming obstacles together, and achieving more together than we ever could apart.”

May is preparing to continue as a member of Parliament after leaving Downing Street, and has hinted that she could join the Conservative rebels fighting in the House of Commons to prevent a no-deal exit. Her speech in Scotland points to one of the most compelling reasons to avoid a messy divorce — it would risk splitting up the United Kingdom.

Scotland voted overwhelmingly in 2016 to remain in the European Union, and a no-deal Brexit would strengthen arguments for a second independence referendum. The status of Northern Ireland would also be in question. In a no-deal scenario, a border would eventually have to go up somewhere to protect the European single market — either on the island of Ireland or between Northern Ireland and Britain. The long-term consequences of that could include a return to violence or a referendum on reunification.

May’s speech probably won’t register much with Johnson and Hunt — or even their supporters. But it could be a flavor of what’s to come later this year.

Today’s Must-Reads

• The Tory members who will pick the next prime minister are tired of waiting for Brexit and ready to gamble on Boris Johnson, Kitty Donaldson and Thomas Penny report.
• Is Boris Johnson up to the job of prime minister? The Financial Times asked colleagues and party members.
• ICYMI, we looked at how the rival Tory Brexit plans compare. Spoiler: They’re looking increasingly alike.

Brexit in Brief

No Free Lunch | What’s the economic cost of canceling Brexit? Trade Secretary Liam Fox said on Wednesday that the political fallout of revoking Article 50 would bring “greater economic turbulence than a managed no-deal.” Bloomberg Economics’ Dan Hanson disagrees. He predicts that sterling would rise if Brexit were canceled, providing a boost to real incomes, and uncertainty would lift, unleashing investment. In addition, the U.K. economy would keep full access to the single market.

Betting on London | M&G Real Estate Ltd. is in negotiations to fund construction of a London skyscraper — nicknamed Gotham City — after financing from Hong Kong investors fell through. The London office market is dominated by overseas investors, but as Brexit is giving some of  them cold feet, that’s opening the way for U.K. firms.

Shrinking Economy | The U.K. economy probably shrank for the first time since 2012 in the second quarter as Brexit uncertainty and fears for the global outlook took their toll on output in June, according to IHS Markit.

More Signs of Gloom | The yield on benchmark 10-year gilts declined below the Bank of England’s bank rate for the first time since the global financial crisis, after BOE Governor Mark Carney said global trade tensions add to risks to growth. Traders are also betting that the central bank will cut borrowing costs by 25 basis points by August next year.

Quiet Trade | Over in the pound market, the summer lull has kicked in and traders aren’t expecting any big Brexit breakthroughs for a while. That’s prompted a measure of future volatility to plunge to the lowest since 2014. Meanwhile, one of the most accurate sterling forecasters reckons the currency will rebound to $1.33 by the end of the year if Brexit gets delayed again. The pound traded at $1.2585 early this morning.

Johnson’s Border Plan | Boris Johnson told the Spectator he would challenge the EU and Ireland to say whether they would build a border in the event of no-deal, and vowed that he would never put border infrastructure on the island. EU officials have indicated that eventually some kind of border would have to go up in the event of no-deal. 

Definitive Position | The Labour Party aims to come to a “definitive position” on Brexit and a possible second referendum before Parliament breaks for summer recess on July 25. It’s consulting with unions as its stance evolves, a spokesman told reporters on Wednesday.

Blocking No-Deal | Labour’s Brexit spokesman Keir Starmer told the Guardian that Parliament will block a no-deal exit — by amending the emergency legislation that will be needed to enact such a split, and would also stand in the way if Johnson tries to implement his proposal to pass the least contentious bits of the withdrawal bill. He doesn’t address how lawmakers would respond if the next prime minister pursued the dramatic option of suspending Parliament to push through a no-deal exit.

Job-Hunting | George Osborne, the former chancellor who now edits the London Evening Standard newspaper, is angling to replace Christine Lagarde as head of the International Monetary Fund, according to multiple reports this morning. Osborne has famously collected job titles since leaving Number 11 Downing Street in the aftermath of the 2016 referendum. His newspaper recently backed Boris Johnson’s bid for the Tory leadership.

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To contact the editor responsible for this story: Adam Blenford at ablenford@bloomberg.net, Leila Taha

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