Brexit Bulletin: Already in Doubt

(Bloomberg) --

Today in Brexit: Britain’s next prime minister is announced, with his ability to govern in doubt and the pound sliding.

What’s Happening?

Britain’s next prime minister will enter No. 10 Downing Street with no clear majority in Parliament, an economy on the brink of recession, the currency sliding and an open revolt within his party over the most pressing issue facing the nation.

Boris Johnson, who’s expected to be named the leader today, has promised to lead the U.K. out of the European Union on Oct. 31 with or without a deal to smooth the process. His “do or die” pledge, which was probably essential to win over the grassroots Conservatives who voted in the leadership election, has alienated many members of Parliament whose support he will now need to govern.

It’s also spooked investors. The pound has lost 2% since Prime Minister Theresa May announced her departure. Traders, like MPs, will be waiting to see if Johnson intends to stick to his word once in office. (Markets are giving him the benefit of the doubt — a messy no-deal departure isn’t yet priced in.)

Getting a brand-new divorce deal, as he says he wants, by Oct. 31 looks all but impossible, as Johnson wants to restructure the whole negotiation. The EU is refusing to reopen the agreement, let alone almost from scratch, as Johnson proposes. The only way it appears Johnson can keep his word is by opting for a no-deal exit — and economic havoc — on Halloween.

The perilous situation Johnson faces in Parliament was underlined on Monday as the Conservatives’ tiny majority looked set to shrink again. Meanwhile, a minister who resigned because he doesn’t want to work for Johnson proposed holding a vote in Parliament to test the new prime minister’s majority. The speaker refused the request, but with former ministers lining up to resist a no-deal Brexit, that looked more like a stay of execution. And the centrist, pro-EU opposition Liberal Democrats have a new leader, potentially increasing the chances of defections from the Tories.

Johnson’s options are narrowing: First he’ll have to decide which of his broad coalition of backers he will disappoint, and then he may have to go to the British people to check they agree with his choice.

Today’s Must-Reads

Brexit in Brief

Keeping Parliament Open | A group of U.K. lawmakers is planning a Scottish court battle to stop the next prime minister from suspending Parliament to force through a no-deal Brexit. It’s one of several cases being prepared. 

Brexit Recession | Brexit may have already pushed the U.K. into recession. Even assuming a smooth exit in October, the National Institute of Economic and Social Research reckons the economy will grow 1% in 2019 and 1% in 2020. And there’s an around a one-in-four chance the economy is already shrinking.

Brexit Drag | Brexit is undermining efforts to boost the U.K. economy by holding back the government from implementing its industrial strategy, according to Bank of England Chief Economist Andy Haldane.

On the Markets | The pound weakened 0.2%, trading at $1.2454 early this morning.

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