The relief that a Brexit deal between the UK and European Union had been reached barely lasted the night. The draft agreement, running to a cool 585 pages, was just the end of the beginning. British prime minister Theresa May now needs to drum up support for the deal from her government and then from a divided and skeptical UK parliament. (Oh, and the other 27 member states of the EU need to agree to it too.)
Yesterday, May said that after a five-hour meeting the cabinet had agreed to support her deal. Markets were skeptical. The pound climbed a little higher but traders were holding out to see if the support was robust.
Then, at about 9am in London, the UK’s Brexit secretary Dominic Raab resigned after just four months in the post. The pound fell as much as 1.8% against the dollar on the news, setting it up for one of the biggest one-day declines since the Brexit referendum in June 2016. At the time of writing, the pound is down around 1.5% against both the dollar and the euro.
When David Davis, the first Brexit secretary, resigned in July, the pound actually rose. Traders thought maybe the departure of such staunch Brexiteer would mean a softer, more business-friendly Brexit.
That feeling didn’t last long. Boris Johnson, the face of the pro-Brexit campaign and foreign secretary at the time, resigned next and the pound turned south. Traders feared there would be even more resignations and more chaos in the government, potentially leading to the UK crashing out the EU with no deal at all to guide its future relationship with its largest trading partner.
Today’s resignations have been far worse for the pound. About an hour after Raab, Work and Pensions Secretary Esther McVey resigned, too. There have been four more junior-level resignations on top of that, all before lunch.
While Raab is a somewhat less consequential figure than Davis, the difference now is time. There are just 134 days until the UK will officially exit the European Union. In that time, the deal must be voted on and passed through parliament, preferably before it goes on recess on Dec. 20.
In the meantime, May could face a vote of no-confidence from within her own party (one is being worked up by a prominent backbench Brexiteer, Jacob Rees-Mogg). Even if she loses that and is replaced, it’s unclear that any other Conservative prime minister could deliver something better. Going back to the EU to renegotiate terms now would likely not result in any substantive changes, aside from losing a lot of precious time.
May has said there are three options: her deal, no deal, or no Brexit. No Brexit—that is, staying in the EU—isn’t being presented as a likely option, but a “risk.” More MPs may be calling for a second referendum on EU membership, but May has firmly said it won’t happen.
No deal is expected to wreak economic havoc as the UK would have no formal relationship with the EU, cutting ties built up over 40 years overnight. This is the option markets seem to most fear, and every step closer to that outcome sends the pound into a downward spiral.
May’s deal, in theory, reduces uncertainty and delivers a so-called “soft Brexit.” Since it faces opposition from Brexiteers in her party, pro-EU MPs in all parties, and the bulk of the opposition Labour party, it might not make it through parliament. If it doesn’t, it leaves almost no time for a new arrangement to be agreed, assuming that the EU would be willing to return the negotiating table at all.
“Time is why markets are reacting as they are,” said John Wraith, head of UK rates strategy and economics at UBS. The more benign outcome—the soft Brexit deal—is still the most likely, he said, but the risk it doesn’t happen is rising by the hour.