Cabinet resignations puts EU agreement in doubt

The bad reaction from Brexiteers to Theresa May’s plans to leave the EU was hardly a surprise.

But David Davis and Boris Johnson’s resignations does come as one, or at least the timing.

The signs so far have been the Brexiteers holding off a challenge to May as long as possible.

Theresa May’s EU plans have turned into a gamble. They also put an agreement with the EU before an October or November deadline at risk.

Factions united by fear

The fear of the consequences of a leadership challenge has united the factions divided around Brexit up to now. But as I wrote in February:

“….as soon as one faction fears they will be disadvantaged by not making a move, that consensus will collapse.”

There has been mixed reactions to May’s plan from the hard Brexit camp. Micheal Gove for example urged “..Eurosceptic Conservative MPs to rally behind Theresa May”

Mixing metaphors, it wasn’t clear at first if Davis’s resignation was a lone wolf reaction or he was a stalking horse for a leadership challenge. He said in an interview with the BBC’s Today Programme that he didn’t’t expect others to follow his lead.

Pound reacted

The pound initially reacted favourably to Davis’ resignation, perhaps in the belief that a ‘soft Brexit’ was now more likely.

News of Boris Johnson’s resignation then triggered an opposite move on fears of a leadership challenge.

GBPUSD Davis and Johnson resign
GBPEUR reaction to Davis and Johnson resignations

What happens next may be a sobering question for markets to chew over.

Theresa May is caught in a contradiction, as I commented last December:

“Theresa May, is on the horns of a dilemma – She badly to needs to move onto trade talks but conceding too much ground risks her fall or that of her government.”

Today’s resignations are a marker of those tensions beginning to come to a head. An early leadership challenge is now on the cards. The Conservative Party may move to resolve the impasse before the party conference in October and when crunch EU agreement deadlines are due.

Whichever they choose in the short term the next few days or so will be febrile. We’ll see that reflected in market movements.

EU agreement deadlines in doubt

Theresa May’s survival has been, ” due to a fine balance of forces between factions”.

David Davis’s and Boris Johnson’s resignations changes that balance of forces and makes a challenge that much more likely.

Theresa May’s EU plans have gone from being an exercise in asserting authority to being a gamble. They’ve served to sharpen the divisions in the Conservative Party and undermine public confidence in her handling of the negotiations.

The plans will also probably receive a sugar coated rejection from the EU.

All this will combine to put an agreement with the EU within the October/November deadline at greater risk…

 

Gary Hollands

Geopolitical analyst Tyga FX