It is almost exactly two years since British citizens voted in a referendum on membership of the European Union. The relatively narrow vote in favor of Brexit stunned Britain's political class, and that shock remains well represented in the current parliament, where a majority of today's sitting lawmakers voted against a departure from the world's largest trading bloc.
The vast and complex piece of domestic British legislation that is designed to transform a multiplicity of European rules into the U.K. statute books is known as the EU Withdrawal Bill. And after more than 250 hours of parliamentary debate and legislative ping-pong back and forth between both chambers in Westminster, the lower House of Commons has begun the latest series of debates and votes on the bill.
A majority of so-called peers who are eligible to vote in the Upper House, the Lords, have made it clear that they are not happy with aspects of the legislation that Prime Minister Theresa May's government has proposed. And so during their most recent debate, or reading, of the bill, they pushed for 15 different amendments. Starting this afternoon and continuing into tomorrow, members of the Commons will vote on these amendments. They can vote for or against them, they can choose to tweak them, or they can choose to try to replace them with different language that is intended to have a similar or identical impact.
Among the most significant votes will be on the Lords' insistence that the government should work to keep the United Kingdom inside the European Union's customs union. Politicians opposed to this idea point out that it would prevent the U.K. from signing separate and independent trade deals with non-EU nations. But proponents argue that continued membership of the customs union will help British businesses trade with Europe as well as maintain an invisible border between the Republic of Ireland and Northern Ireland — currently a major sticking point in the British government's talks with the EU. This amendment could be watered down, perhaps by replacing "customs union" with the vaguer term "customs arrangement," but this may prove a short-term fix ahead of another future debate on trade.
Another vote will center on a Lords proposal that the U.K. should request membership of the European Economic Area, which would provide access to Europe's single market while still allowing for a formal separation from the EU. Critics argue this would force London to accept rules from Brussels that it would have no role in creating, but supporters of the idea in the House of Lords have argued that it allows British businesses and consumers to continue to reap the economic benefits that accrue from the largest single market on the planet. The single market is a deeper form of co-operation between member states that allows the free movement of goods, services, money and people in the bloc. Like many of the amendments that will face a vote over the next 24 hours, this one really seems to have sown divisions in both the two major political parties, Conservative and Labour.
But perhaps the most significant amendment to face a vote in the latest Commons reading is known as the "meaningful vote." If passed, it would mean that a majority of both houses of parliament would have future veto power over whatever deal the government is able to win in the next few months of negotiations with the European team led by Michel Barnier. And this is where investors, business, and markets more broadly should be paying close attention. As of now, the British parliament does not have this veto power. But if the day arises when such a veto is wielded by a majority in either the Commons or the Lords, and if that happens close to the official Brexit date of March 29, 2019, there remains a rather ominous possibility — one that has long worried many economists and trade specialists.
This set of circumstances would be one in which the European side refuses to return to the negotiating table for whatever reason, most likely a lack of time, and in the absence of a confirmed agreement the United Kingdom is forced to exit the European Union in a disorderly manner.
This so-called "no deal" scenario has not received much serious planning, by the government's own admission, and the mere threat of it could add a far greater level of caution into the government's approach to Brexit, or indeed wreck it altogether. Supporters insist this amendment is a crucial test of parliament's sovereignty, but you can be sure that government ministers will be tracking the result of this vote by vote. Markets participants would be wise to do so as well.