The UK will be unable to move onto negotiating its future relations with the EU in detail unless parliament accepts a compromise exit deal first.

• Despite suffering the biggest ever UK government defeat in parliament, the administration is likely to survive an upcoming no-confidence vote, with Prime Minister Theresa May intending to remain in office.
• May's likely efforts to reach a compromise agreement for an amended exit deal in a second vote would most likely only be successful if the EU were to offer substantial concessions on future border management in Northern Ireland.
• In the absence of an exit deal, all alternative next steps - excluding a "no deal" Brexit or revoking Article 50 procedures and hence stopping Brexit - would most likely require a delay to Brexit beyond 29 March.

The UK parliament yesterday (15 January) rejected decisively by 432 votes to 202 the government's recently concluded deal with the European Union that was designed to allow for an orderly UK exit from the EU on 29 March. The agreement, signed off by all remaining 27 EU member states, envisages a post-Brexit transition period largely continuing the current legislative framework of the UK's EU member-state status until at least the end of 2020. Given yesterday's vote, the likelihood of the current arrangement being implemented on time, or indeed altogether, has now been greatly reduced.

Those voting against the UK-EU deal included 118 MPs from Prime Minister Theresa May's Conservative Party, who sided with the opposition led by Jeremy Corbyn's Labour Party. The deal was also rejected by Northern Ireland's Democratic Unionist Party (DUP), which usually props up May's minority government in a fragile "confidence and supply" deal. This alliance will be further tested in a vote of no confidence in the government today (16 January), which was tabled by Corbyn shortly after parliament rejected the Brexit deal. Should May survive this vote, she has promised to consult her cabinet as well as parliamentarians from across the political spectrum over the coming days to find an alternative way forward by 21 January.

Government unlikely to lose vote of no confidence, limiting probability of fresh election

Given that the DUP and many of May's critics from within the Conservative Party have pledged allegiance with the government, it is unlikely that Labour will win the confidence vote, which would otherwise probably trigger an early general election in accordance with the so-called Fixed-term Parliaments Act. Even if an early general election is not held in the coming weeks, the government's defeat still leaves open a broad array of possible pathways to continue Brexit proceedings. Most MPs are strongly opposed to a "no deal" Brexit in which the UK would leave the EU without any formal arrangements in place. However, the key challenge remains the fact that there is currently no identifiable majority in parliament in support of any of the possible next steps.

Success of likely second parliamentary vote highly dependent on EU concessions to UK

As things stand, May will probably try nevertheless to reach a compromise agreement for an amended exit deal that uses the current one as its basis in a second vote before the end of January. She would be likely to lose this vote again unless the EU were to offer substantial concessions to the UK. While many pro-EU and pro-Brexit MPs oppose the current deal for different reasons, the core issue to be addressed remains the backstop clause to prevent a hard border between the UK region of Northern Ireland and the Republic of Ireland in the absence of an agreement on future UK-EU relations at the end of the envisaged transition period. EU reassurance on this matter could, for instance, take the form of a legally binding addendum to the exit agreement that would set a legal time limit for the backstop. Another, albeit low-probability, option would be to acknowledge the bilateral and international legal specifics surrounding the future border management in Northern Ireland by removing the issue from the core contract and signing an additional separate agreement instead. However, the EU and its member-state governments have so far largely opposed reopening the exit deal. Cautious messages from core EU member states such as France and Germany seeking to deflect the UK parliament's concerns would be indicators of potential movement on the part of the EU. Either way, even if the EU committed to further concessions to the UK, this would not guarantee secure passage of the deal through the UK parliament.

No parliamentary majority for second referendum or other alternatives yet

Should May fail to convince parliament to adopt an exit deal in a second vote, it is likely that the House of Commons (lower house of parliament) would further increase its power over Brexit proceedings through cross-party legislative initiatives and potential changes to the common parliamentary rulebook. The extent of such an intervention would most likely be heavily influenced by Speaker of the House of Commons John Bercow because he has a key role in deciding the prioritisation and scheduling of parliamentary business. An option that is increasingly likely to be formally considered to overcome the serious parliamentary deadlock is the holding of a second referendum. However, there is currently no parliamentary majority in support of such a move, which is further complicated by an ongoing row within the Labour Party, whose leader has so far shown little interest in pushing for a second referendum despite growing support for this from his backbenchers. Hence, agreement on this pathway would require a shift in Labour's official policy direction.

Another possibility in efforts to reach agreement on a UK exit deal would be for May to reach out across party divides to the opposition and further back-track on previous "red lines" regarding future UK-EU relations. For instance, acceptance of a permanent customs union with the EU, as endorsed by Labour, would circumvent the current backstop for the Northern Ireland border and have the potential to command a majority. However, parliamentary consent to progress with such an alternative Brexit arrangement would be likely to put enormous pressure on the government and lead to high-profile cabinet resignations.

Outlook and implications

In the absence of an exit deal, all alternative next steps - excluding a "no deal" Brexit or revoking Article 50 procedures and hence stopping Brexit - would most likely require a delay to Brexit. In accordance with the EU's Lisbon Treaty, such a delay would have to be unanimously supported by all remaining 27 EU member states. Although there is a degree of preparedness to continue accommodating the UK's domestic political turmoil, the EU is unlikely to agree to any extension of the Brexit deadline beyond 2 July 2019, at which point the EU enters a new institutional cycle following European Parliament elections at the end of May with the first sitting of the new assembly. Should the UK aim to remain a member state beyond July, it would technically be obliged to participate in European Parliament elections, which would be practically unfeasible and unpalatable for both the UK and the EU. This additional complexity means that, if Brexit were delayed, it is likely that there would be only a very limited window of around three more months for the UK to avoid a "no deal" Brexit.

Posted 17 January 2019 by Jan Gerhard, Senior Analyst Country Risk Europe, S&P Global Market Intelligence