Theresa May resigns: What does it mean for Brexit?

Latest developments
  • Prime Minister Theresa May has announced that she will resign on 7 June.
  • A contest will then resume between multiple candidates in the Conservative Party deciding who will replace her as leader of the Party and as the new Prime Minister.
  • Though it remains to be decided and worked out, the contest is likely to be completed by the end of July at which point a new PM will take office.
  • Theresa May will remain PM until that date.
  • Separately, the European elections took place in the UK yesterday. While the results won’t be known until Sunday night, polls suggest Nigel Farage’s Brexit Party may end up with most votes, with both the Conservatives and Labour expected to suffer losses.
 
How will the new Prime Minister be decided
  • The contest has two stages: first, Conservative MPs will narrow down the field to two candidates, via secret ballots. Secondly, the Party’s 125,000 members will vote on which of the two final candidates they want as new leader.
  • The contest is fluid with candidates often dropping out along the way, declaring support for remaining candidates. When Theresa May was selected following David Cameron’s resignation, it never went to a formal vote.
 
Who is the favourite to win
  • In effect, the contest is split between a Leave field and a Remain field. In the former, Boris Johnson and Dominic Raab appear to have roughly equal support from MPs at the moment, with other key contenders including Michael Gove and Andrea Leadsom. In the Remain camp, Jeremy Hunt currently has most support from MPs. But history suggests, all of this can change quickly.
  • Amongst the membership, Boris Johnson enjoys most support, followed by Raab. As 6 in 10 Tory members either back or say they can live with No Deal, if it goes to the membership with a Brexiteer still in the race, it looks likely he or she would win.
 
What does this mean for Brexit?
  • Theresa May may try to pass some Brexit-related legislation ahead of her formal departure, but it’s unlikely that there can be meaningful legislation or progress before the new PM is in place.
  • Any new Prime Minister will face many of the same dilemmas as May including:
    • No stable majority in Parliament for any specific Brexit outcome
    • An EU that is likely to refuse to open up the Withdrawal Agreement
    • The commitment in the Withdrawal Agreement to an invisible Irish border.
  • It’s politically very difficult for any candidate to back a customs union, meaning most of them are likely to formally back either an FTA (Canada+), which may be perceived to need changes to the Withdrawal Agreement, or No Deal.
  • It would also be politically very difficult for a Brexiteer candidate to back a further extension of Article 50.
  • It remains unclear what would happen if a new PM pushes a No Deal in the autumn, while Parliament is opposed to that option, including whether Parliament can in fact stop a No Deal.
  • A second referendum and/or general election remains a credible option to break the deadlock, with the option being de facto between No Deal or No Brexit.
  • It’s also unclear how the EU would react to any new Prime Minister, including whether all Member States would agree to approve another extension of Article 50.
 
What does it mean for business planning?
  • All scenarios are in play. No Deal on 31 October remains the legal default option and credible. Businesses need to continue to have plans in place for that outcome. 
  • Businesses should also think through what the implications are of a change in government in the event a general election is held before the end of the year.
 
Brexit outcomes
Until a new PM is in place, ascribing probabilities to scenarios will of course be incredibly difficult.
 
Outcome
Likelihood
Rationale
WTO i.e., No Deal
30% (up)
A new PM has to politically back this option and there will be limited time available to renegotiate and change course.
 
FTA
20% (up)
Incompatible with an invisible Irish border and there’s no majority support in Parliament, but likely the option that most candidates will back.
 
Hybrid / Customs union
20% (down)
The failure of cross-party talks and May’s attempt to pass legislation reduces probability. Still closer to a parliamentary majority than other options.   
 
Single market + Customs union (Norway +)
10%
Support is patchy and fragmented.  Free movement of people remains the main sticking point.
 
Stopping Brexit
20% (up)
A second referendum remains a distinct possibility and some candidates may even welcome this option as way to break deadlock.  
Key milestones to look out for
  • 7 June – Theresa May resigns 
  • End of July – New PM takes office
  • 20 July – 5 September – UK Parliament summer recess
  • 29 September – 2 October – Conservative Party conference
  • 31 October – UK due to leave at 11pm GMT
Contact
For any questions, please get in touch with the Brexit and Trade team:

Compliments of EY, a member of the EACCNY