Brexit Bulletin: Split Over Union

340 Days to Go

(Bloomberg) -- Today in Brexit: This week we may get closer to finding out what kind of Brexit Britain ends up with. 

Prime Minister Theresa May's inner circle thinks she could be forced to agree to staying in the European Union's customs union after Brexit, according to one U.K. official. The prospect risks prompting a cabinet revolt – and a crisis: Brexit-backing ministers consider it a betrayal because it amounts to outsourcing a large chunk of trade policy.

As speculation mounts that May is on the verge of a U-turn, pro-Brexit ministers such as Environment Secretary Michael Gove took to Twitter to underline the need for a clean break from the bloc.

Parliament will debate the customs union later this week. Though nonbinding, it will give an idea of the view of how much support there is in the House of Commons, where a crunch vote as soon as next month could force May into changing the Brexit policy she has defended for more than a year. A vote for the customs union would prompt a crisis at home, but would also open the way to a reboot in Brexit talks in Brussels, which aren't making much progress.

The House of Lords last week voted in favor of staying in the trading regime, a policy that's also favored by business as it would keep some of the trickiest restrictions off of cross-border commerce. The opposition Labour Party wants to stay in a customs union. EU negotiators would like it, and so would the Irish government, as it would go some way toward solving the problem of the Irish border after Brexit.

Senior euroskeptic ministers are likely to make their case for breaking free from EU rules directly to the prime minister on Wednesday, when she holds a key meeting of her inner Cabinet focused on the Brexit negotiations, Tim Ross reports. Another senior British official said May's cabinet hasn't yet discussed what kind of customs plan it wants, but needs to reach a decision before a key EU summit in June.

The Sunday Times reported that May's office believed Trade Secretary Liam Fox and Foreign Secretary Boris Johnson would quit rather than accept staying in the customs bloc, but that other euroskeptics, such as Gove, would remain.

And then there's the matter of a leadership challenge. Staying in the customs union would almost certainly prompt pro-Brexit lawmakers to submit letters calling for a leadership vote. Jacob Rees-Mogg, who leads a group of pro-Brexit lawmakers and opposes the customs union, controls enough members of parliament to engineer a vote. But it's less clear that May would lose the challenge: The pro-Brexit lawmakers don't have the numbers to guarantee it. (Rob Hutton takes you through the math here.) If the prime minister is pushed into a corner by one faction, she might just have to call the other faction's bluff.

Today's Must-Reads

• Labour isn't ruling out a second Brexit referendum, finance spokesman John McDonnell said, even though he'd prefer a general election. “We're not opposed to any form of democratic engagement,” he said in an interview.
• Tory lawmaker Nicky Morgan says trying to topple May over the customs union would be “deeply short-sighted,” and would probably fail: “the threats are coming only from one section of my Party, and they aren't shared by the vast majority of Conservative MPs.”

Brexit in Brief

Try Another | Almost half the U.K. public wants to see a new centrist political party, according to a ComRes poll for the Sunday Express. Forty-nine percent of respondents are interested in a new party, compared with 46 percent a year ago, and the figure is 64 percent among voters who favor the centrist Liberal Democrats. On Brexit, only 31 percent say the government is managing it “well.”

Northerners for Single Market | A nonscientific survey showed that 51 percent of people in the North East – which is home to carmakers including Nissan – think Britain should continue to be part of the single European market. About 7,000 people who read North East news websites were polled, according to the Chronicle. 

Missing Out | The U.K. is at risk of missing out on the EU's booming digital market, which spans robotics, battery-powered vehicles and three-dimensional printing, according to Austrian Economy Minister Margarete Schramboeck. Austria is preparing to take over the EU's rotating presidency in the second half. A new framework for the digital single market should be completed during Austria's presidency, but U.K. companies may be frozen out if Brexit negotiations go poorly, she said in an interview.

Less Equal Than Others | A European Parliament committee will discuss how to rework the equivalence system, which allows financial firms access to the EU's market. This is the system that will apply to U.K.-based institutions after Brexit, if the EU gets its way. Markus Ferber, the lawmaker who is leading on the issue, wants to further restrict the range of financial services that can be offered by firms outside the EU, according to a draft obtained by Bloomberg.

Australian Ambitions | Australian prime minister Malcolm Turnbull and May agreed on their shared goal to form a bilateral free-trade agreement after the U.K. leaves the EU. They want current arrangements to continue during the transition period and then create a new deal for afterward.

Bread and Butter | The maker of Lurpak butter said it needs to save at least €400 million ($500 million) because of currency losses after the Brexit referendum. Denmark-based Arla Foods said it was too early to say how many jobs will be cut. It makes 25 percent of its revenue from the U.K.

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To contact the author of this story: Emma Ross-Thomas in London at erossthomas@bloomberg.net.

To contact the editor responsible for this story: Anne Swardson at aswardson@bloomberg.net, Andy Reinhardt

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