MORGAN STANLEY: There's still a chance that Britain won't actually leave the EU

MORGAN STANLEY: There's still a chance that Britain won't actually leave the EU

Business Insider: Politics

People hold banners during a 'March for Europe' demonstration against Britain's decision to leave the European Union, in central London, Britain July 2, 2016. Britain voted to leave the European Union in the EU Brexit referendum.

There is a small chance that the UK could still stay in the European Union, despite the country's vote to leave the bloc, according to new research from economists at Morgan Stanley.

In a new note released on Monday, MS economists Jacob Nell and Melanie Baker argue that while Britain and Europe is largely focused on whether Brexit will be either "hard" or "soft," the possibility that the country could actually stay within the European Union is not entirely off the cards.

A "hard Brexit" is seen as Britain leaving the single market and making a complete break from Europe.

Morgan Stanley acknowledges that the chance of this actually happening is pretty slim — around 10% — but still says that it is an option that remains on the table, and could happen if certain conditions are filled.

"We think three steps would be required for a Remain decision that reverses the referendum," Nell and Baker argue, going on to say that the three conditions are as follows:

  1. An early election being called, or at least, the current government leaving power before the next general election in May 2020.
  2. An official opposition to the government that wants to stay within the European Union.
  3. A victory by the anti-Brexit opposition in any early election.

And here is what Nell and Baker have to say:

"To have early elections before May 2020 (the end of the fixed term), the government would have to lose a vote of no confidence. Given a narrow majority of 16 (Exhibit 7) and a Conservative parliamentary party divided over Europe (Exhibit 8), this seems plausible."

Take a look at exhibits 7 and 8 below:

Morgan Stanley brexit charts october 10

Now, it may be a possibility that Britain ends up staying in the EU, but an awful lot would need to change for it to actually happen, meaning that Morgan Stanley is actually assigning a lower likelihood to staying in the EU than at its previous forecasts.

Here is the extract (emphasis ours):

"The opposition has not offered the option of Remain, since Corbyn has just been reelected leader of the Labour Party with an enhanced mandate, and he has said he will not "stand in the way of" the Brexit vote. Further, the Labour party currently trails the Conservative party by 10 pp in the polls, diminishing the likelihood of an opposition win. For the sake of illustration, say there is a 66% chance of early election, a 25% chance of the opposition running on a Remain or a "second vote" platform,and a 50% chance of opposition victory. This would then imply an 8.25% probability of a vote to Remain. This is false precision, but it nevertheless points to a lower probability of Remain, which we now reduce from 15% to 10%."

More likely than staying in the EU, Nell and Baker argue, is the chance for a "soft Brexit" — something that many have started to rule out in recent weeks.

"There is still some space for a 'soft Brexit' where the UK retains enhanced access to the single market. The negotiations have not yet started, and exit is not likely before 1Q-19, which is 30 months away," they say.

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