Theresa May cannot get a Brexit deal through parliament that includes leaving the European customs union, according to Pantheon Macroeconomics analyst Samuel Tombs.

Only staying inside the customs union solves the Irish border question to everyone's satisfaction.

Thus, May will eventually cave to a soft Brexit deal.

She could force the issue by staging a second referendum with two options: Remain or Hard Brexit.



LONDON — Theresa May is heading toward an "inevitable capitulation" with the EU and a soft Brexit that would keep Britain inside the European customs union, according to Pantheon Macroeconomics analyst Samuel Tombs.

The prime minister has no choice, Tombs believes, because she cannot get any other type of deal through parliament, and because the EU has a stronger negotiating position than Britain. Staying inside the customs union is also the only way to solve the problem of the border between Ireland and Northern Ireland, Tombs wrote in a note to clients last week.

On Friday, May repeated that she believes the UK must leave the EU's borderless customs union. She is being pushed by the right-wing of her party to extract Britain from the EU's single market, its customs rules, and the European Court of Justice.

But Tombs believes this is merely posturing before she ultimately caves to reality.

His position — that Britain will eventually win a soft Brexit package from the EU — is a common one among analysts and economists in The City's investment banks. They believe no government could survive the economic damage of a hard Brexit.

But two things make Tombs' work extra-interesting.

He was the only analyst to correctly predict that May's Conservative government would lose seats in the 2017 general election. (Everyone else assumed she would gain a bigger majority.) He also believes there is a 40% chance of the government staging a second referendum on Brexit, which might reverse the result. If that happened, Remain could snatch victory and (in theory) stop Brexit entirely, he says.

Pantheon analyst Samuel Tombs. Samuel Tombs / Pantheon

Right now, the Brexit negotiations have produced no solid agreements, he wrote, in a note titled "The PM's Inevitable Capitulation is Still a Way Off, Clouding Sterling's Outlook":

"So how will the current deadlock be broken? The chances of the EU conceding ground remain ultra-slim. Its economy is motoring, while cutting the U.K. a good deal would risk fuelling separatist movements elsewhere. It can run down the clock, waiting for the U.K. to capitulate as the cliff-edge draws nearer."

May is going through the motions, playing a game she knows she can only lose, in order to keep the hard Brexit wing of her party appeased, Tombs says. The problem is, only a soft Brexit will keep Irish border arrangements the way they are. Any change &mdash either a new border between the two Irelands or between Northern Ireland and mainland UK &mdash could reignite the armed conflict that was settled there in the late 1990s. He writes:

"The PM, meanwhile, will stick to her unworkable proposals for as long as she can. Later this year, however, Mrs. May must decide, and we expect her to opt to keep Britain tied to the EU with a customs union. This would solve the Irish question and minimise the administrative and economic disruption. It is also the only plan that can command a majority in parliament."

Others agree. Andrew Goodwin of Oxford Economics wrote in a note published after May' speech, that without being in the customs union, "it is difficult to see how the Prime Minister’s plan moves us any closer to a solution to the issue of the Irish border."

Without the customs union, and "with the Government having a fragile majority and deep divisions within the Conservative party, there remains a non-negligible chance that the UK and EU will be unable to find an agreement which is able to gain UK parliamentary approval," Goodwin told clients.

If May cannot get a hard Brexit through the House of Commons, she could be forced to hold a second referendum, according to Tombs:

"The only other option open to Mrs. May is to circumvent parliament by calling another in-out referendum. The options on the ballot paper likely would be a hard Brexit or no Brexit."

It's an extraordinary scenario, and it is essentially speculation on Tombs' part. What makes it significant is that, outside parliament and the Westminster media echo chamber, this is how the smart money sees Brexit playing out.