The European Union has given Britain seven more months to sort out its exit plans. While the chaos of a disorderly Brexit has been averted for now, we think the compromise could have some unintended consequences.

With just two days to go before the deadline for the UK’s exit from the European Union (EU), EU leaders have stepped back from the brink of a disorderly Brexit and agreed to push the exit date back to October 31. This decision was a compromise between France—which wanted an even shorter extension—and most other EU governments, who preferred a longer extension of up to a year.

This compromise may represent the worst of all possible worlds, in our view. It takes the pressure off UK lawmakers, without allowing sufficient time for a material change of approach. That’s unless the UK’s governing Conservative Party can find a way to replace Prime Minister Theresa May, or the opposition Labour Party manages to force an early election. Unfortunately for those hoping to reverse Brexit, it’s probably too short an extension for a second referendum.

Will the Delay be Frittered Away?

Although the risk of an early election remains real, there are other concerns to consider. We think October 31 could represent an even bigger cliff-edge than the previous deferred deadlines of March 29 or April 12. With negotiations between the UK’s Conservative government and opposition Labour Party seemingly headed nowhere and UK lawmakers unable to decide which flavour of Brexit they prefer, there’s a real risk that the extra time provided by the EU will be frittered away.

All of which would make the case even stronger in October for the EU insisting on either UK ratification of May’s previously negotiated withdrawal agreement, or a disorderly Brexit. And if the EU does pull the plug on the UK’s lawmakers, French President Emmanuel Macron may yet get to emulate his UK-sceptic predecessor General de Gaulle, whose repeated ‘non’ ensured that the UK was excluded from the European project until 1973.

Markets Relieved—For Now

The EU’s deferral means that Brexit concerns will probably retreat into the background for a while. At least that’s the way financial markets are likely to see it. But for UK businesses and households, whose spending drives the economy, uncertainty about the Brexit end-game will remain as high as ever—and it’s hard to see how that’s a good thing.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

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