Discussion: (1 comment)
Comments are closed.
View related content: International Economics
The likelihood that U.K. Prime Minister Theresa May’s Conservative Party will score a resounding victory in the nation’s forthcoming snap parliamentary elections would seem to be a foregone conclusion. Not so clear, however, is the answer to the fundamental question that will affect the U.K.’s economic prospects for many years to come: Will these elections pave the way for a soft Brexit? Or, conversely, might they heighten the prospects that the U.K. experiences a hard Brexit?
After having categorically ruled out the need for early elections on five occasions over the past year, May could not resist the temptation to reverse herself on this issue by calling for an early election to be held on June 8. With the opposition Labor Party, led by the hapless Jeremy Corbyn, in totally disarray, May saw the opportunity to substantially increase her party’s parliamentary majority for the next five years.The most recent polls support her view that the Conservatives will score a landslide victory in those elections.
In principle, a resounding electoral victory should strengthen May’s position in the U.K.’s upcoming Brexit negotiations. Going into those negotiations, May could claim to have received a strong mandate from the U.K. electorate. She would also enjoy the benefit of not having to return to the polls until 2022. That should ease her task of getting parliamentary approval for any deal that she might have struck with her European partners by the March 2019 deadline.
The basic question remains as to whether these elections will give May the room to make a U-turn from the hardline position she has been taking toward the Brexit negotiations up until now. Repeatedly, May has insisted that any deal with Europe must satisfy two basic U.K. demands:
First, the U.K. must regain full control over its borders in so far as immigration is concerned. Second, the U.K. must restore its sovereignty by freeing itself from the jurisdiction of the Court of Justice of the European Union.
Maintaining those positions would almost surely lead to a hard-Brexit, since they would cross the red lines enunciated by the U.K.’s European partners regarding what is required for a country to continue enjoying access to Europe’s Single Market. German Chancellor Angela Merkel has repeatedly warned the U.K. against entertaining any illusions as to the firmness of Germany’s commitment to those red lines.
With the recent election of French President Emmanuel Macron, a strong proponent of a unified Europe, it would seem that France will strongly support Germany’s hardline Brexit position. This makes it all too likely that May will need to compromise a lot on her Brexit position if she is to achieve a soft-Brexit for her country.
Far from facilitating the Brexit U-turn that May will need to make, there are reasons to think that the forthcoming election might make such a U-turn all the more difficult. After having fought a highly nationalistic campaign to win the elections, May might find it difficult to make a Brexit U-turn without giving the appearance of having blatantly betrayed her electorate.
More importantly yet, after the elections, May might find that her party’s backbenchers are filled with hardline “Brexiteers” who would vigorously oppose any softening of her Brexit stance.
It cannot be overstated how important it will be for the U.K.’s economic prospects that there be early signs that a soft-Brexit is highly probable. If there is one thing that investors abhor it is uncertainty. Yet, that is precisely what U.K. investors should be bracing themselves for over the next two years unless May will make an early U-turn on her current Brexit negotiating stance.
Not knowing whether the U.K. will, in the end, have access to the Single Market, companies will not want to have part of their European supply chain located in Britain. In addition, not knowing whether they will have passport rights to the European financial market, London-based financial firms will increasingly start moving at least part of their operations to the European continent.
The upcoming Brexit negotiations underline how high the stakes the U.K.’s June 8 elections are. For the sake of the U.K. and for Europe, one must hope that those elections do provide Theresa May with the room to make the compromises she will need to obtain a soft-Brexit for her country.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
Comments are closed.
1789 Massachusetts Avenue, NW, Washington, DC 20036
© 2017 American Enterprise Institute