As the British government is dealing with Brexit and the issues that come with it, the least thing it needs is uncertainty and instability. However, the results of the UK general election, which took place on the 8th of June, has left the current British government with a shock and has made the direction of Brexit more unpredictable. Earlier this April, Theresa May, the prime minister of the UK, decided to bring the next general election forward — that is, she called a snap election. It was originally scheduled for 2020, and May was hoping that the general election would increase her Commons majority before the start of the formal Brexit talks which will begin on the 19th of June this year. The reason that made May so confident regarding bringing forward the election is that she believed the high approval rate of the Conservative Party over the Labour Party would “strengthen her hand” in Brexit negotiations. May surely presumed that she could win the election, furthermore, it is not difficult to tell that the snap election is not just about Brexit —there are much more incentives involved. However, her gamble had failed catastrophically; the Conservative Party did not even retain its majority in the parliament. More specifically, a party is required to win at least 326 seats (absolute majority) in the House of Commons of the United Kingdom in order to form a majority parliament. In this election, the Conservatives remain the biggest party but won only 318 seats, followed by the Labour with 262 seats. Thus, the election resulted in a hung parliament, which means that there is no single political party that has got an absolute majority of seats in the parliament.
How did the UK conservatives lose?
It is worth investigating some primary factors that destroyed Theresa May’s plan to reinforce her power, as she was so certain regarding the public opinions on her and her party that she called a snap election. There are two most crucial factors that play important roles here — May’s pro hard Brexit stance as well as some controversial policies she promoted. If you are not familiar with the concepts of hard vs. soft Brexit: there is no explicit definition of them; both stand for the UK leaving the European Union, but a hard Brexit referred to leaving the EU without a deal in place, while a soft Brexit involves deals such as free movement of citizens and staying in the EU single market. First of all, Theresa May stated pretty clear that she pursues Brexit at any cost. However, for groups such as business people and the younger generation, any form of Brexit represents a loss of opportunities, and the sacrifices of Brexit for them are way larger than the benefits. The UK, specifically London, has been the hub for many multinational financial institutions as well as many international organisations’ portal for the EU markets, and Brexit almost certainly indicates a certain level of restrictions on free movement of goods, capital and people.
On the other hand, the leader of the Labour party, Jeremy Corbyn, has successfully captured the insecurity and the needs of voters who are dissatisfied with the current status of the society as well as the Conservatives Party. The difference between them is pretty obvious by just looking at their campaign slogans — Theresa May’s repeating “strong and stable leadership” versus Jeremy Corbyn’s “For the many, not the few”. The Labour’s manifestos such as free university tuition fees, higher income tax as well as enhance the social welfare and health care systems are very tempting to voters. Furthermore, it supports a softer Brexit comparing to Theresa May’s, which is the main concern of many younger voters. As shown in the election results and polls, the surge of youth vote rate, the “youthquake”, was the major component for Labour’s success. The NME exit poll suggests that the turnout rate of voters under 35 surged to 56%, which is an increase of 12% comparing to the election is 2015; and almost two-third of them voted for the Labour.
Other factors that might have resulted in Theresa May’s failure including she is been criticised for being ‘arrogant’ (e.g. she was absent from the general election debate) as well as being unsympathetic toward the minorities such as the disabled and the poor. The latter intensified even more drastically after the tragic Grenfell Tower fire occurred a week after the election, her responds and actions taken were blamed for being very cold-blooded. After the shocking election result, May now has two options — step down, or form a government withthe DUP — the Democratic Unionist Party, a centre-right to right-wing unionist political party in Northern Ireland. Either way, the snap election certainly generates more uncertainty, which is ironic and contradicting to Theresa May’s original plan —‘strong and stable leadership’.
What does it mean for Brexit?
Despite the fact that there are other (above-mentioned) factors involved in the Conservatives’s lost, for the situation of Brexit, the election result can be interpreted as increased numbers of voters demanding for a softer Brexit. What’s more, the speculation over the UK might have a second EU referendum has raised after the election, although the request was turned down by both parties before. It is far from clear of how Brexit will actually rule out and what specific impacts are directly induced by this general election, therefore, I will illustrate a more general overall picture here. The formal Brexit negotiation talk starts on the 19th of June, 2017; and the UK is due to leave the EU by the end of March, 2019. As the UK is about to leave the EU, which means that it will be disqualified from the freedom that an EU member has if it left without successfully negotiating any terms. The four freedoms of the EU that all 28 full members of the single market share including the free movement of labour, capital, service and goods. Among them, the issues over immigration and customs union are the main concerns for the UK when negotiating the agreement. The ideal situation for the UK is that it can have control over immigration and the free movement of EU citizens, while still enjoy the benefits of a single market by negotiating ‘a good trade deal’. It is very unlikely to happen that the EU let the UK ‘cherry picking’ the deal it desires, or it will trigger more EU members to leave the Union. Theresa May has expressed her stance on both issues clearly: she is against staying at the single market as well as free movement of people, and that “no deal for Britain is better than a bad deal”. With the defeat of the Conservatives in the election, even if May managed to save herself from resigning, her power for demanding a harder Brexit is not as strong. With all the uncertainties involved, a temporary transitional agreement is demanded by some MPs to prevent a shock to the economy as the Brexit negotiation goes on.
What does it mean for the financial markets?
Hung parliament induced a great deal of uncertainty over numerous prime issues, both domestic and international ones. And as we all know, the financial markets are very sensitive toward political changes and swings. This election is not an exception, it has evoked several uproars in the economy. Firstly, a snap poll conducting by the UK Institute of Directors (IoD) shown that after the general election, business confidence has plummeted as political uncertainty heightened. Brexit could change the way the business trade, hire, operate as well as the regulations they followed. Since the British voted to leave the EU, one of the most significant issues is the possible migration kerb and the huge costs that come with it. According to an in-depth research regarding the possible impacts of Brexit on the UK’s small business revealed that most of those business leaders favoured softer or no Brexit. Secondly, credit rating agencies S&P and Moody’s have warned that a hung government implies a higher possibility of downgrading as political risks increased even more after the election. And the instability of the political situation hurts economic growth, and it seems like the turbulence is going to loom the market not only in the short terms. The UK economic surprise index from Citi, an indicator which demonstrates how the data is turning out versus expectations (with above zero means a positive surprise), is now negative and at its lowest since the EU referendum in 2016. On the other hand, for the equity market, the benchmark index FTSE 100 fluctuates hugely with the UK political situation. The FTSE 100 is buoyant as the Brexit talk begins on the 19th of June, nevertheless, there is still many obstacles ahead — as aforementioned, stability and minimised uncertainty is what the UK economy desperately needs.