United Kingdom: a costly gamble

20.06.2017 Chris Little

Following the Brexit referendum, this snap general election is the Tories’ second failed gamble in less than a year. On June 8th, PM Theresa May lost the best she has made by triggering an early election. Now left with a hung Parliament, a confidence and supply agreement has been concluded with the Democratic Unionist Party (10 seats), although the terms of the deal remain unclear. This unstable political situation only adds more uncertainty to the Brexit negotiations.

What Risks might this pose for the UK?

1. Domestic politics

The highly conservative positioning of the Democratic Unionist Party (DUP), as well as tensions within the Conservative party could make the recent majority critically unstable over the new few months. Some of the conservative would like to overthrow T.May and the confidence vote on June 27th will be the first test. If the situation appears to be unstable over the new few months, another election before the end of the year cannot be ruled out.

2. The Brexit negotiations content

This election showed that the hard Brexit defended by T.May (Management of immigration, implying that the UK leaves the EU single market) did not manage to convince voters. They are probably experiencing the first signs of a deteriorating economic situation, such as the rise in inflation (2.7% in April). The weakening of the hard Brexit position is also spreading out in the Conservative party, where T. May’s credibility is not at its lowest. Not only will the PM have to convince the whole country about the benefits of a hard Brexit, but she will need to convince her own party.

3. Brexit negotiations calendar

The already tight calendar for Brexit negotiations will become more and more difficult to maintain as the government’s instability and the heterogeneity of opinions regarding Brexit within the majority are increasing. Brexit negotiations are expected to begin on June 19th but EU leaders have made it clear they will not ease the negotiation process to allow for UK politics.

4. UK economic situation

Investments which were already impacted by uncertainties over the Brexit negotiations (business investments decreased by 1.5% in 2016) will suffer from the additional doubts created by the election results. Coface estimates that business insolvencies will decrease by 2.7% in 2017 and increase by 8.8% in 20181. This would add to the budgetary costs and financial incentives implied by Brexit – such as the reduction in tax rates for businesses.

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