UK election results add to Brexit uncertainties

UK election results add to Brexit uncertainties


By Sabine Vollmer

The UK election on Thursday left Britain with a more politically fractured House of Commons – an unexpected scenario as the nation prepares to exit the EU.

Prime Minister Theresa May, a member of the Conservative Party, had called for the snap election in April in an effort to bolster her party’s position prior to negotiations for what has become known as Brexit. At the time, Conservatives had a four-seat majority (51% of all 650 seats) in the House of Commons.

May was left scrambling when it became clear that no party would hold a majority. The Conservatives’ net loss of 13 seats resulted in a hung parliament. The Labour Party, meanwhile, had gained 32 seats to increase its total to 262.

On Friday, May revealed an effort to form a minority government by seeking the support of the Democratic Unionist Party of Northern Ireland, which won 10 seats on Thursday and has supported Britain’s efforts to leave the EU.

If the Conservatives and the Democratic Unionist Party come to an agreement, May would have the majority of votes needed for an effective minority government.

“This government will guide the country through the crucial Brexit talks … and deliver on the will of the British people by taking the United Kingdom out of the European Union,” May told reporters on Friday.

“We will continue to work with our friends and allies, in the Democratic Unionist Party in particular,” May added. “Our two parties have enjoyed a strong relationship over many years, and this gives me the confidence to believe that we will be able to work together in the interests of the whole United Kingdom.”

If the Conservatives and the Democratic Unionist Party cannot come to an agreement, it will be up to the Labour Party to form a minority government, according to The Economist.

“We’ll put ourselves forward to serve the country and form a minority government, and the reason for that is I don’t think the Conservative Party is stable,” John McDonnell, the Labour Party’s shadow chancellor, said to BBC Radio, according to Reuters.

If the Conservatives and the Democratic Unionist Party aren’t able to come to an agreement to govern, or if the deal is short-lived, another general election could be called.

Hard Brexit

The time and effort needed to form a minority government raise uncertainties about the Brexit process.

In March, May triggered Article 50, the official beginning of the process for the UK to withdraw from the EU. The decision started the clock on the two-year period in which Brexit negotiations must be completed. The first formal negotiations are due to start as early as June 19th.

May had campaigned for a so-called hard Brexit, with strict limits on immigration, a position that could cost the UK its inclusion in the European single market and introduce tariffs on goods trading across the English Channel. About 500 million fairly affluent consumers and more than 20 million small and midsize enterprises make up the EU single market, which stretches from Ireland to Greece.

The lack of a single-party majority led some to speculate whether Conservatives could soften their position on Brexit.

“If the Conservatives govern as a minority, they must recognise that they have not earned a mandate to implement their manifesto in full,” Stephen Martin, director general of the Institute of Directors, said in a statement. “The issues of access to EU markets and the need for skilled workers are still paramount, and Brussels will be keen to get negotiations underway soon.” Brussels is the de facto capital of the EU.

Gordon Barrie, ACMA, CGMA, an executive coach and consultant in the UK, expects May’s failure to win a clear mandate in the election will lead to a softer Brexit. Terms of the deal with the Democratic Unionist Party have yet to be agreed on, but having soft borders with Ireland is in the best economic interest of Northern Ireland, he said.

“May’s position going into Brexit negotiations could not be weaker,” Barrie said.

Discussions to form a minority government will focus on forging a majority of votes in the House of Commons. The Conservatives can do this two different ways, either by informally securing the support of Democratic Unionist MPs on confidence motions and appropriation votes, or by a more formal interparty agreement.

In exchange for their support, Democratic Unionist MPs want assurance that Northern Ireland will not be granted special status in the Brexit negotiations, a key demand of Sinn Féin, the largest nationalist party in Northern Ireland.

Any agreement is expected to complicate the legal separation from the EU, which will require the passing of at least 30 pieces of legislation in the UK parliament, Barrie said. The legislation would likely cover matters from immigration to labour rights to the rights of EU citizens residing in the UK.

Market reaction

UK businesses have generally favoured a softer Brexit for several reasons, Barrie suggested.

Access to the EU single market is very important to avoid customs and tariffs, he said. EU supply chains in key sectors such as automotive and aerospace are fully integrated, and UK financial services deal with only one set of regulators when they handle transactions of European clients.

Talent and labour supply are also key issues for UK businesses in the Brexit negotiations, he added. Immigration limits could stifle their access to the EU’s enterprising and skilled talent pool.

A study by the Centre for Economics and Business Research (CEBR) suggests that if the UK limits migration as outlined in the Conservative manifesto “without making adjustments to boost productivity, especially productivity in the public sector, the scale of the economic damage could be huge.” The CEBR projects a drop in GDP of between 1.5% and 3.1% by 2025.

On the other side of the house, the Labour Party’s plans to nationalise the postal service, railways, and energy companies and further regulate the labour market proved problematic for UK businesses, with Carolyn Fairbairn, director general of the Confederation of British Industry, describing them as “wide of the mark” in a response to the launch of the Labour manifesto.

Sabine Vollmer (Sabine.Vollmer@aicpa-cima.com) is a CGMA Magazine senior editor.