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Gold Price Trend Forecast Summer 2019

The Upsides and Risks of May's Snap UK Election Decision

Politics / UK General Election Apr 23, 2017 - 12:11 PM GMT

By: STRATFOR

Politics

The decision by Prime Minister Theresa May to call a snap election took the United Kingdom somewhat by surprise. When word went out early Tuesday that she was to make an announcement an hour later, rumors about what she would say rumbled across the country, touching on everything from the possible death of the queen to the announcement of direct rule in Northern Ireland. The idea that she would call a snap election initially was dismissed in light of her previous flat denials, but once the other possibilities were eliminated, an election was all that could remain.


The prime minister appears to be seizing the moment with her call for a vote June 8, reckoning that her best chance to shore up national support for her leadership was before her. May gained the top job in British government not via public acclaim but in a party leadership contest from which her opponent withdrew. And, no doubt, she remembers the experience of former Prime Minister Gordon Brown, who in 2007 also attained the top job by default, then remained hamstrung throughout his premiership by the public knowledge that he had yet to win an election. He subsequently suffered defeat in the first one he fought.

Playing into May's calculations is the knowledge that her opposition will never be weaker. Support for the Labour Party, the traditional counterpart to May's Conservatives, has fallen to the low-to-mid 20 percent range in most opinion polls, while the ruling Tories sit above 40 percent. This, then, appears to be a rare opportunity for a historic Conservative win. A triumph would present May with a strong mandate she can use to push through the upcoming Brexit negotiations while they are still at an early stage.

Financial markets reacted to the news with approval. The pound sterling, which had taken a dive when the sudden announcement was scheduled, soared to its highest levels since October once the election notice was given. With the financial world currently seeing the United Kingdom through the prism of the Brexit — and with investors tending to prefer the idea of a softer Brexit (with a focus on retaining ties with Europe) to a harder exit (which at its most extreme would entail a complete break with the Continent) — the bets being placed seem to indicate that this is good news for British Europhiles.

Two main indicators support this case. The first is that polls point to a large win for May's Conservatives. Although May has been the face of hard Brexit since taking office, it could be said that she has been forced to chart this course by the Parliament she inherited. Her Conservative government has a working majority of just 17 seats, leaving it vulnerable to any small group of rebel lawmakers. In Conservative Party history, its rebels have tended to come from the Euroskeptic right wing of the party more than the moderate Europhiles. Thus, with May prioritizing unity, and saddled with the fragile majority, she veered toward the hard Brexit path. A stronger majority could give her a more stable foundation that she could use to take a more accommodating approach in negotiations with the European Union without worrying that unhappy Euroskeptics would force her hand. The markets may be mistaken in this calculation, though. As May has laid out her election platform, it appears that she will run on hard Brexit principles, suggesting that she may be committed to pursuing a definitive departure from the European Union regardless of the election result.

The second factor driving investor optimism is that an election is likely to allow the Brexit referendum voters who futilely supported "remain," the so-called 48 percent, to make their feelings known again. This could be best evidenced in the performance of the Liberal Democrats, the traditional third party of British politics, which was wiped out in the 2015 elections following a coalition with the Conservatives. Going into these new elections, the Lib Dems are the only party with a clear Europhile stance, giving them what is by their standards a huge potential electorate to shoot for and kindling hope that they can capture far more than their current total of nine seats. Having more, clear Europhile voices in Parliament could thus also help to temper a hard stance in the Brexit negotiations.

Conservative support in the country may not be as strong as the polling numbers imply.

But, of course, there is more than one side in any negotiation, and in Europe, presidential elections in France will be over by the time the British vote proceeds. If a Euroskeptic candidate were to win the French presidency, it would throw the European Union into disarray, freeing British negotiators to be much more assertive on the matter of market access, with the European Union less able to put up a fight on such issues as freedom of movement.

May's decision to call elections is not without risks. Opinion polls have proved to be suspect in the past, most relevantly those taken before the 2015 British general election that indicated a hung Parliament and did not predict the resulting Tory majority. It is conceivable that Conservative support in the country is not as strong as the numbers imply. If so, the Conservatives could come to regret their complacency.

More definitely, though, this election is likely to increase the government's headaches around its troublesome home nations. In light of the Brexit, the Scottish National Party has sought a new independence referendum in Scotland, a request that May has thus far rejected. The party will no doubt use the snap election as a vehicle upon which to campaign on the issue and could use a strong result as proof of a mandate for a referendum that May could find harder to resist.

Meanwhile, in Northern Ireland, unionist and nationalist parties are in delicate negotiations following the breakdown of their regional power-sharing agreement. The timing of May's announcement could not have come at a worse time for the process, and if talks cannot be resolved before the British government is dissolved in preparation for the election, a situation could arise in which the Westminster government would need to take direct control in Belfast but could not as it is not sitting. The added element of doubt thrown into an already precarious situation in a highly sensitive part of the United Kingdom can only play into the hands of the nationalists, who believe the way forward is a united Ireland.

May's snap election could see her emerging with a stronger political hand at Westminster but overseeing a country that is even more in danger of unraveling.

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