U.K. election shock could mean delayed Brexit-lite

Posted at 10:13 PM, Jun 08, 2017
and last updated 2017-06-08 22:13:29-04

Prime Minister Theresa May called a snap U.K. general election in the hope of strengthening her hand in negotiations to take Britain out of the European Union.

An exit poll projection and early results suggest that gamble has backfired: Rather than handing May a landslide victory, the election could leave no party with a clear majority, a result that would usher in a period of uncertainty over who governs Britain.

So what does that mean for Brexit, the single issue that could determine the economic prospects for the U.K. and the prosperity of its people for years to come?

Could Brexit be delayed?

Following last June’s Brexit referendum, the process officially started in March when May served formal notice of Britain’s intention to leave the EU.

That started the clock ticking on a two-year period that should end in March 2019 with the U.K.’s departure.

But detailed negotiations haven’t yet started. The EU wants those to begin on June 19, but they could be delayed if an inconclusive election leads to political turmoil.

EU negotiators will want to know who they’re dealing with.

“If this is a minority Conservative government, then it might be a government that doesn’t last very long, and we might head for another election,” said Tim Bale, professor of politics at Queen Mary University of London.

“I think the EU might be very reluctant to agree anything until they know who the government in the U.K. will be for the next three or four years.”

The March 2019 deadline for leaving could be pushed back, but it would need the agreement of all 27 of the remaining EU members.

Why does that matter?

Business and investors want clarity about the terms of Brexit, as soon as possible, because they need to know what kind of access U.K. companies will have to Europe’s vast free trading area in future.

Already, some banks have started moving jobs out of the U.K. and into other European countries because they fear they’ll lose business after Brexit if they don’t.

Ryanair has switched its investment focus away from the U.K., and other companies are reconsidering their plans.

“What really matters is whether people put investment on hold,” said Tim Besley, professor of economics and political science at the London School of Economics. “And there’s already uncertainty about Brexit … and we will see more uncertainty. We have no clue on what’s going to come out of Brexit.”

Millions of EU citizens living and working in the U.K. also need certainty about their status. Recent data showed some are not prepared to wait any longer, and are starting to leave.

The shock election projection sent the pound lower against the U.S. dollar and other currencies. The U.K. economy has already suffered a sharp slowdown — it was the weakest performer in Europe in the first quarter — and prolonged uncertainty over Brexit could do further damage.

Will Brexit be reversed?

That is highly unlikely, although not impossible.

May’s Conservative Party and the main opposition Labour Party led by Jeremy Corbyn both campaigned in this election on a commitment to honor the result of the June 2016 referendum, when 52% of voters backed Brexit.

And those two parties together look likely to have taken a bigger share of the overall vote than in the 2015 election.

Brexit-lite instead?

However, the result could have a big impact on the final shape of Brexit. If confirmed, the lack of a clear majority for any party could force a more consensual approach.

“If a hung parliament forces a cross party compromise it could lead to a softer Brexit strategy, and may turn out to be positive in the long run after some serious initial confusion,” said Kallum Pickering, economist at Berenberg bank.

May had promised a clean break, taking Britain out of the EU’s unified trading area and reducing the number of people coming to the country from the EU. Labour said it would not try to reverse the decision to leave the EU, but it does want to retain “the benefits of the single market and customs union.”

May had also said she was ready to walk away from the Brexit negotiations without a deal, rather than signing up to a “bad deal.”

That scenario — which analysts warned would be economically destructive because of the chaos it would cause to trade — now appears extremely unlikely.

“The ‘we can walk without a deal’ strategy now looks completely dead,” said Patrick Dunleavy, professor of political science at the London School of Economics.