British Election Sends Shockwaves Felt Here and Abroad

Last week's General Election in the United Kingdom was a disaster for the new conservative government of Prime Minster Theresa May. Having called the unnecessary "snap" elections in order to strengthen her political hand, the result actually reduced the number of seats held by the conservatives and delivered large gains to the opposition Labour party, which had seemed in disarray just a few months ago. Although she has announced no plans to step down, her position has been severely weakened, possibly fatally. More pointedly, the UK's hand in negotiating favorable Brexit terms has eroded substantially. Besides creating significant ramifications for the European and global economy, the election also provides important lessons for the potential state of American politics.

In my mind, four main reasons explain the election. The first and most important was May's crucial misreading of British voter sentiment. Like the surprise election of President Trump in November, last year's Brexit Referendum revealed how deep anti-establishment sentiment has become. May failed to sense that this sentiment had shifted to her government which was seen, rightly or wrongly, as responsible for the country's current malaise including low economic growth, mass immigration and local terrorism.

Second, May displayed additional misjudgment when she suggested that health benefits for the elderly should be subjected to a 'means test' that would withdraw benefits from those who were considered well off financially. (5/17/17, The Guardian, R. Mason, H. Stewart & D. Campbell) This policy struck squarely at an important voting block at precisely the wrong time. Bumbled communications around the issue between the Prime Minister and Conservative Party allowed Labour leader Jeremy Corbyn to successfully label it a tax increase. May's eventual reversal on the issue made her look weak. Combined with her previously stating that she would not call a snap election, this lent credence to the rap song, 'Liar, liar' which went viral on social media.

Third, May underestimated how the youth vote had become a bigger factor in politics in the months since the Brexit referendum. Younger voters, who have been long cultivated by pro-EU propaganda, had nonetheless largely sat out last year's referendum, assuming that the "remain" camp would achieve an easy victory. (A similar dynamic depressed younger turnout in the U.S. when an easy Clinton win was assumed). The surprise outcome seems to have shocked that voting bloc out of its complacency. Young voters were further energized by Corbyn's promise of free education.

On a more tactical level May proved to be a weak retail candidate. She declined to participate in a televised debate with other party leaders and instead appeared as a remote and strict schoolmistress. By adopting such a profile, she was clearly hoping to emulate Margaret Thatcher. But unlike the Iron Lady, May could not run on a record of stunning domestic and international achievements. On the other hand, Jerry Corbyn, who I knew in the House, is a natural 'people contact' campaigner. On this occasion he excelled.

The Conservatives in the UK are known for ruthless infighting, and clearly the knives have come out. May's former Cameron cabinet colleague, George Osborne, who she had previously discarded from her own administration, said last week that, "Theresa May is a dead woman walking."

However, in view of the party turmoil and the increased uncertainty surrounding the Brexit negotiations, due to start next week, it may be thought unwise to use these sharpened knives in the short term. On the other hand, a possible majority of anti-Brexit or Remainer backbench MPs could force a leadership challenge in the hopes of scuttling Brexit at birth.

To counter this, May should consider enlisting the talents of the highly popular Nigel Farage by putting him in the House of Lords. As a leading Member of the European Parliament and the former head of UK Independence Party, which triggered and won the Brexit referendum, Farage knows the EU establishment better than almost anyone. He could assist greatly in the Brexit negotiations and help gain their acceptance in the Lords.

But it cannot be denied that Great Britain's hand in the Brexit negotiations has been weakened severely. The trump card of walking away that May described as "No deal is better than a bad deal" in the event of continued outrageous EU demands to punish the UK is unlikely now to be approved by Parliament. This weakened hand likely will result in a so-called 'Soft Brexit' with terms that keep the UK more firmly in the orbit of the EU.

The "Remainers", who opposed Brexit from the start, are now emboldened in their efforts to delay Brexit, in the hope that something will come along to defeat it. Already, they are talking of the UK remaining in the European Economic Area (EEA), a halfway membership of the EU.

To retain a ruling majority, the Conservatives have had to make an alliance with the Northern Irish Democratic Unionist Party (DUP), which is known for its hard line against abortion and gay marriage, positions that the Conservatives have begun to moderate on in recent years. The DUP also favors a 'soft' UK/EU border between Northern and Southern Ireland, a policy that is not supported by the Conservatives. On paper, the DUP might look like firm allies, but when May meets their MPs on June 13th, she is likely to have a mind-bending time. Retaining their vote throughout the, now, far more difficult Brexit negotiations will not be easy. Even when she succeeds, her overall majority will be only two!

That the election disaster should occur just before President Trump's planned State Visit to the UK is another gift to Remainers. Doubtless, May had calculated that Trump's support for a Canada-plus trade agreement would strengthen greatly her Brexit negotiating hand. With the possibility that his personal rapport with May might end, Trump may prove less generous.

During the election campaign, May complained of EU intervention. In this respect, on May 3, Business Insider reported that May had accused European Union officials of trying to influence the British elections, saying, "All of these acts have been deliberately timed to affect the result of the UK general election ... ."(5/3/17, Business Insider, Adam Bienkov) Last Sunday, the Observer released a report, citing an EU source, saying, "It is understood that [EU Commission President, Jean-Claude] Juncker had advised May to call an early general election ... ." (6/11/17, Business Insider, Will Martin)What did he know that May did not?

This all portends a period of great uncertainty that can create difficult conditions for businesses and financial markets. In the short-term, a weakened Pound Sterling likely will shield a potential fall in exports and keep financial markets relatively calm. On the other hand, there is growing evidence that the fall in the currency in recent months has done little on that front. In the medium term, the Brexit negotiations, likely amplified by pro-EU leaks, are likely to cause heightened volatility in which the Remainers and their allies in the media are likely to incite further damage to May's negotiating hand. Parliamentary support was always going to be difficult, especially from the House of Lords, which is dominated by Remainer Life Peers. This potential parliamentary hurdle was perhaps the main factor that tempted May to call the snap election in the first place.

Long-term implications will depend upon the final Brexit result. If the negotiations go badly for May, it will mean that the UK will be forced to maintain relatively open borders and will not be freed from EU funding obligations. Potentially closer bi-lateral trade agreements between the US and the UK will be that much harder to achieve.

Most importantly, the result shows how quickly political pendulums can swing. Republicans should take notice that unless better communication and coordination is achieved with the White House, then midterm elections in 2018 could deliver one, or both, chambers of Congress to Democrats. Proceed with caution.

- John Browne, Euro Pacific Capital


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