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Orderly Brexit more likely due to snap elections

Economic Comment

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  • British Prime Minister Theresa May has called for snap elections to be held on 8 June
  • A victory for Ms. May seems likely at the moment, which would strengthen her Brexit mandate domestically, and her negotiation position with the EU
  • In our view, this would therefore increase the likelihood of an orderly Brexit
  • The impact of a victory for May on future trade is still very uncertain, as it increases her mandate to press ahead with her hard-line Brexit plans, but might also increase the room to make concessions to the EU to secure future free trade
  • A victory for May will likely diminish political uncertainty from June onwards, although a defeat would obviously have the opposite effect

Snap elections to help May deliver Brexit

Yesterday, British Prime Minister Theresa May called for snap elections, to be held on 8 June, and today, the House of Commons is expected to vote in favour. The decision came as a surprise, as Ms. May has repeatedly denied such a move after the British people voted to leave the EU.

A victory for Ms. May, however, would strengthen her political position within the UK. She has not been elected as Prime Minister, and despite the small majority of her party, she is facing opposition in parliament. If she secures a broader majority, however, she will have an electoral mandate and will be able to pursue the Brexit course she thinks is best. Next to this, a victory will likely increase her flexibility of manoeuvre and credibility in talks with the EU.

Figure 1: Conservatives lead by 21 percentage points
Figure 1: Conservatives lead by 21 percentage pointsSource: YouGov Poll April 12-13

Moreover, in recent polls, the Conservative Party enjoys a huge lead of 21 percentage points over the largest opposition party Labour (see figure 1), which has been in disarray. With an election in less than two months, May has given the opposition limited time to prepare. Based on this, chances are that the Conservative Party will increase its majority. It seems justified to note, however, that British polls were not very accurate in the past, as was reflected in the 2015 election and the Brexit referendum. 

Soft landing…

If May were to win the elections on 8 June, the likelihood of an orderly process increases. As it is likely that the two year withdrawal period is not sufficiently long enough to finalise a trade deal, an orderly Brexit requires a transitional agreement (see also Prins, 2017). Such an agreement would bridge the period between the moment that the UK leaves the EU and the moment that the new (trade) agreements are finalised and come into effect. The conditions set by the EU for a transitional deal might, however, be difficult to sell to hard-line Brexiteers. A stronger mandate for Theresa May would thus make it easier for her to make concessions to the EU in order to reach a transitional deal.

In addition, a victory in June would also give Ms. May more time to negotiate a trade agreement. This is because the transitional period will probably last up three years (till 2022), during which the UK and EU can (further) negotiate about future free trade. UK general elections had been scheduled to take place in 2020, which would have given May only limited time to extend (trade) negotiations with the EU beyond the two-year withdrawal period. But the first elections after June 2017 will now only be held in 2022. Therefore, if she wins, May can focus on making a transitional arrangement in the two-year withdrawal period, and still have time for trade negotiations after that. That would probably make up for the delay in the Brexit negotiations caused by the elections. A large victory for Ms. May would therefore decrease the likelihood of a cliff edge, no-deal Brexit-scenario.

On the negative side, independence for Scotland could become an even more complicating factor than it already is. Nicola Sturgeon, the Scottish First Minister, wants to hold another independence referendum before the UK leaves the EU, but May has refused it thus far. If Sturgeon’s party, the SNP, will perform strongly in the elections, it might become harder for May to keep refusing it. 

…but still a hard Brexit?

Thus far, Theresa May has pursued a hard-line approach to Brexit. She has said that she intends to leave the Single Market and the Customs Union in order to deliver upon the main reasons the majority of the British electorate voted for Brexit. It is possible that after a victory, she replaces hard-line Brexiteers in her government, like Boris Johnson and David Davis. This could give her room to make concessions to the EU in order to keep partial access to the Single Market. She could also be forced into a more soft-line Brexit approach if pro-EU parties win many seats in the elections.

At this moment, the likelihood that Brexit won’t happen after all seems limited, even if pro-EU parties win the elections. It is more likely that pro-EU parties would aim for a soft Brexit. This could change, though, if economic activity is significantly slowing down and households start to feel the impact of the Brexit-vote.

Conclusion

In short, with elections out of the way pretty quickly and the outcome relatively predictable, May is betting on a stronger mandate, which will allow her to pursue her Brexit plans. After a victory, she will probably have more room to make concessions to the EU, increasing the chances of an orderly and smooth Brexit. Perhaps she will also use this room to secure partial access to the Single Market in order to keep the costs of trade low. A victory for May will probably diminish political uncertainty somewhat from June. On the other hand, a defeat will likely increase uncertainty about the Brexit process and outcome.

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Author(s)
Carlijn Prins
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60033

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