UK election result: DUP saving the May day?
- Theresa May wanted to exploit her enormous lead in the opinion polls to strengthen her mandate for Brexit, but this gamble has now backfired
- The Conservatives are expected to have won just 318 seats and the UK ends up with a hung parliament
- Although Theresa May said this morning that she won’t resign as PM, her position within her own party has weakened
- The most plausible scenario now is an arrangement between the Democratic Unionist Party (DUP) and the Conservative party
- DUP is in favour of the Northern Ireland leaving the EU, but has emphasised that it also wants the border with the Republic of Ireland to remain as frictionless as possible
- This could lead to a more moderate stance on Brexit, which is positive for both the UK economy and sterling
- Nevertheless, the new government won’t have a strong mandate from the get-go and this means that sterling is in for a rocky ride
Weak and wobbly
Theresa May wanted to exploit her (recently diminished) enormous lead in the opinion polls to strengthen her mandate for Brexit, but this gamble has now backfired. The UK has ended up with a hung parliament, Theresa May’s position is under threat and the pound has dropped around 2% vs. the USD (figure 1).
The campaign of Theresa May has gone from ‘strong and stable’ to ‘weak and wobbly’ in only a matter of weeks. There has been a backlash over the Tory Manifesto and the dementia tax, she failed to present herself at key debates and the recent tragic terror attacks were linked to her policies on policing when she was Home Secretary. All in all, the final election result certainly falsified the “There’s no such thing as bad publicity” hypothesis.
There is still one seat left to be counted (Kensington), but the Conservatives are expected to end up with 318 seats (down 12), Labour with 262 seats (up 30), SNP with 35 seats (down 21), LibDems with 12 seats (up 4) and, crucially, the Northern Irish DUP with 10 seats (up 2) (figure 2). Of the remaining 13 seats, Sinn Féin will win 7 but won’t take these seats in the House of Commons. This means that the actual threshold for a workable majority would be 322 seats.
The geographical distribution was roughly as expected: the Conservatives won in suburbia and the southern part of England, whereas Labour accumulated much of its votes in industrial regions and the inner cities. An NME-survey shows that a majority of younger voters opted for Labour and that turnout among this voter group was relatively high.
Hung parliament – what are the options?
If no single parliament wins the 326 seats for an outright majority in the 650-seat House of Commons, there is a hung parliament. The largest party will not be able to pass laws without support from other parties. There are a number of options to deal with a hung parliament:
- A formal coalition: this is when two or more parties join forces to form a government. Both parties will then deliver ministers. This would be business as usual in some countries, but is much more uncommon in the UK. However, it has happened in 2010.
- An inter-party agreement: a single-party government, but with the explicit support of other parties.
- A minority government: again a single-party government, but without the explicit support of other parties. The government will be seeking to pass bills on a vote-by-vote basis.
- If all of the above options fail, there will be a second election and everything starts all over again.
It’s expected that the Conservatives will have the initiative to form a government, for the simple reason that they are the largest group in the House of Commons. However, the government formation process is “competitive” by nature and it’s not a hard rule that the Tories will have a privileged position. In fact, other parties – including Labour – are perfectly allowed to negotiate simultaneously and make deals with each other. This means that there’s a wide variety of possible solutions on the table.
Will DUP be kingmaker?
The most plausible scenario is an arrangement between the Democratic Unionist Party (DUP) and the Conservative party. At the time of writing, Theresa May is to visit Buckingham Palace to seek permission from the Queen to form a government. The Northern Irish party would then be kingmaker. DUP is pro-Brexit and right of centre on many issues. They have won 10 votes and this may just be enough for the Tories to yield a working majority. They’ve already signalled that they’re willing to work with the Conservatives, but it is not clear yet whether they want to subscribe to a formal coalition or one of the two less formal arrangements.
The DUP will also be able to sell this to their voters if the new government guarantees a good Brexit deal for Northern Ireland. The DUP is in favour of the Northern Ireland leaving the European Union, but has emphasised that this doesn’t mean leaving Europe. It also wants the border with the Republic of Ireland to remain as frictionless as possible. There is a lot of cross-border trade and one of the big successes of the peace process is that the border is currently open. This is obviously more difficult to achieve when the government pursues a hard Brexit in which the UK leaves the Single Market and the Customs Union.
On the basis of the current results, the Conservatives (318) still have more seats than Labour (262), SNP (35) and the Liberal Democrats (12) combined. It will therefore be difficult if not impossible for Labour leader Corbyn to pull this one off, even though the outcome is a moral victory for anti-austerity and soft-Brexit. During the campaign Labour ruled out a coalition with SNP and the Liberal Democrats, mostly because this agreement was branded as the Coalition of Chaos. However, various MPs from all three parties have already signalled that they’re willing to explore the possibilities of such an arrangement. The odds are fairly small.
Brexit means exit?
Although Theresa May said this morning that she won’t resign as PM, her position within her own party has weakened. After all, Theresa May is the one who, despite the Fixed-term Parliaments Act, called for snap elections and put the majority of the Conservatives at stake. She then made the campaign almost entirely about her capabilities as leader to strike a favourable Brexit-deal for the UK. Clearly, voters disagreed. Moreover, the loss of the over 20-point lead of the Conservatives in the polls since the call for snap elections, is at least partly due to May’s personal gaffes on health spending (i.e. the ‘dementia tax’) and security issues.
The possible deal with DUP reduces the pressure, but if she is still to resign, it is likely that she will wait while the Conservatives form a government and prepare new leadership elections. Candidates for this position are amongst others David Davis, Michael Fallon, Boris Johnson and Amber Rudd. However, Rudd only narrowly held her majority in her constituency last night and this could throw her chances.
Theresa May could, however, decide to remain as PM if the Conservatives remain in government – as she confirmed this morning – arguing that when she resigns, the country will again be stuck with a leader who was not elected. After all, she did win the elections. Obviously, Corbyn will become PM if Labour will somehow end up forming government.
Impact on Brexit timeline and negotiations
The impact of the election outcome on Brexit is currently highly uncertain, but it could affect it in two ways; the timing of the process and the UK’s negotiation stance. The lack of an outright majority in the House of Commons almost certainly requires the new government to at least review the current UK negotiations stance. If this results in the UK government missing the start of official Brexit negotiations on June 19 – as initially planned – this setback will shift the entire timetable backwards.
If the Conservatives are able to govern with DUP, the question is if DUP would want to alter the Tory’s negotiation stance to highlight the border issue. This topic is, however, well recognised and already high up on the EU27's agenda. In this scenario, the UK’s negotiating position could also soften to some extent if the PM interprets the result as public’s wish to a more moderate Brexit.
Delays to the start of Brexit talks could be more significant (in the rather unlikely) case Labour will be governing with SNP and LibDem, as they would have to finalise their negotiating position, while at the same time find a consensus on the Brexit stance. On a positive note for the UK economy and sterling, Brexit will likely become softer in this scenario, as Labour pledged to retain the benefits of the Single Market.
The lack of a majority also makes it harder to pass Brexit-related regulation quickly, as the opposition might use these opportunities to try to influence the Brexit-outcome. Of course, the deadline could be extended – for example by a transitional arrangement – but would require a formal EU decision that needs to be backed unanimously by the EU27. For this, the UK is likely to have to spend much of its political capital and to make concessions. Depending on the government’s stance and of that of the MP’s, this could make it harder to strike a deal at all, increasing the risks of the worst-case scenario: a no-deal, cliff-edge Brexit.
Rocky ride for sterling
We already highlighted in the election preview that currencies tend to react favourably to expectations of a strong, liberal and above-all market-friendly government and that sterling would fall on any other outcome, including a hung parliament. This is what we’ve seen overnight, with cable dropping around 2%.
The election outcome also shows that – regardless of a possible arrangement with DUP – the new government won’t have a strong mandate from the get-go. As the position of the new government emerges, the currency could be in for a rocky ride. Moreover, the Brexit timetable has become even more uncertain and the risk of a cliff-edge Brexit has increased.
However, we would also like to point out that a more benign scenario could ultimately unfold when the new government can be formed quickly and adopts a more reconciliatory negotiating stance, perhaps to extract concessions regarding Article 50’s two-year deadline or the Northern Irish border. This may lead to a more moderate Brexit. Indeed, hope for such a scenario has likely prevented a more drastic plunge for the pound this morning. Nevertheless, a choppy period is in store.