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Breakingviews - Breakdown: What happens after the Brexit election?

LONDON (Reuters Breakingviews) - Britons are facing another big electoral choice. For the third time in less than four years, voters heading to the polls are confronted with an existential decision. In 2016 they opted narrowly to leave the European Union, tipping the country into a political crisis from which it has yet to emerge. Less than a year later they deepened the turmoil by stripping Prime Minister Theresa May of her majority. Now they must decide whether to give her Conservative party successor, Boris Johnson, a mandate to finish the job. The outcome of the dispiriting contest has big implications for relations with the EU, but also for companies, financial markets, fiscal policy and the future shape of the United Kingdom.

Flags flutter outside the Houses of Parliament, ahead of a Brexit vote, in London, Britain March 13, 2019.

WILL THE ELECTION “GET BREXIT DONE”?

No. Johnson’s campaign amounted to little more than endlessly repeating that mantra. And it’s true that if he wins a majority, as opinion polls suggest, Britain will leave the EU by the end of January.

But the withdrawal agreement only deals with the United Kingdom’s departure. Once that’s complete, the two sides must codify their future relationship. The deadline for finalising a trade deal is just over a year away. Johnson has pledged not to extend it. The EU has said it will be extremely difficult to hammer out the details of a trade agreement in that time.

The prime minister’s party is betting that formally leaving the EU will take the heat out of Brexit. Supporters will lose interest, while those who campaigned to reverse the referendum will concede defeat. Bureaucrats can then debate the finer points of trade policy in relative peace.

Still, the timetable is tight. If Johnson scores a big victory, he could speed up discussions by promising that Britain will not diverge from EU business regulations, environmental rules and labour standards. But if the former London mayor only has a small majority, he will once again be at the mercy of Conservative hardliners who dream of turning Britain into a lightly-regulated island while striking ambitious trade deals with the United States and China. That complicates a deal with the EU. Johnson could face another political crisis within a year.

If the Labour party forms a government – almost certainly as part of a coalition with smaller groups – Brexit is likely to be delayed again in order to hold another referendum. That would mean more uncertainty, but could avert the long-term economic damage inflicted by a hastily organised Brexit.

WHAT WILL THE RESULT MEAN FOR COMPANIES?

A Conservative victory would end the Brexit limbo that has contributed to a slump in business investment. However, leaving the EU will also force companies that depend on seamless supply chains with the continent to make tough decisions. Some carmakers, for example, could close plants.

The historically free-market Conservatives are also set to become more interventionist. Johnson has promised that the state will prop up ailing companies, and favour local suppliers.

However, these shifts pale when compared with Labour’s plans. The party wants to nationalise railways, energy and water utilities, Royal Mail, and part of the telecom network. It would force British companies to transfer 10% of their shares to employees, with surplus dividends paid to the exchequer. It would also crank up corporate taxes, raising more as a proportion of GDP than any other G7 country, according to the Institute for Fiscal Studies.

WILL THE NEXT GOVERNMENT OPEN THE SPENDING TAPS?

Yes. The election campaign proved that the austerity introduced by Prime Minister David Cameron’s coalition government in 2010 is over. Both parties have promised extra spending on education, health, and pensions, while also cranking up long-term investment.

Still, there are big differences. If the Conservatives keep their promises, government spending will rise to 41% of GDP by the fiscal year ending in April 2024, according to the Resolution Foundation. Labour’s plans would lift that ratio to 45%.

The Conservatives would slightly increase taxes, while Labour would demand more of high earners. Still, government borrowing will rise, whoever wins.

HOW WILL FINANCIAL MARKETS REACT?

Currency traders like the idea of a Conservative majority. The pound has risen by more than 2% against both the U.S. dollar and the euro since parliament voted for an early election in October. Sterling tends to fall when polls suggest Johnson’s lead is narrowing, as they did on Tuesday.

Stock markets are sending a similar message. Listed companies in the FTSE 350 Index that are more exposed to the UK economy have gained since late October. They now trade at the same earnings multiple as more international peers, eliminating the discount that opened after the 2016 referendum. That reflects the receding risk of a disorderly Brexit.

Those gains may not last, though. The risk of Johnson failing to secure a trade deal will unnerve investors. A strong performance by Corbyn would leave open the possibility of Brexit being reversed. But any boost to markets would be cancelled out by the prospect of Labour implementing its hard-left agenda.

WHAT HAPPENS IN SCOTLAND AND NORTHERN IRELAND?

The election increases the chance of one, or both, nations breaking away. A weak Labour-led government might depend on the Scottish National Party, which would almost certainly demand another referendum to determine whether Scotland should stay in the United Kingdom. However, a Corbyn victory would also revive hopes of cancelling Brexit while boosting public spending. Both would weaken the case for Scottish independence.

A Johnson victory could be a bigger problem. His Brexit deal will introduce frictions on trade between Northern Ireland and the rest of the United Kingdom, potentially boosting support for Irish reunification. Allowing Northern Ireland to effectively stay in the EU’s single market also bolsters the SNP’s argument for detaching Scotland from England.

A breakup of the United Kingdom remains a distant prospect. But the election makes it more likely.

WHEN’S THE NEXT VOTE?

In theory, not until 2024. Legislation which makes it hard to call a poll before parliament’s five-year term is up remains in force. But three general elections in less than five years are a symptom of divided politics and chronically weak governments. Regardless of which prime minister occupies Downing Street, it’s hard to see them mending those rifts. The winner may be back at the ballot box before long.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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