Theresa May has thrown caution to the wind and decided she wishes to lead Europe. The erstwhile careful campaigner to keep Britain in the European Union, who – since becoming prime minister last July – has fully espoused the ‘UK out’ cause, has now undergone a second metamorphosis.
Her next step is to become a substantial election victor, crush the opposition Labour party, and gain a strong mandate to steer the UK to a reasonable economic and political exit deal with the remaining EU states. The Conservative party is an unusual 20 percentage points head in the polls over luckless and semi-leaderless Labour. Unless something catastrophic happens, May in June will swap her present unelected status for the prize mantle of the sole top European leader with sizeable popular backing for her policies.
With France facing instability, whoever finishes first in the French presidential elections, culminating on 7 May, and Chancellor Angela Merkel fighting a grim battle ahead of Germany’s September elections, May will be able to bask in unusual acclaim. She hopes envious glances from her European peers will be translated into negotiating leverage that will give the UK clear benefits in a relatively smooth and ‘soft’ withdrawal agreement taking effect in 2019.
By unexpectedly calling an early election for 8 June – requiring careful political engineering in view of Britain’s fixed-term parliamentary system – May has every chance of establishing Britain, from 9 June onwards, as an island of relative stability in an otherwise uncertain continent.
The Franco-German relationship, and with that the future make-up of Europe, seems headed for its most problematic passage since 1945. In June, France will be in the throes of parliamentary elections designed to give legitimacy to whichever candidate becomes French president after 7 May. Whoever it is will struggle to gain firm backing in the National Assembly and a messy ‘cohabitation’ of political bickering and skulduggery is likely to ensure. Financial markets will have to get used to spread between German and French bonds continuing semi-permanently above the 60 basis points margin of the last few weeks, which has widened further to around 67 basis points.
The dollar has fallen back as perceptions gain ground that its three year run of strength may undermine key tenets of President Donald Trump’s economic programme. But, in an unprecedentedly tight and fluctuating French race among exceptionally diverse leading candidates, shocks that would knock the euro against the dollar, and all other leading currencies, cannot be excluded. May’s move seems likely to strengthen sterling in the short and medium term.
May and her advisers have argued against holding an early election. They have pointed to her ability to govern effectively with a working majority in the House of Commons inherited from her predecessor, David Cameron, who resigned immediately after the UK voted to leave the EU on 23 June. In addition, the government had argued that an early poll would represent a distraction from Brexit talks. And May undeniably has enjoyed a series of easy victories against Jeremy Corbyn, the hapless Labour leader.
Against this, the prime minister has now clearly been swayed by a series of counter arguments calling for upending the status quo. Apart from the potential European benefits, she has the chance of upstaging the Brexit hardliners in her party who, although at present quiescent, represent a potential threat. She can erase the continued irritant of the United Kingdom Independence Party, now seen to have outlived its usefulness, and score some useful wins against the Scottish National Party north of the border.
This is not the first surprise in the Brexit saga. Cameron didn’t expect to lose the June referendum and said he would stay on if he did. The Leave side in that campaign did not expect to win and had no ready leadership plan. Financial markets and economists of all persuasions expected the UK economy to dip after the result – it still hasn’t happened. May now has the chance to show that she can turn successive surprises to her advantage. For the time being, at least, it looks like a successful strategy.
David Marsh is Managing Director of OMFIF.