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Economy pulls Cameron through

Economy pulls Cameron through

Strengthened for European fray 

by David Marsh

Fri 8 May 2015

The relative strength of the UK economy – the factor that decided the British election – should ease Prime Minister David Cameron’s task of winning concessions from the rest of Europe ahead of an expected referendum on EU membership.

However, the disastrous showing of Cameron’s erstwhile coalition partners, the Liberal Democrats, and the Scottish Nationalists’ near-wiping out the opposition Labour party in Scotland, will complicate manoeuvring over Europe.

The double-edged nature of the poll outcome demonstrates how British politics remains finely balanced. Yet, in view of the much clearer than expected result, uncertainty over Britain’s future path has diminished. Sterling and UK financial markets are likely to benefit. This will not help in reducing Britain’s giant twin international and domestic deficits, on the balance of payments current account and in the public sector budget, each of more than 5% of GDP.

There are eight key conclusions.

First, two fundamental UK electoral relationships – the importance of economics and the power of incumbency – have been upheld. Four weeks ago, in the OMFIF Analysis ‘UK election: more political stability – Towards a more competitive sterling rate’ (13 April), I vouched the opinion that Ed Miliband, the Labour leader, was most likely to be the next prime minister, and that this would help relations with Europe. The prediction turned out to be wrong, but for reasons that are eminently logical. The UK recovery, which should have benefited Cameron’s Conservatives far more than the mostly misleading pre-election opinion polls had been suggesting, turned out to be a prime ministerial game-winner.

Second, Britain’s economic dynamism will strengthen Cameron’s hand in dealings with Continental European leaders, especially Germany’s Angela Merkel. As I wrote a month ago, despite a relatively robust British recovery, low unemployment, increased consumer spending and the Conservative-led coalition’s generally successful economic policies, Cameron ‘failed fully to occupy the high ground of economic competence that should be his to command.’ The coming horse-trading over EU membership offers Cameron – the first conservative prime minister to be confirmed in office since John Major in 1992 – the chance of a second coming.

Third, Britain’s bargaining position has been reinforced by euro area travails. The likelihood of a bloody Greek showdown, jitters over higher inflation and tighter US credit that have upset European bond prices, and antagonism over the European Central Bank’s quantitative easing, will make Merkel still more anxious to hang to the UK as a reliable partner.  By winning the election far more comprehensively than expected, Cameron has moved into a strategic lead over European partners. Merkel and French President François Hollande both face bruising elections in 2017. With a small majority, Cameron, at the helm of a reasonably solid government in a fixed-term parliament, looks relatively unshakeable until 2020.

Fourth, the soaring success of the Scottish Nationalists, while derailing Labour’s chances of a win, has not been an unmitigated blessing for Cameron. He will have to handle the setback, both practically and symbolically, of presiding over a deeply divided nation. The Scots remain much more pro-EU than the English, partly for ideological reasons, partly because they are poorer. In European negotiations, Cameron knows any hard-line stance would lead to calls for a fresh referendum north of the border on Scottish secession from the UK. Unless politics takes another unexpected turn, that may happen in any event.

Fifth, the debacle suffered by the Liberal Democrats, even though Cameron will no longer rely on them for support, may generate complexity. The pro-European Liberals may be able to exert leverage that could lower Cameron’s freedom of manoeuvre. Reduced to probably only eight seats in the Commons after 54 in 2010, the Liberals – in coalition with the Tories over the past five years – will wish to extract retribution from Cameron for the damage he has inflicted on them while in a coalition.

Sixth, the lack of any conspicuous breakthrough by the anti-EU party Ukip, with only one or two seats, removes an electoral menace that had been hanging over Cameron since he took over as prime minister. In squaring up to Europe, Cameron will have to appease anti-EU factions on his own party but will no longer have to worry about an existential threat from a nationalist party to his right – an enormous relief.

Seventh, the election has confirmed convergence with politics in Germany. The two main UK parties won around 68% of the vote, the average of the last four elections on Germany. The Liberal’s crushing defeat, the grim sanction for five years of coalition, mirrors the experience of the German Free Democrat party, punished for four years of coalition with Merkel in 2009-13 by ejection from government and from parliament. The Scottish Nationalists, after their sweeping gains, now take the role of the Bavarian Christian Social Union as a permanent thorn in the side of whoever is ruling in the capital. There are differences: the Bavarians these days are rich, not poor; they are less instinctively pro-European than the German average, opposite to the Scottish Nationalists; and the CSU is wedded (most of the time) to Merkel’s Christian Democrats.

Eighth, the aftermath has highlighted the specific nature of the UK’s first-past-the-post electoral system. The Scottish Nationalist have 56 seats with just 5% of the vote; Ukip’s one or two  and the Liberal Democrats’ eight seats have been achieved with respectively voting shares of 12% and 8%. However, since the parties that have suffered from the system will be in no position to make decisions, any campaign for UK proportional representation – as always in the past – will remain still-born.

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