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May on the rocks

May on the rocks

Brussels will need to show flexibility over Brexit

by Brian Reading

Mon 12 Jun 2017

Theresa May’s election campaign was a botched job. She is staying in power only with the backing of 10 Democratic Unionist MPs from Northern Ireland, who represent less than 1% of voters. Their support is not certain and may depend on all kinds of deals the prime minister and the country find unacceptable.

May has lost the ability to deliver any agreement on Britain’s exit from the European Union. Parliament is hung; it will soon be drawn and quartered.

EU negotiators are demanding up-front agreement on payment of a huge divorce bill before any other exit terms are considered. With a more solid Franco-German alliance remerging, the other EU states are approaching with confidence the start of negotiations, scheduled for later this month.

Emmanuel Macron, the new French president, looks set for a convincing majority in the National Assembly for his freshly minted party La République en marche, which won over 32% of votes in yesterday’s first round of parliamentary elections – on course for more than 400 seats out of 577.

Britain by contrast is in disarray. Even if May manages to limp on for a while, everyone knows she’s on the rocks. ‘Dead woman walking’ – yesterday’s cutting epithet from George Osborne, the former Conservative chancellor of the exchequer, whom May sacked last July – will live on.

However, precisely because of the UK’s weakness, the EU’s financial demands are totally unrealistic. Bureaucrats will need to show flexibility. Otherwise negotiations will be over as soon as they begin.

We have been in this kind of mess before. In February 1974, Edward Heath, who was then prime minister (and a man I used to work for), called a snap election and ran a mismanaged campaign – much in the way May has done. 

I wrote in a commentary on 5 May that May was unlikely to win a sweeping victory – and predicted that Jeremy Corbyn, the Labour leader, promising to look after the man in the street, could be Britain’s Donald Trump. 

Heath called the election in the middle of a coal-miners’ strike and a three-day working week brought about by power shortages. Heath’s campaign centred on whether he or the National Union of Mineworkers governed Britain. The answer was ‘not him’. 

Today’s impasse means another general election before too long, rather like in 1974. How long is hard to say because of the Fixed-term Parliaments Act. This sets out that elections must be held every five years. For one to take place earlier, the act requires a vote of no confidence in the government or a two-thirds majority in the House of Commons. It is unlikely that sitting MPs will opt for another election soon.

Britain’s political instability will overshadow the Brexit negotiations. Punishing Britain for its fecklessness might appeal to some European politicians but it makes no sense. ‘No deal’ would damage the rest of the EU as well as the UK. Measured by GDP, the UK is the third largest EU economy and a world giant. After Brexit, it would be one of the EU’s biggest external markets. 

In the absence of a Brexit deal, the German motor industry, directly and indirectly 10% of manufacturing employment, would be shattered. As the EU economy is larger, the relative damage would be less but the absolute damage might be greater because it would be concentrated on specific locations and sectors. Further, no agreement would blow a huge hole in EU budget. Nobody wants to pay more, nobody wants to get less.

To help stabilise the UK government, the EU may have to think about meaningful concessions. Britain’s botched election gives it some strong cards. Beyond what happens in the UK, much depends on how the Brussels negotiators play their hand. 

Brian Reading was an Economic Adviser to Prime Minister Edward Heath and is a Member of the OMFIF Advisory Board.

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