INSIGHT: UK election result could mean softer Brexit

09 June 2017 10:32 Source:ICIS News

By Will Beacham

BARCELONA (ICIS)--The UK election result in which the ruling Conservative party lost its majority in the House of Commons throws the forthcoming Brexit negotiations into disarray.

The country’s Prime Minister, Theresa May, called the snap election to give her a personal mandate to pursue her uncompromising stance in the forthcoming Brexit negotiations.

The humiliating result will mean the Conservative party has to do deals or form a coalition with other political parties, most of whom take a different stance to the Brexit process.

It leaves the Prime Minister with less personal authority and facing calls for her to resign. There is also the prospect of a further general election being held until a party emerges with a clear majority. Some are calling for a second referendum on Brexit, but there does not seem to be enough political support for that at present, commentators suggest.

Any coalition deal will mean compromises over Brexit. Theresa May’s “hard” Brexit strategy included a tough stance on immigration control, withdrawal from the single market and the prospect of trade barriers or tariffs being erected between Britain and the EU.

With many Conservatives proposing the UK should refuse to pay the “divorce” settlement, there was also the possibility that the UK could come crashing out of Europe with no deal in place at all. In that case punitive tariffs under World Trade Organisation rules would be imposed by default.

Without her personal mandate, May is likely to take a softer stance, if indeed she can form the next government. Over the next few days parties will scramble to try and form a workable majority through coalitions.

May also has the option to form a minority government, which she is expected to attempt today. This would rely on doing individual deals to get decisions approved by the House of Commons.

Most in the UK chemicals industry would favour a softer Brexit as it could open up the possibility of a better deal on trade. The UK chemicals sector does a huge amount of external trade with 50% of its chemicals exports going to the EU and 75% of its imports coming from the EU. But there are exceptions. INEOS chairman, Jim Ratcliffe, has made it quite clear that he is relaxed about Brexit and its impact on his company. 

One option favoured by many proponents of a softer Brexit is for the UK to join the European Economic Area (EEA). Membership allows full access to the European single market although it brings with it the obligation to allow freedom of movement of labour, as well as the duty to follow EU policies relating to transport, competition, social policy, consumer protection, environment, statistics and company law.   

The timetable for Brexit is also now in question. It seems highly unlikely that negotiations can start, as planned, in 10 days’ time on 19 June. The two-year timetable with the exit happening in 2019 will also be even more difficult to adhere to.

UK trade body the Chemical Industries Association called for stability. CEO Steve Elliott said: “Our industry will work with whatever political outcome arises, which we hope will be as soon as possible to help deliver the certainty business needs to tackle the huge economic challenges facing the country.”

Market reaction has been muted so far. Sterling dropped as the election result became clear but the FTSE UK stock market index initially jumped up before settling back down to just a 0.47% rise on the previous day to 7,485 at 09:30 London time.

Weaker sterling always boosts the foreign earnings of UK companies and this has offset fears about uncertainty over the UK political situation.

Michael Metcalfe, global head of macro strategy at State Street Global Markets said: “The government has fallen at its first election hurdle. The approach to the potentially larger and more dangerous hurdle of Brexit will now surely be delayed. It is a shock that markets were not well prepared for, and in response sterling is likely to remain under pressure.”

Here are the results so far at 09:56 London time on 9 June.

Source: Google

By Will Beacham