Why Britain’s days as a haven of political, economic stability are numbered

November 21, 2014

Flares are let off as police stand guard while pro-union protestors clash with pro-independence protestors during a demonstration at George Square in Glasgow

For the past five years, Britain has been a haven of political and economic stability amid the turbulence in Europe. No longer.

In the years ahead, Britain will likely be Europe’s most politically unpredictable country. This risk, first brought to the world’s attention by the Scottish independence referendum in September, has been confirmed by the defeat suffered by Prime Minister David Cameron’s Conservative Party in a special election on Thursday.

Yet the loss of Britain’s safe-haven status is not yet factored into asset prices — especially sterling. The pound is still near its strongest since 2008 despite the country’s current-account and budget deficits, the biggest in Europe relative to gross domestic product.

Although Britain faces an unpredictable general election on May 7, most investors and businesses are still behaving as if political uncertainty would have limited impact on economic conditions. This complacency seems misplaced, for three reasons:

Britain's Prime Minister David Cameron delivers a speech at the Aberdeen Exhibition and Conference Centre in Aberdeen, Scotland

First, Britain could become literally ungovernable after the election, with no single party or coalition of parties able to form a majority government. Current public opinion polls predict that neither the Conservatives nor the Labour Party will win enough seats to form a majority government — even in a coalition with Liberal Democrats.

Conservative-Liberal and Labour-Liberal majorities may both prove arithmetically impossible because of the rise of previously insignificant fringe parties. The Scottish Nationalists look able to boost their six seats in Parliament to anything between 20 and 50, largely at Labour’s expense. The United Kingdom Independence Party is threatening dozens of Conservative incumbents. Meanwhile, the Liberals are almost certain to lose about half their 56-seat representation. As a result, a ruling coalition may have to include not just two parties but three or four, including fringe nationalist groups.

The Scottish National Party is sure to demand another Scottish independence referendum as its price for supporting a coalition, while the UK Independent Party will likely insist on Britain’s withdrawal from the European Union. It is hard to imagine either Labour or Conservatives agreeing to such terms.

This means that a government may have to be formed without a majority in Parliament. While minority governments are quite common in continental Europe, the British Parliament has only once failed to produce a government majority — during a brief interlude in 1974 under Harold Wilson. It created seismic upheavals in Britain’s adversarial politics.

The second reason for concern is that a multiparty coalition or minority government, even if it can be patched together in post-election haggling, will probably collapse within a year or two. Whether the next prime minister turns out to be Cameron or Labour’s Ed Miliband, he will be seen as a short-term caretaker, passing only non-controversial measures.

United Kingdom Independence Party (UKIP) supporters canvas for votes in Rochester

At some point in 2016 or 2017 at the latest, the opposition parties are almost certain to unite in a vote of no confidence on some major issue — bringing down the government. This would force a new election in spite of the theoretical requirement that Parliament should serve a fixed five-year term.

The near-certainty that whatever government emerges in May will fall within a year or so, raises the third and most troubling business issue. A snap election in 2016 or 2017 is most likely to produce an overtly euro-sceptic government, committed to taking Britain out of the European Union.

Since a continuation of the current coalition is almost impossible because of Tory commitment to an EU referendum, which the Liberals oppose, Cameron may only be able to lead the next government if his party wins an outright majority or forms an alliance with the Scottish Nationalists, UK Independent Party and other fringe parties. An outright Tory majority is out of the question, according to current opinion polls, and time is running out for the surge in support the Tories were expecting as a result of economic recovery.

A Tory government supported by Scottish Nationalists and UKIP is a more plausible option. But the glue holding together such a coalition would be an EU referendum on membership terms that the rest of Europe would be extremely unlikely to accept.

UKIP would certainly press for such an impossible negotiating mandate and even the Scottish Nationalists would do so for tactical reasons. The Scots would insist that a British vote to exit the European Union should be followed immediately by one on Scotland leaving Britain. And in this second referendum, the generally pro-European Scots would almost certainly vote to leave. The chaotic breakup of the constitutional status quo would then be complete.

An EU exit might, paradoxically, be even more likely if a Labour-Liberal coalition comes to power in May. Though both parties are committed to keeping Britain in Europe, a weak Labour-Liberal government would face falling business confidence and possibly a sterling crisis. So it would be even more likely to fall in a snap election than a Tory-Nationalist coalition.

Meanwhile, the Tories, forced into opposition, would undoubtedly replace Cameron as leader with a more hard-line euro-sceptic — possibly Boris Johnson, the popular and populist mayor of London. If so, the snap election in 2016 or 2017 would probably result in a landslide for radically euro-sceptic Tories in alliance with the UK Independence Party. A quick referendum mandating the new government to negotiate an exit from the European Union would then become an odds-on bet.

All these scenarios can, of course, be qualified with numerous ifs and buts. Many political surprises will surely occur between now and 2017. In the end, the instinctive caution of the British electorate might well prevail — as it did in the Scottish referendum — preserving the status quo of British membership in the European Union.

But whatever ultimately happens, outbreaks of political panic are near-certain in the six months before the general election. Then again during the period of turmoil and ungovernability leading up to a snap election and EU referendum in 2017.

Investors and businesses in Britain are queuing up for a roller-coaster ride.

 

Flares are let off as police stand guard while pro-union protestors clash with pro-independence protestors during a demonstration at George Square in Glasgow, Scotland September 19, 2014. REUTERS/Cathal McNaughton

Britain’s Prime Minister David Cameron gestures as he delivers a speech at the Aberdeen Exhibition and Conference Centre in Aberdeen, Scotland September 15, 2014. REUTERS/Dylan Martinez

United Kingdom Independence Party supporters canvas for votes in Rochester, south east England, November 18, 2014. REUTERS/Paul Hackett

13 comments

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Aye very good – exciting “what if” stuff.

Just one teensy-weensy problem, the SNP has stated unequivocally many times in the past and has restated in the past few days one simple unalterable truth..

“under no circumstances will the SNP enter any coalition agreement with the Conservative Party”

end of – it won’t happen. It can’t happen, because the membership would not stand for it – not then, not now, not ever.

It is just possible that some agreement short of a formal coalition on a supply and confidence basis might be worked out with Labour but the price will be very high indeed.

A little basic journalism and one quick phone call would have prevented this writer making a complete clown of themselves speculating on scenarios that are patently impossible. But then finding honest journalists who are prepared to do a little work is impossible these days. Reuters is no different from any other news operation in that regard.

Posted by Willie_Fleming | Report as abusive

Hell will freeze over before SNP ever form an alliance with Tories or UKIP. Since Thatcher days our deep hatred for Tories is known around the world. As for UKIP, we,unlike the south welcome all nationalities to come and settle in Scotland so UKIP’s fascism and racism is not welcome here. When Farage visited Edinburgh in the last few years there was a mass protest against him and his fascist party and he was in no doubt we felt about him and his party, the same deep loathing. As much as it would choke SNP, they would form an alliance with Labour as they are only the slightly better between Tory and Labour and Scotland used to be a deeply Labour country until Scottish Labour had its voice and power taken stealthily back by Miliband in London. In England Labour are middleclass centre party, in Scotland they pretend to be leftwing but Miliband has control and they act like rightwing Labour. Scotland favours devo max, imagine being a country who has been controlled and cheated by London for over 300 years, Scotland is a wealthy country and we are chained to the UK like the cow as London milk us! We are a majority of pro EU voters so it should be interesting in 2017 if Tories are back in power. For us Indy Scotland now over 50%, we will be wanting another Indy referendum to come out of UK and stay in EU.

Posted by ElaineSk | Report as abusive

Spectacularly ill-informed. The Scottish National Party has a stated policy of never entering coalition with the Conservatives. The idea of them also entering into some sort of agreement with UKIP is fantastical. Really, Reuters? This guy is the best you have? His CV seems impressive, but that was yesterday: this is today.

Posted by OskarMatzerath | Report as abusive

This author clearly needs to do some more/better research before writing such utter crap about the SNP. I don’t know any SNP supporter who wants to leave the EU. And where does he get this idea from that the SNP or any of its supporters would ever consider a coalition with the Tories? …let alone with UKIP?! Only because the word “national” is in the title of the party doesn’t mean that it’s a right wing/radical group. On the contrary, with some basic research, the author of this article would have found out it is in fact the stark opposite of that! shame on you Reuters for allowing this to be published

Posted by Klabauterfrau | Report as abusive

The Brits have been propped up by their captive minion the US for the last 50 years. That’s the only reason they are not in utter chaos. They give us lessons in imperialism and they get thrown a few bones. The British people are very good at being compliant, or as with our black communities, trained to be self destructive. They must hope that we don’t have a decay in our empire because however bad it gets here, it will be far worse there.

Since Reuter’s has eliminated comments on other stories I assume they are trying to sell them selves to Rupert Murdoch and showing just how well they can put this propaganda out. The comments were eliminated to keep people from pointing out the obvious fallacies in the reports. It’s all pretty standard rich people control of the masses. Reuter’s is here to protect the rich from the poor.

Posted by brotherkenny4 | Report as abusive

Hysteria much?

The UK will still be a functioning state capable of paying its debts if there is a minority government or multiparty coalition – which, if I am not wrong, is exactly how most of continental Europe currently operates.

And with a functioning central bank and currency union, Britain will at no point be more unpredictable that the Eurozone.

A little depressing to see Reuters regress into publishing cheap clickbait.

Posted by James_L | Report as abusive

england has always punched above its weight , england earns more out of the money markets than the germans earn from their cars which the rest of europe cannot equal so they must be doing something right ?

Posted by peterspc3 | Report as abusive

Mr. Kaletsky is not “clickbait”. He seem to be very optimistic most of the time actually. I always read his opinions and am glad to see them.

Posted by tmc | Report as abusive

Clearly not a man scared to make assumptions! All one can say is that a range of scenarios are possible – this is one; there are lots of others, And the distinguishing feature of British politics for centuries has been its moderation and stability – but perhaps AK is right and that is all about to change. Personally, I doubt it.

Posted by Pimlicoman | Report as abusive

A thoughtful and balanced assessment by one well qualified to do so. Well done!

Posted by OneOfTheSheep | Report as abusive

“A Tory government supported by Scottish Nationalists and UKIP is a more plausible option.”

Even after the LibDem betrayal, I don’t think the SNP backing a Tory government could happen. One of the main arguments of the Yes campaign was saving Scots from Tory rule.

Posted by KingAl86 | Report as abusive

The main issue is that the British are massively populist. Their “public” opinion is formed by aggressive populist ideas that have little connection to reality. When populism applies its well-tested and scarcely educated propaganda (the British are masters of this), the public form a sclerotic opinion manipulated by its leaders through the bad quality newspapers. Can someone recall another country that someone who has studied PR is a Prime Minister? The EU example perfectly fits the bill: even the most uninformed individual can realise how the EU has become the main enemy of the British the let few years. The scape-goat of all problems with the country, only because the tories need to deflect ukip populism, they adopted populism themselves, with D Cameron flexing muscles, talking in anecdotes and playing hard in every EU meeting. It is a bit sad, but people go for it.

Posted by UlissesD | Report as abusive

Stable coalitions impossible in an adversarial political environment like that of the UK? Nonsense. New Zealand’s political stability since the introduction of MMP [Proportional Representation] shows very clearly that political parties with British Parliamentary traditions can quickly adapt to the trade-offs necessary for effective government. What we are seeing in the UK is the inevitable crumbling of a winner-take-all two party system. Politics in the aftermath will be more representative – and much more interesting.

Posted by KeithJohnsonNZ | Report as abusive