A decisive majority at the polls is key in UK vote

February 9, 2010

MarkBolsom-150x150.jpg- Mark Bolsom is the Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialist. -

Political debate exploded at the weekend after two national opinion polls revealed that a hung parliament is thought to be the most likely outcome of the general election, which must be held by June 2010.

It has also been widely noted that Kenneth Clarke, the Shadow Business Secretary, was so alarmed at the prospect of a hung parliament that he declared a Labour victory would be preferable.

A hung parliament looks like it could become a distinct reality, as voters remain confused or complacent about party policies. From an economic viewpoint, it is very difficult to distinguish between the policies of Chancellor Alistair Darling and Shadow Chancellor George Osborne, with both politicians backing away from full-scale spending cuts.

This seems to be because they both understand how close we are to returning to recession and that swingeing spending cuts would bring the possibility of a double-dip recession too close for comfort. Their tacit agreement on this point makes it difficult to differentiate and fully understand their economic policies. Certainly, neither have so far offered a credible plan for cutting the budget deficit.

But is the prospect of a hung parliament really so damaging? Vince Cable, the Liberal Democrat Treasury spokesman, has refuted its negative impact, saying that market concerns are “completely and totally irrational.”

Despite Cable’s view, markets hate uncertainty and a hung parliament would create huge political and economic ambiguity. Investors are concerned that a hung parliament would not have the sufficient leverage needed to pass legislation or would be unwilling to compromise, incurring unforeseeable delays in policy making.

Certainly, sterling would weaken significantly, although more against the U.S. dollar than the euro. The pound would also fall against higher yielding currencies like the Australian dollar and New Zealand dollar.

Against the euro, we may see a slightly different story. With the single currency so weak at the moment, it could be a tale of two underperforming currencies. While Germany, France and Italy appear to have a decent recovery underway, Greece, Portugal and Spain are still underperforming to a great extent and are in real trouble.

I don’t think they can still abide by their ECB Growth and Stability pact, which is supposed to promote financial discipline within the Eurozone. Although not publicly discussed, there must be some members of the monetary union that would like to see a two-tiered system for the alpha and beta economies. Hence, with such sustained economic uncertainty in the eurozone, the pound can only strengthen against the euro in 2010, even if a hung parliament becomes a reality.

Whatever the result of the election, it is clear that, regardless of a Conservative or Labour victory, getting a decisive majority is now the most important thing. Undoubtedly, our credit rating will be downgraded if the agencies don’t buy into a long-term plan to cut the deficit and a hung parliament will make forming a credible budget plan all the more complicated.

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