All change in Britain, and more global talk of loosening fiscal screws

July 12, 2016

Britain's Prime Minister David Cameron returns to 10 Downing Street after making a statement  in Westminster, London, July 11, 2016.

David Cameron was caught on tape humming a merry tune as he walked back into 10 Downing Street after announcing that Theresa May would succeed him as prime minister; yet May herself now has the unenviable job of picking up the pieces he left behind. She inherits leadership of a country whose social divisions were cruelly exposed by the referendum campaign, and which does not as yet have a clear roadmap for its future.

Financial markets heaved a sigh of relief that the uncertainty over who is actually running Britain would not be as protracted as once assumed.

Europe’s governments — which over the past three years saw EU business held hostage by Cameron’s referendum gamble and for a while even braced for the prospect of Boris Johnson as PM — will be happy to deal with May as a pragmatic and efficient operator.

It is ironic that she comes from the Remain camp while the prime Leavers — Johnson, Michael Gove and Andrea Leadsom — have all managed to score political own goals in the days since the vote. May has nonetheless made it clear she will ensure Britain does leave the EU: the question now is how, and when. Her European counterparts will probably allow her to wait until the end of the year to trigger the Article 50 exit clause, but not much longer.

In the meantime Germany’s Angela Merkel — the no-frills politician to which May is already being compared — has repeated that Britain will not get full access to the EU single market without guaranteeing freedom of movement of citizens. As she prepares to enter Downing Street on Wednesday, May’s first job is to select the cabinet that will accompany her on the rough ride ahead.

The decision by Japanese Prime Minister Shinzo Abe to order a new round of stimulus spending after a weekend election victory will add weight to calls for policy-makers in Europe and beyond to consider giving the economy a fiscal shot in the arm.

Analysts from JP Morgan and elsewhere are arguing that now would be the time for governments to make use of ultra-cheap borrowing costs and invest in upgrading infrastructure and all the things needed to kickstart an economy and enhance productivity. Ruling party sources told Reuters before the election Abe was ready to spend more than $100 billion. While there are no signs of European governments prepared to go that far, expect more talk of loosening the fiscal screws in coming weeks and months.

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