Could UK’s Snap Election Signal Softer Brexit Stance? - Context

by Fixed Income AllianceBernstein

Economics

By Darren Williams
April 20, 2017

British Prime Minister Theresa May has called a snap election on June 8. With only a slim majority in parliament, she hopes to strengthen her position ahead of complex Brexit negotiations.

May’s announcement that the UK is heading to the polls three years ahead of schedule is a surprise in terms of timing. But an early election has looked tempting ever since she took over as prime minister last July.

Stronger Mandate for Negotiations?

An electoral victory would give May a stronger mandate in the negotiations for Brexit—the UK’s departure from the European Union (EU). And she also hopes to boost her Conservative government’s parliamentary position. Recent opinion polls suggest that Conservatives enjoy a huge lead over the opposition Labour Party. But the Conservatives have a majority of just 17 seats in parliament—May hopes to turn this into a much more commanding advantage on June 8.

Of course, the prime minister’s gamble could backfire, particularly because she is putting Brexit firmly at the heart of the campaign. If the election becomes a proxy referendum on Brexit, the Conservative’s poll lead could suffer.

Conservative Victory: Two Brexit Scenarios

Still, the election is unlikely to be a single-issue affair, and May should take comfort from the Labour Party’s disarray and lack of a coherent Brexit strategy. At this stage, we’re assuming that the Conservatives will increase their majority.

The big question is what May intends to do with a bigger majority. One interpretation is that a crushing electoral victory would give her a robust mandate to pursue a hard Brexit, i.e. one in which the UK is willing to walk away from the EU with a much-downgraded trading relationship.

Pound Points to Conciliatory Position

The counter to that interpretation is that May wants a bigger majority because she’s seeking a freer hand in negotiations with the EU and therefore needs to strengthen her position within her own party. With only a small majority, any attempt by May to soften the Brexit terms can be torpedoed by the Conservative right wing—some of whom favor an “ultra-hard” Brexit, in which the UK leaves the EU without any trade agreement at all.

Given that May voted to remain in the EU and that the government’s Brexit tone has become more conciliatory in recent weeks, we think the second interpretation may have more merit. This narrative would certainly explain why financial markets have bid up the pound since the snap-election announcement.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

Could UK’s Snap Election Signal Softer Brexit Stance?

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