by Jeffries Briginshaw, CEO - Transatlantic Business Britain
Earlier in the summer we plotted the rough time line ahead for the UK Conservative Government’s increasingly desperate efforts to deliver on the 2016 referendum mandate to leave the EU – with the next ‘hard stop’ due on October 31st when the latest extension to UK membership runs out. We, along with most others, correctly assumed a new Boris Johnson Prime Minister ship, and here we are 17 days in as he leads a government with the smallest of majorities, one, underpinned by an ongoing semi formalised pact with the Democratic Unionist Party of Northern Ireland.
As we enter the ‘dog days’ of August what can we see as the political and economic options and scenarios ahead, including the increasing likelihood of a British General Election in September?
With a party mandate behind him, and a new team, including key political players such as Michael Gove and Sajid Javid, Prime Minister Johnson’s core approach is to seek to paint the European Union as refusing to be reasonable by not negotiating a new deal. His new government blames the EU for not falling into line to negotiate during August, despite everyone in the world knowing that that institutionally there is little or nothing that happens in Brussels during August: Emergencies do not include filling home screens as caricature baddies in a British disaster movie!
What happens next? – The Scenarios
With the political promises he made to his own party faithful before they elected him, and the threat of the resurgent, single-issue, Nigel Farage lead BREXIT party at his right flank, the Prime Minister probably has only a narrow range of options:
Scenario 1 – Hard ball
Play rhetorical hard ball through to October 31st and hope that the EU blinks and renegotiates the UK exit deal in ways satisfactory to his government and Parliament.
Likely outcomes – EU refuses to deliver substantive changes to deal; Parliament refuse to countenance no deal Brexit; period of political chaos before an emergency extension to Article 50 or a ‘run-down’ clock exit based on the default legal position that is Exit on 31st October; currency and bond markets respond.
Scenario 2 – Soft ball
Play rhetorical hard ball but then accept a superficial repackaging of what is already on the table, eg new wordings in the political declaration accompanying the existing withdrawal agreement, and then declare a ‘great patriotic victory’ against newly ‘humbled’ Europeans.
Likely outcomes – EU agree to provide rhetorical ‘camouflage’; parliamentary majority difficult but conceivable; Eurosceptic opposition inside Conservative party and Brexit party flank potentially merciless but also institutionally powerless in the short term; medium term collapse of Conservative Party support if deal is perceived as a betrayal.
Scenario 3 – New ball
Play rhetorical hard ball and call a General election early in September to obtain a mandate for a hard Brexit, campaign against the European Union, appealing to ‘faux liberation’ with ‘dog whistle’ undercurrents of latent, unchallenged, post imperial nationalism, racism, and economic populism (unfunded ‘give away’ promises); with new mandate ‘face down’ unmoving EU negotiators.
Likely outcomes – high level of uncertainty as to outcome, with no clear likely winning hand visible in opinion polling plus or minus potential pre or post- election ‘pacting’; if Prime Minister Johnson wins to lead new administration revert to Option 1 hard ball; if not; anything possible from Brexit cancelled, to a new softer Brexit, eg with customs union etc or a further negotiation and or referendum, but a further delay request highly likely.
When do the games stop?
But at what point do the political games have to stop? Former Democratic political adviser James Carville’s said in 1993: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Is that still going to hold true in Great Britain and Northern Ireland?
Current UK core economic performance is not forcing any political re-thinking
Away from the headlines core UK economic performance is resilient and even FDI attractiveness, with some notable sectoral exceptions (Financial Services, Automotive) appears to be holding up, based on broader indicators of attractiveness such as ease of doing business, legal and regulatory order, language and culture. Understandably the UK government points to this as a strength and an endorsement of its path, as much as opponents remind them that Brexit hasn’t happened. Currency markets, which factor in a broader and often less tangible range of circumstances, remain unconvinced and the pound roughly appears to decline against news of further Brexit uncertainty and or more extreme Brexit outcomes such as a ‘no deal’ exit in October.
With Prime Minister Johnson and new Chancellor Javid already offering a series of unfunded promises in infrastructure, policing and the health service as Brexit ‘comforters’, we can easily imagine the kind of scenario where proposals to spur the economy post hard Brexit are stymied by concern about how bond investors would react to increased debt and deficits, and act as the lightning rod between gathering negative sentiment at political adventurism and bad outcomes newly visible on the yield curve.
That makes currency market volatility and the strong correlation to Central Bank interest rate movement as the decisive short-term driver of economic credibility and of political viability. And so far the bond markets that act to price British government future borrowing are like the giants in Roald Dahl’s the BFG: while they are asleep and snoring happily, it’s fine, but you don’t want to wake them up.
So what about the bond markets?
Etched in this UK’s government’s memory is the UK’s ejection from the European Monetary System, the forerunner of the Euro, also in 1993. Indeed, much of the visceral euro skepticism that characterizes large swathes of Conservative government, and Party, dates from the humiliation heaped upon it back then. As the then Conservative Government sought to spin a political ‘yarn’ at home about the UK’s fundamental economic resilience, the global financial system told it where to go, and it only took a few hours before political resolve crumbled. Back to the future anyone?