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13 June 2017

Dissecting the Brexit Election

The election on Thursday 8th June was intended to consolidate the government’s mandate for a “hard Brexit” emphasising the political imperatives of border control and casting doubt on the economic benefits of the Single Market. 

However, while 80% of UK voters cast their ballots for parties committed to Brexit, the mandate that Theresa May sought for “her” Brexit failed to materialise. Instead the Tory party lost seats against a resurgent Labour party, seemingly assembling a coalition of voters against the isolationist vision of Mayism. The potency of their “social vision” was so effective that traditional class and economic divides gave way to new boundaries; metropolitan vs rural, internationalist vs nativist, young vs old. This new emphasis on social values was encapsulated by the shock Labour win in Kensington, one of the wealthiest constituencies in the country, and in particular by the youth turnout across the country.

What does the election mean for Brexit:
In the short term the absence of a Tory majority only adds to the uncertainties firms face in the City. Far from consolidating the government position, the Conservatives risk entering an all-out civil war.  Peering through the rhetoric, it is clear that the likelihood of a “softer Brexit” has significantly increased. However, simultaneously, the risk of the UK crashing out without a deal also appears to have risen, with a weakened UK government contrasting sharply with political strength in Germany and France.

Scottish Conservatives:
The success of the Scottish Conservative Leader Ruth Davidson may signal the emergence of a “Soft Brexit” standard bearer within the Conservative Party.

Whilst the Tories lost ground in England, Davidson’s party saw a resurgence in popular support. Her statement on Saturday morning sounded a profoundly non-Mayist note, suggesting her Scottish MP’s were committed to an “open” and “trade protecting” Brexit.

Some liberal Conservatives such as Osbourne, Soubry, and Morgan have gone further, suggesting that Theresa May is on “death row” and looking to force a revised set of priorities renewing the emphasis on the economic and social imperatives of access to the Single Market.

The absence of a clear strategy, and the ensuing turmoil within the Tory party, only heightens the challenge of the Brexit negotiations.

The DUP:
Without a majority, the Conservatives have reached for an informal “confidence and supply” agreement with the Democratic Unionist Party of N. Ireland.

While other DUP priorities are probably more front of mind, there is a possibility that this partnership will encourage a Brexit which accommodates the free flow of goods, services and people across the border with the Republic.

However, more importantly, any alliance is likely to be a looser arrangement than a permanent coalition. As such the likelihood of a collapse in the government, resulting in either a Conservative leadership battle or even fresh elections during the negotiating period are material, and in the meantime UK negotiators will know they do not have the unequivocal backing of Parliament. This only heightens the prospect of a failure to achieve a deal within the two year time frame. The prospect of crashing out of the EU without any transitional arrangements is widely recognised as being the most damaging scenario for financial firms, but one which is receiving increased focus.

In summation; the outcome of the Brexit negotiations are more uncertain than ever. There remains no guarantee that a “Softer Brexit” will contain the fabled passporting rights on which the City of London relies. The likelihood is a softer final outcome, but the imperatives for firms to prepare for every eventuality, including the worst-case “no deal scenario”, have only increased.