Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

U.K. Election Sows More Doubt Than Hope

Posted by hkarner - 9. Juni 2017

Date: 08-06-2017
Source: The Wall Street Journal By Simon Nixon

Whether Theresa May has the skills to reach a good deal with the EU seems less clear than two months ago

It seems strange to recall now, but when Theresa May announced her plan in April for a snap general election in June, the markets reacted with relief. The pound rallied and stocks rose. The expectation was that the British prime minister would secure a landslide victory over Labour, giving her a mandate to face down hard-line Brexiters prepared to risk the U.K. crashing out of the European Union if no deal is reached in the next two years.

The market’s optimism was shared in Brussels and other European capitals, where there were concerns that Mrs. May lacked the political capital to make the concessions they believed necessary to reach the “deep and special partnership” she has said she seeks with the EU.

Seven weeks later, it is hard to be so optimistic about Britain’s outlook. Though the polls have tightened dramatically over the course of the campaign, Mrs. May is still widely expected to win with an increased majority and the pound remains above its level when the election was called. But the campaign has altered the political landscape in unexpected ways that could have profound consequences for the economy.The first concerns Brexit itself, billed as the point of the election but barely featured in the campaign. That absence was surprising because the nature of the U.K.’s exit from the EU is the single most important question determining the British economy’s long-term fortunes.

Whoever wins the election will soon face an essential choice. They will have to decide to what extent Britain is willing to continue abiding by EU rules as the price of securing favorable access to EU markets, by far the most important ones for the British economy.

The U.K. could minimize the economic disruption of Brexit by striking a trade deal underpinned by a dispute-resolution mechanism that effectively requires it to accept EU rules and judgments, as Norway and Switzerland do. The price, however, would be the U.K. becoming a rule-taker rather than a rule-maker, restricting the scope of any trade deals it might strike other countries.

If the U.K. insists instead on absolute legal sovereignty, it can expect significant new barriers—in the form of tariffs and regulations—to trade with the EU, but would also have greater freedom to strike new trade deals with the rest of the world.

The optimistic assumption at the start of the campaign was that despite Mrs. May’s insistence that Brexit should mean an end to the jurisdiction of the European Court of Justice in the U.K., she would find a legal formula to allow the U.K. to take the first option, overriding those in her party who want a complete break with the EU. But that assumption looks less safe following a dismal election campaign that even close colleagues acknowledge has left her damaged.

Her U-turn on a flagship policy on social care just four days after it appeared in her manifesto has undermined her claims to offer “strong and stable” leadership, instead raising doubts about her ability to withstand pressure. Meanwhile, her fondness for secrecy and banal sound bites—hailed just a few weeks ago as brilliant statecraft—now looks like cover for indecisiveness, inflexibility and an inability to answer legitimate questions.

Far from enhancing her political capital, the election has raised doubts about whether Mrs. May has the political skills to deliver a deal with the EU. And that, in turn, raises the prospect of not only a hard Brexit, but a chaotic one.

The election has also shifted perceptions of what a post-Brexit U.K. will look like. To succeed in a globalized world, an economy needs to make itself as attractive as possible to global capital and talent. This is particularly important for a country that has just opted to undermine its competitiveness by embarking on a path that will inevitably result in new barriers to trade with its closest partners.

Yet the election appears set to result instead in a leftward lurch by both main parties that risks making the U.K. less attractive to investment.

For her part, Mrs. May has committed to reduce net migration to below 100,000 over the next five years, raising concerns that businesses won’t be able to recruit the workers they need. She is also proposing new red tape on businesses, including new powers for the government to intervene in corporate takeovers, block share buybacks, give workers a bigger role on company boards and cap domestic energy prices.

Labour’s manifesto goes much further, with plans to nationalize energy, water, rail and postal services, funded by substantial increases in taxes on corporations and high earners. Worse, neither party “has set out an honest set of choices” over their tax and spending plans, according to the Institute of Fiscal Studies, raising questions about what will happen if gloomier Brexit forecasts materialize.

Optimism about the Britain’s prospects now rests on a bet that Mrs. May will win the election and face down hard-line Brexiters in her party while at the same time yielding to free marketeers opposed to her interventionist policies.

The risk is that this election has left the U.K. facing the worst of all worlds: a more hostile trading environment and an economy less equipped to cope with it.

 

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