LONDON — In a global economy amply stocked with anxiety-provoking variables, Britain just added another.
An
election designed to bolster the government’s mandate instead yielded
fundamental confusion over who is in charge as the nation prepares for
fraught negotiations in its pending divorce from the European Union.
Prime
Minister Theresa May had called the election on the assumption that her
Conservative Party would emerge stronger, solidifying her negotiating
position. Instead, the electorate’s stunning rebuke of her leadership
has left her relying on the support of a small, socially conservative
right-wing party in Northern Ireland in order to form a government,
intensifying uncertainty about future commercial dealings across the
English Channel.
Investors took the latest turmoil in Britain as a prompt to unload the British pound.
As European markets began trading on Friday, the currency slipped as
much as 2 percent against the dollar. The country’s benchmark stock
index, however, gained around 1 percent. Analysts said that rise
occurred because many of the companies that make up the index do a
majority of their business overseas and therefore benefit from a cheaper
pound.
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And
yet the shocking electoral outcome also has the potential to diminish
the looming economic costs of Britain’s exit from the European Union,
commonly known as Brexit.
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It
enhanced the possibility that a chastened government led by Mrs. May
would now strike a less confrontational approach with Europe while
seeking a way to keep Britain within the bloc’s large single
marketplace.
As
Britain prepared for its face-off with Europe, the prime minister had
been adamant that her country would impose strict limits on immigration,
a posture seemingly enhanced by recent terrorist attacks.
Yet limiting immigration appeared certain to cost Britain inclusion in
the European single market, a swath of the globe stretching from Ireland
to Greece and holding some 500 million relatively affluent consumers.
The
European authorities have consistently emphasized that Britain’s
continued inclusion in the single market requires that it abide by the
bloc’s rules — not least, a provision that people be allowed to move
freely within its confines.
In
the parlance of the moment, Britain appeared destined for a so-called
hard Brexit, in which it would sever itself from the single marketplace,
raising the prospect that tariffs could ultimately constrain trade
across the English Channel.
This
redrawing of the basic geography of European commerce was playing out
just as President Trump was disavowing regional trade deals across the
Atlantic and Pacific, while variously threatening trade hostilities with
Canada, China, Germany and Mexico.
This election could change that trajectory.
It
is unclear how long Mrs. May’s government will hold together — even
with the support of the Democratic Unionist Party from Northern Ireland,
it retains a narrow majority in parliament. But the unexpected new
political configuration might compel Britain to relinquish its pursuit
of immigration limits in an effort to keep itself within the single
market.
In
short, the election has complicated the assumption that Britain is
headed irretrievably toward the exits, producing a moment in which
seemingly everything may be up for reconsideration.
Those
who have favored Britain remaining within Europe, or at least softening
the terms of its exit, now have “an expectation, or at least a hope,
that cooler heads will prevail,” said Jeremy Cook, chief economist at
World First, a company based in London that manages foreign exchange
transactions. “It may be that hard Brexit has been rejected by the
electorate.”
How ‘Brexit’ Could Change Business in Britain
Britain has started the clock on leaving the European
Union, and will be out of the bloc by March 2019. Here is how “Brexit”
has affected business so far.
And
yet, perhaps counterintuitively, the election also appeared to increase
the possibility of an unruly Brexit in which Britain crashes out of the
European Union absent a deal governing future interaction.
Mrs.
May formally initiated the proceedings in March, setting the clock
ticking on a two-year negotiating window in which Britain and Europe
must settle financial terms and strike an agreement on trade. That was
always going to be complicated, subject to the influence of domestic
politics in the other 27 members of the European Union.
Now,
such talks are to unfold in an atmosphere in which she must tame an
unruly party whose fiercest advocates for Brexit may be emboldened by
her narrow majority, with the prospect of still another election later
this year. All of which heightens the possibility that the two-year
clock may expire without a deal, a scenario known in Brexit vernacular
as going over the cliff edge. As the metaphor implies, it could get
ugly.
Britain
now sends nearly half its exports to the European Union, a flow of
goods that would be impeded by its departure from the single market.
London’s future as a dominant global financial center
would be imperiled. Global banks have established regional headquarters
in the city, relying on so-called passports that allow them to serve
clients across Europe as if the bloc were one country, with a single set
of regulators. If Britain abandons Europe without a deal, the banks
would have to satisfy regulators in multiple countries. Many of the
transactions they now handle in London for European clients would be
effectively illegal.
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Worries
about the economic impact of Brexit have been weighing heavily on the
pound, which plunged after the referendum last June that unleashed
Brexit. With Britain at risk of suffering barriers to trade, it has lost
some of its considerable luster as a place for companies to invest,
making its money a less desirable currency to hold.
A
weakened pound has, in turn, translated into rising prices in Britain —
on food, gasoline and imported components used by domestic factories.
All of this has reinforced concerns about the fate of the economy.
The scene in Britain has played out just as other sources of uncertainty have been gnawing at the global economy.
Beyond his bellicose threats of confrontation on trade, President Trump revoked American participation in the multinational accord struck in Paris
to combat climate change, heightening a sense that a global order long
shaped by American engagement is now fundamentally uncertain.
Perpetual
existential threats to the euro, the currency shared by 19 European
countries, were eased last month by the election in France, which saw
the defeat of Marine Le Pen,
who had threatened to pull her nation out of the common currency area.
But elections to be held in Italy this year or early next year may
elevate the Five Star Movement, which has been gaining strength in part
because of talk of scrapping the euro.
Add
to the list of variables the fact that Britain — with the world’s
fifth-largest economy — is scheduled to sit down with European leaders
to haggle over Brexit just days after its leadership suffered a major
setback at the polls.
The
decisive question is whether this latest wave of uncertainty marks a
step back from Brexit, one that could restore a sense of calm, or
whether it means more chaos at a time when the world craves capable
leadership.
“The
outlook for Brexit is now very unclear,” Mujtaba Rahman, managing
director for Europe at Eurasia Group, a risk consultancy, said as the
sun rose over London. “The odds of a softer Brexit have increased as a
result of the outcome last night. At the same time, it also does
increase the odds of a cliff-edge Brexit.”
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