Will the results of the UK’s recent election trigger havoc for the American economy or will it foster more cooperation between two of the largest democracies in the world?
On June 8th, the results of the UK snap election shocked observers the world over. Prime Minister of the UK Theresa May called this snap election in order to secure more seats for the Tories (Conservative party). However, her plan seems to have backfired with the party losing 13 seats and thus their majority in the House of Commons. This has a resulted in a hung parliament. The Tories are looking to form a minority government by forming an alliance with Northern Irelands Democratic Unionist Party.
This result is particularly significant due to the onset of Brexit negotiations. Due to the hung parliament, the UK’s stance is not clear. Theresa May’s status as Prime Minister, to lead the UK through Brexit talks has been heavily contested and thus weakened her authority. This definitely means the talks scheduled for today (the 19th) are going to be postponed until a clear consensus in parliament can be achieved.
Experts have different views on how the hung parliament will affect Brexit talks. Some say that the minority government will have such a hard time getting legislation past the house that there might be need of another election in the fall. This is because historically, hung parliaments in the UK have not fared well. The rise of the Labour Party with its increasingly popular leader Jeremy Corbyn has shown it is a force to be reckoned with. With infighting within the Tories (conservatives) and a weakened Prime Minister another election in Fall could be anyone’s game. If Labour were to win it would dramatically change the direction of negotiations. However, the possibility of a Bremain referendum is completely of the table as both leading parties said they would carry on with Brexit.
If the minority government stands, then experts say that they could be moving towards a softer Brexit. Theresa May’s original ‘Hard Brexit’ entails leaving the EU single market, trading with the EU under World Trade Organization (WTO) rules and complete control over immigration.
A ‘Soft Brexit’ is basically a deal which is as close to the existing relationship with the EU as possible. This is preferred by many people who wished to remain in the EU before the Brexit vote. It would mean that the UK would remain a part of the EU single market, trade with the EU would be tariff free and since the UK would still be in the customs union, UK exports would not be subject to border checks. However, in return the UK would need to give payments to the EU and observe the four freedoms of the free movement of goods, services, capital and people. The UK would also lose its seat on the European council due to the leave vote. Examples of this type of deal can be seen with Norway, Iceland and Lichtenstein. Theresa May now faces pressures from both sides – pressure from within Parliament from parties wanting a Soft Brexit and pressure from Hard Brexiteers who will protest if she gives up any part of the original agenda.
What remains certain is the increased amount of uncertainty that these elections have brought about. American companies who have bases in the UK are in a tough spot as they attempt to predict their futures to save business. U.S. Federal Reserve Chair Janet Yellen forewarned when Brexit happened that it “would negatively affect financial conditions & the U.S. economy”. However, Nationwide Chief Economist David Berson remained skeptical on the impact Brexit would have on the American economy. He said in an interview with Fox Business that the impact was overstated. He may be right as the UK only accounts for less than 4% of U.S. exports and just about 4% of U.S. imports. However, it is still important to examine other factors that may affect the U.S. and its firms.
A big factor that will come into play when considering the U.S. economy is consumer confidence. This is due to an economic concept coined by John Maynard Keynes (an important economist) called “Animal Spirits”. It basically describes the phenomenon that when people and firms prepare for the economy to go bad, they actually contribute to the economy going bad whether it was initially going bad or not. Some experts have said that Brexit will hit consumer confidence. This will increase market volatility and slow down U.S. economic growth.
The biggest factor for the U.S. will be the strengthening of the dollar after Brexit. This will be great for American travelers but will be very harmful to U.S. trade. The strength of the dollar is accounted for by a projected fall in the value of Sterling (British pound). This would make U.S. products in the UK more expensive and less competitive in that market. Tech companies like Apple and global brands like Nike and Coca Cola are set to be hit by this.
A possible silver lining to all this is that with the UK economy in turmoil, the spot for the financial capital of the world may be up for grabs. Experts claim that whether a ‘Hard’ of ‘Soft’ Brexit occurs, Foreign Direct Investment in the UK will decline. Some argue that with the increased uncertainty in the global financial market, people will flee to safer investments. Safer potentially means American assets as British and European assets will be seen as riskier. And with pundits projecting that companies will be shifting their resources from the UK to mainland EU territory in order to keep access to the EU market, London’s status as the world’s financial capital would be greatly diminished. Furthermore, while people may be transferred to Frankfurt, Paris and other European cities, New York is likely to gain business in the transfer of financial trading centers and wealth management. Given that New York real estate is seen as a safe place to hold wealth, London’s loss may be New York’s gain.
Theresa May’s snap election is disastrous for her position as Prime Minister and her party. For the onset of Brexit negotiations, it has provided uncertainty of what UK really wants out of the Brexit deal and could potentially slow down and delay the negotiations. Though the United States may not feel the impact as much as the immediate parties involved, many U.S. firms having bases in the UK will anxiously observe the increasingly complex situation to figure out what to do next. If some experts are right, the election will result in a softer Brexit which means less adjustments to be done by U.S. firms. However, no one can say this for certain. The only thing that’s certain is the uncertainty and what that means for the U.S., UK and the world.