United Kingdom: Cameron set for another term as Prime Minister bringing potential for Brexit one step closer
May 26, 2015
The right-wing Conservative Party led by Prime Minister David Cameron won the 7 May general elections with an absolute majority against polls’ expectations of a hung parliament, thus bringing the possibility of a British exit from the European Union (Brexit) one step closer. The Conservatives secured 331 seats in the next parliament, which is a much better result than what opinion polls had suggested. The left-wing Labour Party came in second with 232 seats, thus losing 26 seats from the previous parliament. This was the party’s worst performance in over a decade, which prompted Labour leader Ed Miliband to resign shortly after the elections. Nick Clegg—the leader of the Liberal Democrat Party—also resigned after the party ended up with only eight Members of Parliament (MPs), which was notably down from 57 MPs in the 2010 general elections. The Scottish National Party came in the third place with 56 seats. Following the uncertainty in the weeks before the elections regarding the economic and political implications of a hung parliament, the Conservative’s victory clarified the outlook on economic policies in the short-term, with an expected continuation of fiscal consolidation. Nevertheless, in the medium-term, this electoral outcome might bring about significant changes, including the possibility of a “Brexit”.
The government’s agenda for the next five years was outlined at the Queen’s speech on 27 May. The speech pointed out the Conservatives’ key election promises, such as legislations to cap welfare benefits, tax cuts for people with low incomes, as well as the delegation of more power to Scotland in line with the agreement the major parties signed in November of last year. The speech also confirmed a reset of Britain’s relations with the European Union (EU) before holding an “in-or-out” vote expected by the end of 2017.
While keen to see the UK remain part of a reformed EU, it is PM Cameron’s belief that the EU needs to undergo fundamental legislative changes in order to give national parliaments a greater say in EU lawmaking and to control key issues such as immigration and freedom of movement. To that end, the Prime Minister recently held talks with EU leaders in order to build support for the changes he wants to undertake. Cameron has not ruled out an earlier EU referendum in the case that he secures a substantive package of reforms. While there is a possibility for a deal to be reached among EU leaders, failure to fully accommodate the UK’s demands could lead to a “yes” vote in the referendum, which in turn could have important economic implications for both the EU and the UK. Regarding this issue, James Knightley, Economist at ING, comments:
“If the UK were to leave the EU a deal on trade is likely to be agreed fairly quickly. However, foreign investors may not be prepared to wait for clarity on the UK-EU situation, which would put UK asset prices and sterling under pressure, as was the case in the run-up to the Scottish independence referendum. […] Domestic business and consumer sentiment may also be hit and we fear that we could see a general loss of economic momentum with the Bank of England probably raising interest rates more cautiously than we had previously predicted through 2016-17.”
While the surprise victory of the Conservative Party in the general elections can be positively interpreted in the short term, the possibility of a Brexit following the EU referendum could lead to significant political and economic uncertainty in the medium term. In its latest inflation report from May, the Bank of England projects that the economy will grow 2.5% in 2015 and 2.6% in 2016. FocusEconomics Consensus Forecast panelists expect the economy to grow 2.6% in 2015, which is unchanged from the previous month’s estimate. The panel sees GDP expanding 2.4% in 2016.
Author: Dirina Mançellari, Senior Economist