Tag Archives: political uncertainty

Strong and Stable

The impact of the Brexit vote on UK politics was far reaching and the results of the UK general election have shown just how far reaching. In a post last year following the Brexit vote I said “one lasting impact of the Brexit vote is likely to be on the make-up of British politics”. The graph below shows the political allegiance breakdown of the Brexit vote.

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The Brexit issue meant that the previous political (social class) allegiances of the UK electorate has splintered further by factors such as age and by views on immigration and/or globalisation. This has led to some extraordinary results in Thursday’s election: conservatives winning seats off the Scottish nationalists with swings as large as 16%, a significant number (reportingly 25%) of the collapsed UKIP vote going to Labour, a resurgent left wing Labour winning in some of the wealthiest constituencies in the UK are just a few examples.

Adding to the political volatility is that the Brexit referendum vote has to be implemented by politicians elected under a parliamentary system by a first past the post (FPTP) electoral construct. Given the 4% spread in the Brexit vote, the difference between the seats allocated under a FPTP electoral system as opposed to a proportional representation (PR) one can be material, as the results of the 2015 general election with spreads of +14%/-19% show.

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It is therefore highly interesting to see that the difference between the FPTP and PR systems in Thursday’s election result is significantly less with spreads of +6%/-3%.

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There can be little doubt that the earthquake that the Brexit vote set off in UK politics is far from over and there will be more tremors to come as the Brexit negotiations play out. On the plus side, this election has resulted in a closer parliamentary representation of the UK electorate than the 2015 election. On the minus side, it reflects the uncertainty over the exact type of Brexit that the British electorate wants. And that uncertainty looks set to continue. Strong and stable government in the UK looks to be more aspirational than reality in the coming years.

Anarchy in the UK

Uncertainty reins and the economic impacts of Brexit on the UK and on Europe have yet to become clear. And a big factor in the uncertainty is the political path to Brexit. The UK political class are now trying to rally around newly agreed leadership of their respective parties (assuming Labour MPs eventually manage to get rid of their current leader) and craft policies on how to engage in the divorce negotiations.

A unique political feature of the UK is their first past the post (FPTP) electoral system. The graph below of the 2015 general election shows how the system favours the larger political parties. It also shows how parliamentary representation under FPTP can be perverse. The Scottish SNP, for example, got 4.8% of the vote but 8.6% of the members of parliament (MPs). The right wing little Englander party UKIP, whose rise in popularity was a direct cause of the decision to have a referendum on Brexit, got 12.6% of the vote but just 0.26% of the MPs. Despite its obvious failings, the British are fond of their antiquated FPTP system and voted to retain it by 68% in a 2011 referendum (albeit with a low voter turnout at 42%).

click to enlarge2015 UK General Election Results

One lasting impact of the Brexit vote is likely to be on the make-up of British politics. Much has been commented on the generational, educational and geographical disparities in the Brexit vote. A breakdown of the leave-remain vote by the political parties, as per the graph below, shows how the issue of the EU has caused schisms within the largest two parties. Such schisms are major contributors to the uncertainty on how the Brexit divorce settlement will go.

click to enlargeUK Brexit Vote Breakdown by Political Party

Currently both sides, the UK and the EU, have taken hard positions with Conservative politicians saying restrictions on the freedom of labour movement is a red line issue and the EU demanding that Article 50 is triggered and the UK agree the divorce terms before the future relationship can be discussed.

Let’s assume that all of the different arrangements touted in the media since the vote boil down to two basic options. The first involves access to EU markets through the European Economic Area (EEA) or the European Free Trade Association in exchange for some form of free movement of labour, commonly referred to as the Norway or the Switzerland options. The second option is a bilateral trade agreement with a skills based immigration policy, commonly referred to as the Canadian option (although it’s interesting to see that there is political uncertainty in Europe over how the Canadian trade deal, which has been agreed in principle, will be ratified). I have called these option 1 and option 2 respectively (commonly referred to as soft and hard Brexit respectively).

Let’s assume the negotiations on Brexit in the near future will be conducted in a sensible, rather than an emotive, manner whereby the economic impacts have been shown to be detrimental albeit not life threatening. And both sides come to realise that extreme positions are not in their interest and a workable compromise is what everybody wants. In such a scenario, I have further assumed that the vast majority (e.g. 98%) of remain voters would favour option 1 and I have judgmentally assigned political preferences for each option by political party (e.g. 90% and 75% of Conservative and Labour leave voters prefer option 2 respectively). Based upon these estimates, I calculate that there would be a 56% majority of the UK electorate in favour of option 1, as per the graph below.

click to enlargeBrexit Options Breakdown by Political Party

Now, the above thought experience makes a lot of assumptions, most of which are likely to be well off the reality. Particularly, I suspect the lack of emotive and divisive negotiations is an assumption too far.

What the heck, let’s go one step further in these fanciful thoughts. Let’s assume the new leadership in the Conservative party adopt option 2 as their official policy. Let’s also assume that the Labour party splits into old labour, a left wing anti-globalisation party, and a new centre left party whose official policy is option 1. In a theoretical general election (which may be required to approve any negotiated deal), I guesstimate the result below under the unpredictable FPTP system.

click to enlargeTheoretical post Brexit General Election Result

This analysis suggests a majority government of 52% of MPs with option 1 as their policy could be possible with a grand coalition of the new centre party (Labour break away party), the Liberal Democrats and the SNP. The Conservatives and UKIP could, in this scenario, only manage 35% between them (the old labour party at 9% of MPs wouldn’t tolerate to join such a combination no matter what their views on the EU). The net result would be a dramatic shift in UK politics with Europe as a defining issue for the future.

Yea, right!

Back to today’s mucky and uncertain reality….

 

Follow-up: I thought I was been clever with the title of this post and I only realised after posting it that the Economist used it in their title this week! Is there nothing original any more….

Stuff just happened…

Many, like me, are scratching their heads this weekend about the Brexit vote. Besides the usual little Englanders and other crazies who crave an idealised yesteryear, a significant proportion of sensible people registered their protest in the vote, in a result that is clearly against their and their children’s economic interest. Places in the UK with significant employers dependent upon European access, places like Sunderland, Swindon and Flintshire (with bases for Nissan, Honda and Airbus), voted to leave.  They choose to ignore the consensus advice of the experts and their political leaders, the elite if you like. That’s what makes the outcome of this vote so significant.

In an article two years ago called “The Pitchforks are Coming”, the billionaire Nick Hanauer, who made his fortune on Amazon and aQuantive, wrote the following to his fellow billionaires:

“If we don’t do something to fix the glaring inequities in this economy, the pitchforks are going to come for us. No society can sustain this kind of rising inequality. In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out.”

The thing is, would the populations of other major European countries also register such a protest, even where it was clearly against their interest? The graph below from Bloomberg suggests it could be a distinct possibility.

click to enlargeBrexit Contagion Bloomberg

The problem now is that the EU cannot be seen to give the UK a deal which may encourage more discord. And, of course, the UK has no idea what deal it wants. The political turmoil in the UK government means they can’t even decide when to trigger Article 50 of the Lisbon Treaty, which will likely need a vote in parliament. The economic factors upon which any deal should be decided are illustrated in the exhibit below from a 2015 Open Europe report on Brexit. These economic factors may not play as important a part in the negotiations as they should given the emotive opposition to free labour movement, aka migration, which is a key issue for all Europeans.

click to enlargeOpen Europe Sectors Impacted by Brexit

Matching these interests to the exit options available, as outlined in the exhibit below from Bloomberg, whilst satisfying the diverse opinions of the Brexiteers is the mess that we are now in. Any deal, whenever it arrives, will likely have to be voted upon again by the British public, maybe in the form of a general election.

click to enlargeAlternatives of EU for UK Bloomberg

Before that agreement can be made, we are in for an extended period of uncertainty. Radical uncertainties are a more apt term, with the emphasis on the radical.

Let’s hope that pitchforks are not part of our future.