In one of the tightest elections in the United Kingdom, the Conservative Party emerged victorious with a highly unexpected majority win, allowing the party to govern without a need for a coalition or alliance with other parties. The outright win clears all the uncertainties of a political stalemate but refocuses attention on the following two concerns:
- The United Kingdom’s European Union (EU) membership “In-and-Out” referendum (or vote)
- A possible repeat of the Scottish independence “yes-or-no” referendum.
Firstly, while the re-election of the Conservative Party into office means policy continuity, the risk is the materialization of Prime Minister and Party leader David Cameron’s pre-election promise to allow the EU “In-or-Out” referendum (“Brexit”) by 2017. Underlining our concern, Societe Generale SA (Bloomberg report, May 6th), highlighted that a Brexit is the “biggest risk to the (UK) economy”, threatening to knock 0.5% a year off economic growth.
Secondly, the Scottish National Party’s landslide win in Scotland with a sweep of almost all the seats (56 out of 59), renews the question of a breakup of the United Kingdom if Scotland orchestrates a second independence attempt. Last September, Scottish voters narrowly rejected independence with a mere 5.3% tipping the scale to the “No” camp. In return for keeping Scotland in the United Kingdom, Prime Minister David Cameron promised to “transfer” more taxation and spending powers to the Scottish Parliament. More concessions would have to be made in favour of the Scots.
Looking beyond the domestic unity issue, we believe that the second-term parliament would continue to demonstrate economic common sense. The importance and advantages of direct access to a common trading market, which is also the world’s 2nd largest market after the United States, cannot be ignored by rational voters. The “In-or-Out” referendum is inevitable and it is all up to the negotiation skills of Prime Minister David Cameron to wrangle more constructive economic and even political changes from the EU. With the threat of another country potentially quitting the EU (besides Greece), the EU has more incentive (and stress) to consider changes or incorporate more flexibility in its “one-size-fits-all” rules and regulations.
We deem Brexit, a threat to the viability of the EU (and also European Monetary Union – countries that use euro), as a low possibility. Despite the potential removal of a stress factor on the euro, we expect euro to trade weaker as the European Central Bank continues its asset purchase program.