United Kingdom – Brexit Uncertainty Heightens Risk

Prime Minister Theresa May faces a rebellion by hardline Brexiteers in her Conservative Party, who have threatened to vote down her compromise plan for guiding the UK out of the EU in March 2019 with limited disruption to the country’s existing relationship with the bloc. The conflict has already prompted the resignations of the government’s Brexit “czar,” David Davis, and Foreign Secretary Boris Johnson. If approved as written, the plan would have established a “facilitated customs agreement” that would maintain free-trade in goods between the UK and the EU, and eliminate the need to restrict movement across the border between Ireland and Northern Ireland, while enabling the UK to impose restrictions on inward migration of people from EU member states and pursue trade agreements independently of the EU.

That is not nearly enough of an “exit” to satisfy the hardliners, and was in any case rejected by negotiators in Brussels. The EU remains open to the proposed customs arrangement, but has conditioned an agreement on the UK’s acceptance of the principle of free movement of labor, and rejected the demand of hardliners that the UK be granted a unilateral “opt out” from any deal concluded over the coming months.

May has dismissed speculation that she will call a snap election in a bid to secure her leadership status, and the draft budget for 2019 unveiled by Chancellor of the Exchequer Philip Hammond in late October certainly has the look of a pre-election spending plan. In addition to tax cuts for an estimated 32 million British voters, the budget includes a hefty increase in health spending and outlays to finance affordable loans for business.

At this point, it is not clear that May can count on majority backing even for a temporary arrangement thrown together to buy some time during a transition period, and the uncertainty creates a risk of volatility in the financial markets as the deadline for Brexit approaches. The possibility of May hitting a snag that forces an early election only adds to the uncertainty. Poll data shows support for both the Conservatives and the main opposition Labour Party, which has tacked left under leader Jeremy Corbyn, fluctuating near 40%. Of possible significance, Labour has voted to campaign on a pledge to hold a second referendum on Brexit in the event of an early election triggered by May’s failure to secure approval of a deal with the EU.

In the meantime, firms operating in the UK lack a firm basis on which to make investment decisions, and May’s inability to build consensus behind an exit strategy increases the likelihood that the early post-Brexit period will be marked by costly disruptions to normal trading activity. Such a scenario would likely be accompanied by an increase in the risk of political instability, as the devolved government in Scotland pushes for another independence referendum and economic troubles in Northern Ireland arising from border restrictions undermine the foundation of the peace that has prevailed there for the past two decades.

Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This excerpt is from our latest Political Risk Letter publication, for more information please contact us at (315) 431-0511 and sales@prsgroup.com

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