What Looms Large Over Theresa May? Seemingly Everything

Theresa May, the lead in tragic play that is Brexit negotiations, continues to be hit by a variety of challenges. Business, the future of the UK economy and a resurgent Labour party are all pressing on the Prime Minister.

Like King Lear, the Prime Ministership is proving to be a lot more maddening than expected.

To recap the current state of Brexit negotiations: In the latest round in Brussels, EU and British negotiators could not agree to an exit bill. This is the biggest sticking point before moving on to trade and transition talks. The future relationship between the two is perhaps the most consequential part of the ongoing negotiations, and both sides are certainly keeping the March 2019 deadline in mind.

Read our commentary on October’s Brexit negotiations: Why a Brexit Deal Remains a Leap of Faith: Theresa May’s Big Week of Negotiations

On the divorce settlement, there is some good news and some bad news for Theresa May. The good news? It looks like Theresa May has accumulated the political support to write a big check to Brussels. According to The Times, the UK government may be willing to pay €60bn to the EU to break free of its financial obligations.

The bad news? Everything else seems to be crashing down on Theresa May at once, just as she sets to the stage to move the negotiations on to trade.

So in addition to the Brexit negotiations, what exactly is giving the Prime Minister heartburn?

Business

The uncertainty from the Brexit negotiations have companies in Britain scrambling for backup plans:

  • According to the Telegraph, 60 percent of UK businesses will have a contingency plan in the case of a no-Brexit deal by March 2018. That would directly result in jobs moving across the English Channel.
  • Reuters recently reported that 63 percent of EU-based companies are expected to move part of their supply chains out of the UK. That’s an increase from 44 percent just 6 months ago. That’s in spite of a weaker pound, which makes investment even more attractive for companies in the Eurozone.
  • According to the Bank of England, the post-Brexit landscape isn’t one that is favorable for investment. According to Bloomberg, “The central bank predicts that investment will be about 20 percent lower now than it expected before the referendum in June 2016.”

The good news: If the divorce bill is finalized and a transition agreement can be made., 75 percent of those no-Brexit planning businesses will reverse course.

The Future of the British Economy

  • A recent paper from Thomas Sampson of the London School of Economics, titled “Brexit: The Economics of International Disintegration,” presents a dire warning for the UK. According to Sampson, the costs of Brexit will equal 1 to 10 percent of UK per capita income.
  • Sampson also calculates that “the EU accounted for 44 percent of UK exports and 53 percent of its imports.” If there are higher costs to trade with the EU, that could very well fall hardest on lower income Britons, who are generally the biggest beneficaries of cheaper goods imported from abroad.
  • The UK is already seeing higher import costs from a drop in the value of the British pound. In the short-run, that effect would likely dissipate. But in the long-run the UK faces higher import costs and more expensive goods because manufacturers can’t specialize in production. All of those garments made in lower-wage Eurozone countries? They’ll either be hit with high tarriffs, or they’ll have to be made in the UK. That is a direct hit to the wallets of British consumers.
  •  The impact of the pound and inflation have already influenced monetary policy. Mark Carney, the Governor of the Bank of England, led the central bank’s effort to raise interest rates last week to fight inflation. This is in the face of declining real wages in the UK economy, and higher rates could sink short-term economic growth.
  • Gavin Jackson of the Financial Times notes the productivity issue vexing the Bank of England. He writes, “They have changed their minds because labour productivity growth has disappointed over the last decade. The UK produced no more in an hour of work in 2017 than it did in 2007, the OBR and the BoE now believe this is the new normal and we will not return to pre-crisis rates of growth.”

Sexual Harassment Charges in May’s Cabinet and Tory party

  • Last week, UK Defense Secretary Michael Fallon resigned after sexual harassment scandal.
  • This week, Theresa May’s deputy Damian Green faced allegations of having pornography on his Parliament computer and other incidents of “inappropriate behaviour.” Another Tory, junior whip Chris Pincher, was also alleged to have exposed himself to a political activist 16 years ago.

Of course, this isn’t anything that directly impacts policy. But it only hurts the confidence that both Tories and the British public have in May’s leadership.

Jeremy Corbyn’s Labour Party

As mentioned above, businesses are grappling with long-term plans if there is no Brexit agreement. Interestingly – and surprisingly, given Corbyn’s own beliefs on the relationship between government and business – businesses are seeing Labour as the more reliable partner, and are cozying up with the party. As noted in the Oct. 25 Bloomberg Businessweek article “Business is Building Bridges to Labour,”

Even Shadow Chancellor of the Exchequer John McDonnell, who a few months ago was criticized by some in his own party for saying “there was a lot to learn” from Karl Marx’s Das Kapital, is being courted by, and himself seeking out, big business. Two lobbyists speaking on condition of anonymity say that access to McDonnell has become the top demand from their clients, which include global financial services firms as well as retail companies.

Clearly British businesses have sub-optimal choices in the UK these days. European cities like Paris and Frankfurt are only making bigger oeuvres to draw companies to the relative stability of the continent.

Is the Lady for Turning?

There are contingency plans, of course. Betting odds from the website Paddy Power imply:

  • A 20 percent chance (4/1) the UK applies to rejoin the EU by 2027
  • A 12 percent chance (7/1) another EU referendum is held before April 2019
  • A 2 percent chance (50/1) Theresa May performs a Brexit U-Turn and announces the UK will remain

Cover Photo: The Noun Project

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