U.K. election shock could delay and soften Brexit

Prime Minister Theresa May called a snap U.K. general election in the hope of strengthening her hand in negotiations to take Britain out of the European Union.

But that gamble has backfired: Rather than handing May a landslide victory, the election has left no party with a clear majority, throwing into doubt who will govern Britain.

So what does that mean for Brexit, the single issue that could determine the economic prospects for the U.K., and the prosperity of its people for years to come?

Could Brexit be delayed?

Following last June’s Brexit referendum, the process officially started in March when May served formal notice of Britain’s intention to leave the EU.

That started the clock ticking on a two-year period that should end in March 2019 with the U.K.’s departure.

Detailed negotiations haven’t yet started, however. The EU wanted those to begin on June 19, but they could be delayed if an inconclusive election leads to political turmoil.

“We don’t know when Brexit talks start. We know when they must end,” tweeted Donald Tusk, president of the European Council. The EU’s chief Brexit negotiator, Michel Barnier, said the talks should begin when the U.K. is ready.

EU negotiators will want to know who they’re dealing with.

“If this is a minority Conservative government, then it might be a government that doesn’t last very long, and we might head for another election,” said Tim Bale, professor of politics at Queen Mary University of London.

“I think the EU might be very reluctant to agree anything until they know who the government in the U.K. will be for the next three or four years,” Bale said.

The March 2019 deadline for leaving could be pushed back, but it would need the agreement of all 27 of the remaining EU members.

Why does that matter?

Business and investors want clarity about the terms of Brexit as soon as possible, because they need to know what kind of access U.K. companies will have to Europe’s vast free trading area in future.

Already, some banks have started moving jobs out of the U.K. and into other European countries because they fear they’ll lose business after Brexit if they don’t.

Ryanair has switched its investment focus away from the U.K., and other companies are reconsidering their plans.

“What really matters is whether people put investment on hold,” said Tim Besley, professor of economics and political science at the London School of Economics. “And there’s already uncertainty about Brexit … and we will see more uncertainty. We have no clue on what’s going to come out of Brexit.”

Millions of EU citizens living and working in the U.K. also need certainty about their status. Recent data showed some are not prepared to wait any longer, and are starting to leave.

The shock election projection sent the pound lower against the U.S. dollar and other currencies. The U.K. economy has already suffered a sharp slowdown — it was the weakest performer in Europe in the first quarter — and prolonged uncertainty over Brexit could do further damage.

Will Brexit be reversed?

That is highly unlikely, although not impossible.

May’s Conservative Party and the main opposition Labour Party led by Jeremy Corbyn both campaigned in this election on a commitment to honor the result of the June 2016 referendum, when 52% of voters backed Brexit.

And those two parties together have taken a bigger share of the overall vote than in the 2015 election.

A softer Brexit?

However, the result could have a big impact on the final shape of Brexit. The lack of a clear majority for any party could force a more conciliatory approach.

“If a hung parliament forces a cross party compromise it could lead to a softer Brexit strategy, and may turn out to be positive in the long run after some serious initial confusion,” said Kallum Pickering, economist at Berenberg bank.

May had promised a clean break — or “hard Brexit” — taking Britain completely out of the EU’s common trading area and reducing the number of people coming to the country from the EU.

She had even threatened to walk away from Europe without paying a hefty divorce bill or striking a new trade deal — the nightmare scenario for business and the economy.

Europe’s top economic and finance official, Pierre Moscovici, said the election result was likely to have an impact “on the character of the negotiations.”

Labour won’t try to reverse the decision to leave the EU, but it does want to retain “the benefits of the single market and customs union.”

Some analysts said it was hard to see May’s Conservative party softening its line significantly on remaining in the EU single market because it would mean accepting the free movement of people and that would make it much harder control immigration.

But crashing out of the EU without some kind of deal now looks much less likely.

“This result certainly doesn’t mean that you are going to the Brexit negotiation with the kind of stand Theresa May and [Brexit secretary] David Davis had,” said Patrick Dunleavy, political science professor at the London School of Economics.

“The ‘we can walk without a deal’ strategy now looks completely dead.”

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