Interpreting the British Election Result

Like most other pundits, I was wrong in my prediction last Thursday that the Conservative Party would win a landslide victory in the British General Election.

In fact, although they emerged as the largest party in Parliament, they failed to secure a majority, worsening their position following an election they chose to hold. I’ll explain more about what this means for the British Pound later, but first, a few words about how the British political system works so future scenarios can be understood.

Britain is divided into 650 districts which each elect a member of Parliament. Whoever wins the most votes in one district becomes the member for that district. If that person dies, a special election is held quickly to replace them. A government is formed from Parliament by a party or coalition of parties that can win a majority in crucial votes. The Prime Minister is the leader of this majority. If the government loses a crucial vote, it must resign and usually a new general election is held. If a member of Parliament is too ill to show up to a vote in Parliament, their vote cannot be counted. As the 4 members of Parliament from the Sinn Fein party in Northern Ireland never attend Parliament (because they do not recognize that Northern Ireland is part of Britain), to form a government it is necessary to control 324 seats in Parliament.

The result: the ruling Conservatives won 317 seats and the only other party which usually votes with them, the Democratic Unionist Party (from Northern Ireland), won 8 seats. The two parties are in talks to formalize a deal but even if it works, it is wafer thin, and could be eroded if these seats are lost due to deaths and special elections, within a year or two. It is a wafer-thin majority. Such a deal is problematic due mainly to issues around the Irish peace deal.

The Prime Minister is clinging onto power and must begin negotiations with the EU over Brexit terms in a matter of days. Yet everything is on the table, it is even possible that the Brexit process could be reversed. It is an absolute mess and it appears that most of the Prime Minister’s party want her to resign as soon as she safely can, probably a few months from now.

The opposition Labour Party is on a roll after its unexpectedly strong showing, now effectively controlled by a faction that could fairly be described as communist (perhaps the Greek Syriza party is a more useful comparison). They are a whisker away from power (although they would also be in extremely weak position in Parliament). However, most of the party’s members in Parliament do not belong to this far-left faction and would like to get rid of the leader, Jeremy Corbyn, if they only could (they have already tried and failed, as the leader is elected by members nationwide). The country is bitterly divided down the middle, by age, with Labour winning 63% of the vote among the under-35s, while the Conservatives won 59% of the over 55s. Jeremy Corbyn

I warned that the British Pound would fall as a “hung Parliament” (where no party commands a majority) became apparent, yet the Conservatives would have to be more than 10 seats short for a huge drop to happen. In fact, they were less than 10 seats short, and as such the Pound fell by less than 2%. I think it continues to look very shaky, and will be extremely vulnerable to political developments. If the Conservatives soldier on with a tiny majority in coalition, the Pound should fall further. This is the most likely scenario. If somehow Jeremy Corbyn becomes Prime Minister, the Pound will fall substantially. The only positive scenario I see for the Pound would be if a majority from both major parties break with their leaders to form a “grand coalition”. This could even prevent Brexit, or ensure a Brexit in name only. It is extremely unlikely but the situation is so weird it would take much bravery to rule anything out.

It is a fascinating time for political junkies. As a final word on the British Pound, I can only say I have converted almost every Pound I own into other currencies. In other words, I am completely short GBP/USD for the long term.

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