Streetwise: Don't Bet Money on Britain's Broken Politics

By James Mackintosh Features Dow Jones Newswires

"I don't know what I want, but I know how to get it," snarled the Sex Pistols' Johnny Rotten in Anarchy In The UK. A surge of voter support for another 1970s throwback , Labour leader Jeremy Corbyn, has plunged the U.K. into chaos, while leaving observers scratching their heads as to what the country actually voted for.

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The snap election on Thursday backfired badly on Prime Minister Theresa May, leaving no party with overall control in Parliament and making a mockery of her "strong and stable" campaign theme. But the voters didn't attach a message to the brick they chucked through the political window.

The core result seems to be that Britain is evermore divided, making governing harder. With negotiations over Britain's exit from the European Union just about to start, the country has no government and no mandate from voters for the difficult choices that have to be made. Investors can be forgiven for being confused too.

Consider just three aspects of the results:

-- The governing Conservatives gained about the same share of the national

vote as in Margaret Thatcher's 1983 landslide victory. Yet there is

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already talk within the party of how to replace Mrs. May, who is no Iron

Lady.

-- The opposition Labour Party gained about the same share of the vote as in

Tony Blair's 2001 (second) landslide victory. Yet Mr. Corbyn is detested

by many of his own MPs, and has no prospect of becoming prime minister.

-- The Liberal Democrats fought a campaign focused on having a second Brexit

referendum, and gained seats -- but their share of the vote fell. Voters

presented no mandate to reverse the Brexit decision.

Investing is all about decision making under uncertainty, but the uncertainty runs much deeper than usual now. The discussion isn't about what Britain might wring out of its former EU partners at the negotiating table in Brussels, but what it will even ask for.

If the Tories are to remain in power they will have to rely on Northern Ireland's Democratic Unionist Party for votes, and they stood on a pledge to stay in the single market -- something Mrs. May ruled out.

Traders responded by dumping the pound. Sterling hit a low of $1.264 on Friday morning, down 2.4% from where it was before the first exit poll. And there is no positive story about Britain coming from equities.

The Brexit negotiations drown almost everything, and the medium-term outcome for sterling turns on a binary decision: will the U.K. accept EU immigration to secure single market access, or not? Such a move is anathema to many Tories, including Mrs. May, and seems highly unlikely.

In the longer term an almost equally divided electorate combined with Britain's first-past-the-post voting system means a weak government, and a weak government won't take hard decisions. Government spending won't be cut as much, difficult choices about retirement and health care will be put off again, and more inflation will have to be tolerated as a result.

This isn't the 1970s though. London may have led the ABBA revival, but unlike the Seventies Britain has a competitive labor market and remains open to trade and investment. Inflation is rising and back above the Bank of England's 2% target thanks to the plunge in the pound in the past year, but is still only 2.7% -- a far cry from the 20%-plus hit in the Seventies.

Britain is down, and it is going to hurt. But it is a long way from Johnny Rotten's ironic God Save The Queen lyric: "There is no future in England's dreaming."

Write to James Mackintosh at James.Mackintosh@wsj.com

(END) Dow Jones Newswires

June 09, 2017 08:40 ET (12:40 GMT)