Theresa May calls snap election in bid to strengthen hand in Brexit talks

Theresa May dramatically seized the initiative on Brexit on Tuesday by calling a snap general election on June 8, as she sought a direct mandate for her plan to deliver a smooth British exit from the EU.

The pound rose on expectations that the prime minister would win a much increased Commons majority, allowing her to sideline implacable Eurosceptics in her Conservative party and ensure a phased Brexit concluding with a UK-EU free-trade deal.

Polls predict a heavy defeat for the opposition Labour party, which has been in disarray under the leadership of leftwinger Jeremy Corbyn.

Mrs May had only last month ruled out an early election, saying it would be “self-serving” and would create uncertainty, but on Tuesday morning she stunned Tory colleagues by announcing in Downing Street that she had changed her mind. The House of Commons will vote on Wednesday to trigger an election that had not been due until 2020.

Mrs May said she had “only recently and reluctantly” concluded that a poll was desirable, and blamed opposition parties and the House of Lords for weakening her negotiating position with the EU.

“Division in Westminster will risk our ability to make a success of Brexit. The decision facing the country will be all about leadership.”

Privately Mrs May told colleagues she feared that a general election in 2020 would significantly complicate Brexit, with other EU leaders using the impending poll to put her “over a barrel” in final negotiations due to conclude in 2019.

By holding an election now, Mrs May will not have to face electors again until June 2022, allowing her to negotiate a transition deal after Brexit takes effect, during which time Britain might have to apply EU rules including free movement.

Amber Rudd, home secretary, told the BBC’s Newsnight that Mrs May could use an increased majority as an opportunity “to arrive at potential compromises within the EU”.

The pound climbed as much as 2.7 per cent to a five-month high of $1.2905 on Tuesday, as investors bet the prime minister would use the vote deliver a softer Brexit.

“Not only does this neutralise Labour and the SNP, but it means she can negotiate a Brexit deal along the lines of what she wishes for, rather than having to appease the hardliners in her own party,” said David Owen, chief European financial economist at Jefferies.

The strength of the pound unnerved UK stock markets, which have been energised by sterling’s slide since the Brexit vote as global companies with earnings in dollars benefit. The FTSE 100 was 2.2 per cent weaker at 7,169 in late-afternoon trading.

Mrs May is expected to win parliamentary support for a snap election, overriding the five-year Fixed-terms Parliaments Act, which requires a two-thirds majority in the House of Commons to back a general election motion.

Mr Corbyn said on Tuesday that his party would support a vote, even though Electoral Calculus, a prediction website, forecast that his party would be left with just 170 seats, down from 229 at present.

“Labour will be offering the country an effective alternative to a government that has failed to rebuild the economy, delivered falling living standards and damaging cuts to our schools and NHS,” said Mr Corbyn in a statement.

According to the FT poll tracker, the Conservatives have an 18-point lead over Labour with bookmakers offering odds as low as 1/10 on a Tory victory. Electoral Calculus predicts a Tory majority 130, compared with 17 now.

Mrs May was cheered by Tory MPs as she addressed them on Tuesday evening, but privately some fear they could be exposed to a strong challenge from the Liberal Democrats, who are promising a second referendum on any final Brexit deal.

Mrs May told the Queen of her plans for an early election on Monday evening and explained her decision to Donald Tusk, European Council president, on Tuesday. Mr Tusk joked that, as with a good thriller, “First an earthquake, then the tension rises.”

Holding an election gives Mrs May her first opportunity to win a direct mandate to be prime minister. She took power last July without a public vote, after David Cameron resigned and her remaining rival in the Conservative leadership contest pulled out of the race.

The Tories’ existing majority would have made it hard for the government to push through its Repeal Bill, which transfers EU legislation into the statute book, without significant amendments. William Hague, the former Conservative leader, was among those to have called for an early poll in an attempt to win a larger majority.

A general election will allow Mrs May to scrap the 2015 Tory manifesto and campaign on her own policies, including the opening of new grammar schools which have been opposed by Tory moderates. Key policies from the Cameron era, including a commitment to spend 0.7 per cent of gross national product on international development, might also be changed.

The SNP, which has called for a second independence referendum by mid-2019, could use the election to win a new mandate for such a vote. An election comes as Northern Ireland remains in political turmoil, following the failure of the main unionists and nationalist parties to come to a power-sharing deal.

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British PM holds back from triggering Article 50

After protracted parliamentary debate, the bill authorising the prime minister to invoke Article 50, the legal basis for leaving the European Union, finally became law this week. Late on March 13th the House of Commons rejected two amendments that had been proposed by the Lords. As expected, the upper house then backed down. The government had been hinting broadly that the letter triggering Article 50 would be sent to Brussels immediately. On March 14th Mrs May duly hailed the bill’s passage into law as “a defining moment for our whole country”.

But then came anticlimax: Downing Street said the invocation of Article 50 would actually happen only in the week of March 27th. Before then, Mrs May plans to visit Scotland, Wales and Northern Ireland. All being well, she will still fulfil the promise she made last October of starting the Brexit process by the end of March.

A delay of two weeks in a negotiation due to last two years may sound trivial. Yet a plan in Brussels to hold a special EU summit on April 6th to discuss Mrs May’s letter had to be hastily junked. The meeting will now take place in early May, losing almost four weeks out of what is already an extremely tight timetable.

So why did Mrs May pull back at the last minute? After all, there was never going to be a perfect moment to invoke Article 50. Doing so just before the Dutch election on March 15th might have bolstered the far-right anti-EU party of Geert Wilders. Acting too close to the 60th anniversary celebration of the Treaty of Rome on March 25th might have seemed provocative. French and, later, German elections also loom in the near future.

The truth seems to be that Mrs May’s plans were upset by Scotland’s first minister, Nicola Sturgeon, who chose to announce on March 13th that her government would ask for a second independence referendum. She cited Brexit as the “material change” to justify this demand. And she attacked Mrs May for choosing to pursue a hard Brexit that will take Britain out of the EU’s single market, when a majority of Scots had voted to stay in the EU last June.

The reality is that Brexit is unwelcome not just to Ms Sturgeon but to all of Britain’s European partners. Even as they hold their 60th birthday party—which Mrs May will not attend—they know that the club is in deep trouble, not least because so many countries besides Britain have seen an upsurge of populist anti-EU parties. To most other EU countries, indeed, Brexit is just one more ingredient in a cocktail of often more pressing problems that afflict them.

In this context, indeed, some may take quiet satisfaction from seeing the Scots ruin Mrs May’s plan to trigger Article 50. A few may even see the rising risk of a break-up of the United Kingdom as suitable punishment for Brexiteers. Yet nobody will much enjoy the Article 50 negotiations when they eventually start.

At the same time few are convinced by Mrs May’s repeated mantra that no deal is better than a bad deal, which they see as just an attempt to bolster Britain’s weak bargaining position. On March 15th David Davis, the Brexit secretary, admitted to the Commons Brexit committee that since the referendum the government had made no forecasts of the economic consequences of leaving the EU without a deal and reverting to trade under World Trade Organisation rules. That makes it even harder to see how Mrs May can justify her claim.

Nor are the parliamentary manoeuvres over Brexit finished. This week it emerged that at least seven bills besides the planned “Great Repeal Bill” will be needed to give effect to Brexit. Mr Davis has also conceded that any deal negotiated under Article 50 would require parliamentary approval. And although Lord Bridges, a Brexit minister, said in the Lords that he found it hard to see how Parliament could hold a vote if there were no deal, even that could be open to question. Lord Hope has declared that the Supreme Court judgment which forced the government to bring forward the Article 50 bill may require further primary legislation before Brexit actually happens. And he should know—for he is a former Supreme Court justice.

Where is sterling heading?

  • How have investors reacted to Brexit?
  • Investors have struggled to make sense of the politics and economics of Brexit ever since the referendum.
  •  A large devaluation in the early post-referendum days prompted gloomy predictions for the pound.
  • At times, the government’s Brexit policy, particularly its confusing communication strategy, left investors flummoxed and so more inclined to be bearish on sterling.
  • But the economy’s resilience and Theresa May’s more coherent Lancaster House speech on Brexit in mid-January have kept sterling above $1.20 since that threshold was tested in January.
  • Meanwhile, the government’s legal difficulties, which at one stage cast doubt on its Brexit timetable, have been largely forgotten as it has steered its Article 50 bill through parliament.
  • What will happen to sterling when Article 50 is triggered?
  •  It has long been regarded as likely to be a significant market-moving event but forex analysts now expect the moment itself to have only a modest impact on sterling.
  • Investors are no longer in denial about Brexit, and have been pricing in the reality of the coming divorce.
  • Still, Article 50’s trigger will not go unnoticed by investors. Even though it is a sure-fire event, further weakness may ensue, possibly involving a test of the January low.
  • More significant may be the EU’s response in the days after the announcement, and what it says about the negotiations process.
  • How is sterling shaping up as the negotiations begin?
  • Sterling is considered cheap, given the underlying health of the UK economy, now forecast to grow 2 per cent this year.
  • While that is a buying opportunity to some, a series of factors are also assuming greater importance to investors than the Article 50 trigger. These include the increasing burden of sterling’s decline on corporate Britain, the risk of Brexit on inward investment, the relationship between Mrs May and other EU leaders in the run-up to official negotiations and the French presidential election. There is also the prospect of US interest rate rises to consider.
  • So sterling is heading for what value?
  • The problem for investors is how to judge the progress of what will be two years of Brexit negotiations. Which is why several strategists are reluctant to forecast anything significantly at variance with the pound’s current value during at least the remainder of 2017.
  • More likely is that sterling’s direction will be influenced by developments in other countries. For example, there is scope for the pound to weaken against the euro in the coming months, if the eurozone economy continues to strengthen, Marine Le Pen loses the French presidential election and the European Central Bank becomes less dovish.