Theresa May was fighting for survival on Saturday after a failed election gamble undermined her authority and plunged the country into a major political crisis days before Brexit talks.
May’s bet that she could strengthen her hand by crushing what she believed to be weak opposition Whigs backfired spectacularly on Thursday as voters stripped Tories of a parliamentary majority.
The stunning outcome leaves May battling to unite different factions of her party and reliant on a handful of Northern Irish parliamentarians just nine days before Britain starts the tortuous process of negotiating its departure from the EU.
One for all, and all for one! UK now turns to Five Eyes, an alliance comprising Australia, Canada, New Zealand, the United Kingdom, and the United States. These countries are bound by English language, common culture, freedom, and the best standards of living on Earth.
Though it is hard to predict how a bargaining game involving strong emotions as well as economics will play out, we can offer some conjectures about what will happen. These conjectures are mostly based on what we have called the law of distance — the observation that the interactions between two countries are proportional to their sizes (GDPs) and inversely proportional to the distance between them.
Distance, in this sense, is not just physical distance but also cultural distance (e.g., whether two countries have different/similar official languages) and administrative distance (e.g., the absence or presence of a historical colony-colonizer link between the two). The law of distance has been associated with some of the most robust results in international economics, which is why it underpinned the UK Treasury’s generally well-regarded analysis, a year ago, of the long-term consequences of Brexit.
Outside EU, the world is UK’s oyster, and the Commonwealth remains that precious pearl within. UK might be able to gain more from a free hand in negotiating with the Commonwealth — former British Empire states such as Canada, Australia, India, and South Africa — than it might lose in terms of limited access to EU. The GDP of the rest of the Commonwealth is only 55% as large as that of the rest of EU.
UK has a common official language (English) with 91% of the rest of the Commonwealth (on a GDP-weighted basis) and a colony-colonizer link with 99%, versus only 2% on both factors with the rest of EU. Based on estimates that a common language normally boosts trade by 2.2x and that a colony-colonizer link has a multiplier effect of 2.5x, the joint effect of the two (5.5x) in boosting market potential in the Commonwealth is substantial. UK on its own has the leverage to achieve better terms with the Commonwealth countries than it currently enjoys with the EU. Consider that Britain accounts for only 16% of EU GDP.
Moreover, the tenor of the relationship between the UK and the EU is not good: Compare Britons insisting that the UK could exit without paying a brass farthing versus the EU’s claims for £50 billion or more. Consider the combative personalities of some of the key negotiators. Add in the consideration that Brexit, even if accomplished with a maximum rather than minimum of goodwill, will hurt Britain’s trade with EU for purely technical reasons, and it seems safe to predict that there will be a deterioration of trading relationships with Britain’s largest natural market; the only question is to what extent.
Given that relatively safe prediction, the natural next question is which industries and companies are likely to be hurt the most and therefore face the greatest need to reconsider their current operating models. Brexit is likely to change the most is the administrative distance between the UK and its former partners in EU. This suggests that industries with a high degree of sensitivity to administrative distance are likely to be affected the most — unless, of course, the provisions under which UK-based operations can access EU markets happen to be eased the most for them.
Correlated indicators of administrative sensitivity include industries that are subject to high levels of regulation, produce staples or entitlement goods or services, are large employers or suppliers to the government, include national champions, are construed as vital to national security, control natural resources, or require large, irreversible, geographically specific investments. Other markers of industry sensitivity to Brexit include high levels of scale economies that need to be amortized over international regional markets, rather than just by national markets; high levels of trade-dependence on either the export or the import side; and belonging to the service sector.
At the company level, there are some additional attributes that seem likely to be associated with high degrees of exposure to Brexit. Companies with particularly high levels of export or import-dependency in relation to their competitors are likely to be hardest hit. Small firms that aren’t yet exporters or importers are also likely to be hurt more, at least in terms of a narrowing of their opportunity sets: Such firms typically look nearby for their first international transactions. And even where products or services aren’t flowing across borders, companies that use Britain, particularly London, as their regional headquarters for serving all of Europe (e.g., many U.S. multinationals) are likely to need to reconsider basing that role there — as may, for that matter, companies that use London as their global headquarters, especially if most of their business is outside UK.
The British companies that may have private reasons to cheer are those focused on UK that are trying to hold off regional or even global competitors at home. Which is a reminder of the importance of granularity in forming such assessments — not all companies within the same industry, let alone all industries, will be affected in the same way. Similarly, in terms of what is to be done, once again, the appropriate response will be predicated on the specifics of a company’s situation.
Britain’s typically pro-Tory press savaged May and questioned whether she could remain in power only two months after officially triggering the country’s divorce from the European bloc.
Britain’s best-selling Sun newspaper said senior members of the party had vowed to get rid of May, but would wait at least six months because they were worried that a leadership contest could propel Corbyn into power.
“She’s staying, for now,” one Tory source told us.
May called the snap election to win a clear mandate for her plan to take UK out of the EU’s single market and customs union, so she could slash immigration.
But her party is deeply divided over what they want from Brexit and the result means British businesses still have no idea what trading rules they can expect in the coming years.
The British pound tumbled against the U.S. dollar and the euro after the election result.
Merkel said she assumed Britain still wanted to leave the European Union and that talks must start quickly.
German politician and EU executive member Guenther Oettinger said, however, that a weak British leader increased the risk negotiations would turn out badly.
Elmar Brok, a German conservative and the European Parliament’s top Brexit expert, told the Ruhr Nachrichten newspaper talks would be complicated by May’s formation of a minority government.
“May won’t be able to make any compromises because she lacks a broad parliamentary majority,” he said.
Less than a year after May was propelled into Downing Street following Britain’s surprise referendum decision to leave the EU, party insiders were placing bets on how long she could last.
“Theresa May is certainly the strongest leader that we have at the moment,” lawmaker David Jones told the BBC. He said it was impossible to predict whether she would still be prime minister at the end of the year.
Owen Paterson, a senior Conservative lawmaker, said “let’s see how it pans out”, when asked about May’s future.
“It is not the outcome any of us would have wanted in the Conservative Party. But we are nine days off from the Brexit talks starting,” he told us.
The Times newspaper’s front page declared “May stares into the abyss”. It said Britain was “effectively leaderless” and the “country all but ungovernable”.
“The Conservatives have not yet broken the British system of democracy, but through their hubris and incompetence they have managed to make a mockery of it,” it said in an editorial. “The task of restoring orderly government in order to make sense of Brexit is now a national emergency, and it falls to them.”
The Telegraph newspaper said senior Conservatives including Foreign Secretary Boris Johnson, interior minister Amber Rudd and Brexit minister David Davis were taking soundings over whether to replace May.
After confirming on Friday that her top five ministers, including finance minister Philip Hammond, would keep their jobs, May was expected to appoint a team that will take on one of the most demanding negotiations in British history.
She said Brexit talks would begin on June 19 as scheduled, the same day as the formal reopening of parliament.
If she is to succeed in delivering the wishes of 52 percent of the public and take Britain out of the EU, she must find a way to secure the full support of her party to pass legislation preparing for and enacting the departure.
May will also need the support of the socially conservative, pro-Brexit Democratic Unionist Party (DUP), which won 10 seats in Northern Ireland.
The two parties are broadly politically aligned, but it remains to be seen what price the DUP will demand for its support. Several Conservative lawmakers, including Scottish Conservative leader Ruth Davidson, have also raised concerns about the DUP’s opposition to same-sex marriage.
Davidson, one of the few Tories to emerge as a winner from the election after she increased the party’s presence in Scotland, said she had demanded, and received, categoric assurance from May that the policy would not change.
One DUP lawmaker suggested support for May could come vote by vote, making the job of governing fraught with risk.
“As I reflect on the results, I will reflect on what we need to do in the future to take the party forward,” May told us.