Britain may turn into Europe’s most politically unpredictable country

For the past five years, Britain has been a haven of political and economic stability amid the turbulence in Europe. No longer.
In the years ahead, Britain will likely be Europe’s most politically unpredictable country. This risk, first brought to the world’s attention by the Scottish independence referendum in September, has been confirmed by the defeat suffered by Prime Minister David Cameron’s Conservative Party in a special election on Thursday.
Yet the loss of Britain’s safe-haven status is not yet factored into asset prices — especially sterling. The pound is still near its strongest since 2008 despite the country’s current-account and budget deficits, the biggest in Europe relative to gross domestic product.

Although Britain faces an unpredictable general election on May 7, most investors and businesses are still behaving as if political uncertainty would have limited impact on economic conditions. This complacency seems misplaced, for three reasons:

First, Britain could become literally ungovernable after the election, with no single party or coalition of parties able to form a majority government. Current public opinion polls predict that neither the Conservatives nor the Labour Party will win enough seats to form a majority government — even in a coalition with Liberal Democrats.
Conservative-Liberal and Labour-Liberal majorities may both prove arithmetically impossible because of the rise of previously insignificant fringe parties. The Scottish Nationalists look able to boost their six seats in Parliament to anything between 20 and 50, largely at Labour’s expense. The United Kingdom Independence Party is threatening dozens of Conservative incumbents. Meanwhile, the Liberals are almost certain to lose about half their 56-seat representation. As a result, a ruling coalition may have to include not just two parties but three or four, including fringe nationalist groups.
The Scottish National Party is sure to demand another Scottish independence referendum as its price for supporting a coalition, while the UK Independent Party will likely insist on Britain’s withdrawal from the European Union. It is hard to imagine either Labour or Conservatives agreeing to such terms.
This means that a government may have to be formed without a majority in Parliament. While minority governments are quite common in continental Europe, the British Parliament has only once failed to produce a government majority — during a brief interlude in 1974 under Harold Wilson. It created seismic upheavals in Britain’s adversarial politics.
The second reason for concern is that a multiparty coalition or minority government, even if it can be patched together in post-election haggling, will probably collapse within a year or two. Whether the next prime minister turns out to be Cameron or Labour’s Ed Miliband, he will be seen as a short-term caretaker, passing only non-controversial measures.

At some point in 2016 or 2017 at the latest, the opposition parties are almost certain to unite in a vote of no confidence on some major issue — bringing down the government. This would force a new election in spite of the theoretical requirement that Parliament should serve a fixed five-year term.
The near-certainty that whatever government emerges in May will fall within a year or so, raises the third and most troubling business issue. A snap election in 2016 or 2017 is most likely to produce an overtly euro-sceptic government, committed to taking Britain out of the European Union.
Since a continuation of the current coalition is almost impossible because of Tory commitment to an EU referendum, which the Liberals oppose, Cameron may only be able to lead the next government if his party wins an outright majority or forms an alliance with the Scottish Nationalists, UK Independent Party and other fringe parties. An outright Tory majority is out of the question, according to current opinion polls, and time is running out for the surge in support the Tories were expecting as a result of economic recovery.
A Tory government supported by Scottish Nationalists and UKIP is a more plausible option. But the glue holding together such a coalition would be an EU referendum on membership terms that the rest of Europe would be extremely unlikely to accept.
UKIP would certainly press for such an impossible negotiating mandate and even the Scottish Nationalists would do so for tactical reasons. The Scots would insist that a British vote to exit the European Union should be followed immediately by one on Scotland leaving Britain. And in this second referendum, the generally pro-European Scots would almost certainly vote to leave. The chaotic breakup of the constitutional status quo would then be complete.
An EU exit might, paradoxically, be even more likely if a Labour-Liberal coalition comes to power in May. Though both parties are committed to keeping Britain in Europe, a weak Labour-Liberal government would face falling business confidence and possibly a sterling crisis. So it would be even more likely to fall in a snap election than a Tory-Nationalist coalition.
Meanwhile, the Tories, forced into opposition, would undoubtedly replace Cameron as leader with a more hard-line euro-sceptic — possibly Boris Johnson, the popular and populist mayor of London. If so, the snap election in 2016 or 2017 would probably result in a landslide for radically euro-sceptic Tories in alliance with the UK Independence Party. A quick referendum mandating the new government to negotiate an exit from the European Union would then become an odds-on bet.
All these scenarios can, of course, be qualified with numerous ifs and buts. Many political surprises will surely occur between now and 2017. In the end, the instinctive caution of the British electorate might well prevail — as it did in the Scottish referendum — preserving the status quo of British membership in the European Union.
But whatever ultimately happens, outbreaks of political panic are near-certain in the six months before the general election. Then again during the period of turmoil and ungovernability leading up to a snap election and EU referendum in 2017.
Investors and businesses in Britain are queuing up for a roller-coaster ride.

Flares are let off as police stand guard while pro-union protestors clash with pro-independence protestors during a demonstration at George Square in Glasgow, Scotland September 19, 2014. REUTERS/Cathal McNaughton
Britain’s Prime Minister David Cameron gestures as he delivers a speech at the Aberdeen Exhibition and Conference Centre in Aberdeen, Scotland September 15, 2014. REUTERS/Dylan Martinez
United Kingdom Independence Party supporters canvas for votes in Rochester, south east England, November 18, 2014.