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UK Election: Brexit Confusion

UK Prime Minister Theresa May went to the country June 8 seeking a larger mandate both personally and for Brexit, negotiations for which should in theory start in a matter of weeks. Instead, the UK has returned a hung parliament in which no single party has an overall majority.

It is a devastating result for May, whose position is now uncertain, and a vindication for opposition Labour leader Jeremy Corbyn, whose continuing leadership of the Labour Party now looks assured.

However, despite its billing as the “Brexit election,” the first since the UK’s fateful referendum of June 23, 2016, neither of the two main parties campaigned on a reversal of that decision. The pro-Remain Liberal Democrats made gains, but still have only a handful of MPs. The Scottish Nationalists, also pro-Remain, registered significant losses, but remain the largest party in Scotland.

Even if the Conservatives manage to form a minority government with the help of Democratic Unionist Party MPs from Northern Ireland, it will be a highly unstable administration, as would be an informal minority coalition led by Labour.

It means that negotiations on Brexit are highly likely to be interrupted by another UK general election. The timetable was already tight.

The UK triggered Article 50 of the Lisbon Treaty at the end of March 2017, creating a deadline of March 29, 2019 for negotiations to be complete.

The EU negotiators plan to conclude the basic withdrawal agreement, “taking account of” the future UK-EU27 relationship, by October/November 2018.

If this deadline is missed, the UK would exit the EU without a specific agreement or transitional arrangements — unless the EU27 unanimously agreed to extend the negotiating period.

The chances of negotiations being complete by the deadline, already slim, now look minimal.

A “hard” versus a “soft” Brexit is generally an expression of the barriers that might arise to trade between the EU and the UK as a result of Brexit.

For the energy industry, in a scenario where no agreement is possible and recourse is made to WTO rules, ad valorem duty (charged by the EU as a percentage of price on imports) on electrical energy, natural gas (gaseous and liquefied), petroleum oils, coal and wood pellets are all zero.

However, the election result creates huge uncertainty about the UK’s capacity even to engage in negotiations with the EU; it creates uncertainty over the clarity and direction of domestic energy policy, both main parties having expressed populist interventionist tendencies in the campaign; and uncertainty over the UK’s general macroeconomic direction.

The pound dived in value against the euro in reaction to the election result.

Uncertainty over policy is often the biggest brake on investment. The rules may be good or bad from any individual project developers’ perspective, but not knowing what they are causes paralysis.

The UK faces an uncertain period in which its capacity to negotiate with the EU looks very weak.