trending Market Intelligence /marketintelligence/en/news-insights/trending/DMglslBBIhsEt3IkTLFF-g2 content esgSubNav
Log in to other products

 /


Looking for more?

Contact Us
In This List

What the European parliamentary elections mean for Brexit

Podcast

Street Talk Episode 76: Record pace of fintech M&A, funding in Q1'21 has legs

Street Talk – Episode 76: Record pace of fintech M&A, funding in Q1'21 has legs

Blog

Banking Essentials Newsletter: May Edition

Fintech Intelligence Digital Newsletter: April 2021


What the European parliamentary elections mean for Brexit

In the U.K., this week's elections for the European Parliament have little to do with what its members will do once they reach Brussels and much more to do with whether they think the U.K. should be part of the European Union at all.

In voting between May 23 and May 26, citizens of the 28 European Union countries will elect 751 members, or MEPs, to the European Parliament in Brussels. Each member state is represented loosely proportionate to population size, affording the U.K. the third-largest number of seats, at 73.

The MEPs get to vote on laws drafted by the European Commission, which is made up of unelected representatives of member states, but, in the U.K. the vote is more of a de facto rerun of the 2016 referendum on membership of the EU.

SNL Image

Since the U.K. voted to leave the economic bloc by a narrow margin, the Conservative government led by Prime Minister Theresa May has labored to reach a deal on the terms of leaving. Her withdrawal bill, which the EU agreed to in November 2018, failed three times to get support from the House of Commons.

May's latest offer on May 20 to give Parliament a vote on a second referendum, so long as her Brexit bill is passed, has already been rejected by the Labour Party, and only added to the number of rebels on her own side. The much-maligned bill has been spruced up with plans to align standards of workers' rights and environmental regulations in the U.K. with those of the EU. It will be published in the coming days but will likely not be debated or voted on before mid-June as Parliament is in recess.

"[May's] authority is so eroded that her latest attempt to finally resolve Brexit will likely fail," Kallum Pickering, senior economist at Berenberg Bank, said by email. The bank places the risk of the U.K. slipping toward a hard Brexit, i.e., leaving the European Union without a formal agreement, unchanged at 20%.

Voters go elsewhere

The failure of the government to deliver on the outcome of the vote has seen the traditional domination of its major political parties evaporate, according to recent polling. The Brexit Party, only established in November 2018, is led by Nigel Farage, who became a central political figure during the referendum campaign despite having failed seven times to be elected as a member of Parliament.

SNL Image

Nigel Farage has taken center stage since abandoning the U.K. Independence Party and launching the Brexit Party, with a clear message of leaving the EU without a deal.

Source: Associated Press

The popularity of the single-issue party, designed to attract the ire of disillusioned "Leave" voters, has proven extremely popular, reaching 35% of the vote in the latest YouGov poll.

"Remain" parties have also seen their share of the vote rise, but having decided against combining for the purposes of this election, the hardline vote to remain is split between the Liberal Democrats, Green Party, Change UK, Scottish National Party and Plaid Cymru.

All of this has come at the expense of May, whose Conservative Party is languishing with just 9% of the vote, and Jeremy Corbyn's Labour Party, who has 15%. Both appear to be suffering from the indecision and internal divisions that have plagued their visions for Brexit, as hardliners to leave among the Conservative ranks reject the Brexit deal May agreed, and Remainer Labour MPs demand Corbyn back a second referendum.

Pound pain

The value of sterling, having been hammered in the immediate aftermath of the election result, had been relatively calm as markets increasingly priced in a "soft" Brexit — i.e., leaving but remaining closely aligned to the EU — even as any prospect of agreement in the House of Commons appeared faint. But with the failure of talks between May and Corbyn to agree a deal they could cajole their respective MPs into backing, some investors lost hope and the pound slumped for eight consecutive days between May 9 and May 20, shedding 2.2%.

Aberdeen Standard gives a 25% chance of a general election, an eventuality long called for by Corbyn even despite the collapse in his party's polling. But a general election would be a bold move for the Conservatives, considering it is a world away from the 42.4% vote share it achieved in the 2017 general election. The party instead appears set for a leadership election as May will begin the process of steeping aside after one more crack at passing her deal.

The current betting favorite is Boris Johnson, a committed hard Brexiter and well-known figure as a former foreign secretary and mayor of London. Other leading contenders include former Brexit Secretary Dominic Raab and cabinet minister Michael Gove, both prominent Brexiters, whereas May was a somewhat cautious Remainer.

But Aberdeen considers a customs union deal the most likely outcome, despite the breakdown of talks between the Conservatives and Labour, although only giving a 30% chance of a deal agreed to by Parliament. "A plurality of votes for the Brexit Party should not be interpreted as a sign that broader support for a hard Brexit has increased," Stephanie Kelly, senior political economist at Aberdeen Standard Investments, wrote in a research note.

SNL Image