As Brexit Talks Begin, A Weakened Government Faces Internal Divisions

Uncertainty about the UK's plan to leave the European Union is making Britain's business community nervous.

British officials led by “Brexit secretary” David Davis sat down with their EU counterparts in Brussels on June 19 to start discussing plans for the UK’s departure from the world’s largest trading bloc, almost exactly one year after the fateful Brexit referendum. Investors and businesses were following this process closely. However, the outcome of the parliamentary election held on June 8—when prime minister Theresa May disastrously lost her majority, and most of her authority, in a vote she called three years early—has made investors very nervous indeed.

“No single Brexit negotiating position appears to command majority popular or parliamentary support,” Fitch Ratings declared the day after the vote, affirming the UK’s sovereign rating at AA Negative.

The Institute of Directors (IoD), a leading employers’ body, was even more blunt, pointing to a poll it undertook just after the vote that showed a dramatic slump in business confidence after an election in which the economy—including the possible impact of Brexit on such key areas as investment—was barely mentioned, except in bread-and-butter terms.

 “It is hard to overstate what a dramatic impact the current political uncertainty is having on business leaders,” says Stephen Martin, the IoD’s director general. “The last thing business leaders need is a parliament in paralysis, and the consequences for British businesses and for the UK as an investment destination would be severe.”

There is a very strong sense that the UK is politically adrift. With young voters turning out in unprecedented numbers, mostly against the government and, many analysts argue, the very concept of Brexit, the election has weakened the government’s legitimacy and resolve. And now the May administration, criticized for a lack of preparedness even before the vote, is entering negotiations despite a clear rift between May and chancellor of the exchequer Philip Hammond: He favors preserving free access to the 743 million strong EU market, while she has prioritized immigration curbs that are incompatible with such access. However, despite real doubts over the political longevity of May and her minority government—which she hopes to prop up via an informal deal with the ultra-Protestant Democratic Unionist Party of Northern Ireland—most investors have little appetite for another election because of concerns over the leftist agenda of the opposition Labour party, which performed better in June than anyone expected.

These political dramas are taking place against a darkening economic backdrop. Although the UK had defied gravity by being one of the fastest-growing G7 economies, the slowdown that was widely predicted following last year’s referendum has finally hit, with GDP growing by only 0.2% in the first quarter (and 0.0% in per capita terms), while inflation has risen to 2.9%, the fastest rate in more than four years, thanks to the depreciation in sterling. Real wages, stagnant for most UK workers since the 2008 economic crisis, are now falling, all of which suggests that consumption is set to fall fast. The sense of national malaise has meanwhile been compounded by a series of fatal terrorist attacks and by a catastrophic fire in the heart of wealthy Kensington that left dozens dead.

The UK’s business community is well aware of the dangers of no deal, with five organizations—the IoD and the Confederation of British Industry, among others—issuing a united call for the government to “put the economy first.” They say any final deal should allow continued free access to the EU market, mutual recognition of standards and regulation, and a flexible system allowing some labor movement (a “soft Brexit”).

However, with less than two years until Britain must leave the EU, May’s insistence on making a “success of Brexit” rings increasingly hollow. All the cards are held by Brussels, for whom Brexit is just one of many problems. And although the UK needs a deal much more than does the EU, right now it doesn’t know where it is going, or why, or how to get there.