I am writing this while we do not know the full results and have yet to hear Theresa May speak, so I expect much of what I write will quickly be irrelevant or overtaken by events.
But this is so important and interesting, it is worth recording some ideas.
Most likely outcome seems to be:
Minority Conservative government led by May with informal backing of DUP
This is the very likely outcome in the short term, because the other options look so terrible:
- DUP fail to back Conservatives
Why would they not take this excellent opportunity to be central to government and push their agenda?
- May resigns
Her main character trait seems to be her stubbornness, and it’s not clear why she would have an unprompted crisis of confidence now.
- Tory MPs force her resignation
This is possible but the Brexit timeline makes this difficult and dangerous. The current rules of the Conservative party mean that any new leadership election takes months and how that would intersect with a new General Election is unclear to me. Either the whole process will take many months or the Conservatives are heading into an election with no clear leader appointed.
The 2-year countdown to Brexit has already begun, this would make a disorderly exit highly likely.
If this minority government is formed what would it do?
The top priority of the DUP will be the Irish portion of the Brexit negotiation. I wrote at length about this here (https://appliedmacro.com/2017/05/02/brexit-and-ireland/). The only option which seems to make sense for an Ulster Unionist is for the UK to stay at least within the Customs Union and possibly within the Single Market. Hard Brexit involves Hard borders.
The next priority for the DUP will be on domestic Northern Ireland issues. The vote has been strongly polarised, with the DUP with 10 seats and Sinn Fein with 7 seats. If the DUP are successful in promoting their Unionist agenda for N Ireland, then this will bolster the Sinn Fein argument that the power sharing government in the Good Friday Agreement is not working, and a further breakdown in politics is likely.
For the Conservative Party, especially any aspiring Tory Prime Ministers, it may seem attractive to let May spend the next 2 years negotiating Brexit while they snipe at the side-lines. Then they can blame her for the deal, whatever it is. They can then say that she betrayed Brexit, was incompetent and if they had been in charge it would have been great.
But this path will likely be contested from day one. For true Brexiteers, acceding to the demands of the DUP, will not be acceptable and they will rebel. So I doubt this softer Brexit route will be a stable one.
Would another election solve anything?
All the parties are formed from coalitions of views and these intra-party divisions are becoming more critical. Look at the inability of the Republican party in the US to agree on anything, despite having control of both Houses and the Presidency. The electorate is similarly unstable. Such volatile opinion polling in an election campaign can often indicate something highly unusual is about to happen.
The ideal election would have been one in which the two main parties laid out clear, coherent, and different plans for Brexit. Then for one of them to win a clear majority, and to lead the country on that mandate.
But with such a conflicted electorate (https://appliedmacro.com/2017/05/24/uk-election-brexit-views/), Labour chose an incoherent policy so as not to offend anyone. The Conservatives, after running on a Hard Brexit platform, might be tempted to try the same although it is not clear this was the flaw in the campaign. The Brexiteers have perhaps done too good a job convincing people Brexit has already happened with the triggering of Article 50, as it became a shockingly minor issue in the campaign.
The UK is in danger of remaining in political chaos. It would have made more sense to have sought this mandate BEFORE triggering Article 50. But May has copied Cameron in choosing to play politics, more like a game of Russian Roulette.
I have been extremely negative on the UK for a long time, in particular on the currency and I see nothing now to change my mind. May’s Brexit negotiating position never made any sense to me (https://appliedmacro.com/2017/05/04/what-game-are-brexiteers-playing/) and it remains unclear. Her position, to stay stubbornly unreasonable, and then the EU will be forced to give in. A different character might be chastened by this election and move to a more centrist negotiating position, but that does not seem to be in her dogmatic manner.
After this election , a veneer of bravado may remain over what seems an ever more chaotic position but this may be a catalyst for more rapid problems in financial markets.