On May 7, the Conservative Party won a significant victory in the United Kingdom’s General Election, securing a second term for Prime Minister David Cameron and enough seats to form a government without their former coalition partners, the Liberal Democrats. The Conservative’s win was largely unanticipated by the media, even as the exit polls began to roll in, with Paddy Ashdown, chair of the Liberal Democrat’s 2015 general election team and leader of the party from 1988–99, claiming he would publicly eat his hat if the exit poll’s predictions were correct. Despite the Conservative’s decisive victory, Columbia Business School economist Geoff Heal warns that several years of uncertainty still loom before the UK.
The single biggest question in the wake of the Conservative victory is the future of the UK’s relationship with the European Union. In 2013, Cameron promised an in-or-out referendum on the UK’s continued membership in the EU in 2017, a promise the party re-affirmed in the aftermath of the election. While markets initially surged in response to the election results — The Financial Times Stock Exchange 100 Index, colloquially known as the “Footsie,” jumped 2.3% while the pound sterling went up 1.5% against the dollar — concern over a potential British exit from the EU could soon dampen investors’ enthusiasm. “The reason for a lot of inward investment in the UK is that it gives easy access to the European market on terms that are more preferable to business than in many other countries in the EU,” Heal says. But with the future of British access to the European market unclear, “companies may shift their investment away from the UK to other countries in Europe where the future looks more certain.”
The UK is a net-importer of goods from the EU, with a trade gap of nearly £8 billion (approximately $12.5 billion), but Europe is also the UK’s most important export market. According to the Centre for Economic and Business Research, exports to other EU countries from the UK support over four million British jobs — about 13 percent of the total labor force — contributing £3,500 to per capita income.
According to Heal, the success of a British exit, or “Brexit” as it’s become known, all comes down to the trade deals an independent UK could strike. The absence of strong trade relations, he notes, would cause “serious damage.” A recent study by the think tank Open Europe estimated that in the absence of any trade deals UK GDP could fall by as much as 2.2 percent. A new free trade agreement with the Eurozone alone would fail to make up for that loss. Instead, the UK would have to use its new-found freedoms to aggressively promote trade around the world and reduce regulation, including, critically, support for continued immigration, a politically divisive topic in the UK, which the UK Independence Party, with its anti-EU anti-immigration platform was able to translate into an unprecedented third place finish in this election. “Simply put,” Heal says, when it comes to the EU, “Britain is better off in than out.”
The recent election doesn’t just cast a shadow over the future of the EU, however, it places the future of the United Kingdom in question. If anyone believed last fall’s referendum would settle the issue of Scottish independence, the Scottish National Party’s near sweep of Scotland has demonstrated that relations between Edinburgh and London remain tense. The possibility of a divided UK, however, bears fewer and less substantial downsides for the region’s economic outlook. Scotland’s most valuable economic resource, and the driver behind it’s largest industry, is the oil held in the North Sea Oil Fields, but those fields are rapidly running dry, with production ceasing to be economically viable in several fields even when oil was trading at over $100 a barrel. The decline in tax revenue resulting from persistently low oil prices may be enough to constrain Scotland’s independence ambitions in the near term, but even if full independence is achieved its impact is likely to be limited to Scotland and, to a lesser extent, the rest of the erstwhile United Kingdom. As Heal puts it, “the business community is largely unconcerned about the potential for Scotland leaving the UK. This is an issue of politics and culture more than one of economics.”
While uncertainty looms large in the future, in the near-term the Conservative victory is unlikely to lead to any substantive policy changes. “Looking at these results,” Heal says, “it’s hard to read this as any sort of broad-based mandate. In the end it’s fairly straightforward — though no one saw it at the time — by pushing for the same policies as the Tories but slower, and more cautiously, Labour simply didn’t offer much of an alternative.”
About the researcher
Geoffrey Heal, Donald C. Waite III Professor of Social Enterprise at Columbia Business School, is noted for contributions to economic theory and resource and...Read more.