Today’s Headlines: The UK Elections and Separatist Movements

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Today’s Headlines: The UK Elections and Separatist Movements
May 19, 2017

An Election-Day Surprise in the UK

The British election on May 7th was supposed to be extremely close and give the UK an unusual second consecutive coalition government. Neither Tory (Conservative) incumbent David Cameron nor Labour challenger Ed Miliband was expected to gain a clear majority in Parliament, and a host of smaller parties were jockeying for position to be the dealmakers in the next government.

Pollsters turned out to be spectacularly wrong. Cameron’s Conservative party won a clear majority of seats, collecting 331 of the 650 seats in Parliament. The Labour Party could only muster 232 seats, with the Scottish National Party (SNP) coming in third at 56 seats. Miliband resigned as the head of Labour shortly thereafter.

Progressives took a horrible beating, the worst in over 30 years. The Tories gained 24 seats, while Labour lost 26. Liberal Democrats — who, under party leader Nick Clegg, had joined an odd coalition with Cameron to form the last UK government — forfeited 49 of their 57 seats. This shellacking demonstrated the tenuous nature of that coalition and relegated the Liberal Dems to backbencher status. The scale has collectively tipped toward not just conservative but nationalistic groups, with the SNP as the primary example.

Separatism Gains Support

SNP gained a startling 50 of the total 56 Scottish seats in this election. After the 10-point defeat of the Scottish independence referendum last year, SNP membership surprisingly surged, and the party’s grass roots efforts appear to have paid off in this election cycle. What will the SNP do with its new power? Is another independence vote in the offing?

The answer to both these questions is: Time will tell. One wild card is the relative inexperience of the new wave of SNP Members of Parliament, which includes comedy club owner Tommy Sheppard and hard-drinking, 20-year-old college student Mhairi Black. Ms. Black raised the eyebrows of even her own party leader, Nicola Sturgeon, when she jokingly called for the castration of a prominent Labour politician. Clearly, the political skills of this new Scottish political wave remain to be demonstrated.

Scots aside, there's another vocal separatist movement in the UK today. Led by the UK Independence Party (UKIP), it is demanding British withdrawal from the European Union (EU). While UKIP garnered only one seat in Parliament — one more than the Cannabis is Safer than Alcohol Party and the Monster Raving Loony Party — they came in third in the popular vote with almost 3.9 million votes (12.9% of the total ballots cast).

The collective results fit into the argument of a separatist threat to the European Union (EU) and the Eurozone.

Prime Minister Cameron now faces an interesting bit of tightrope walking. While the UK is not a member of the Eurozone, it is a lynchpin of the European Union, and Cameron has pledged to allow a referendum on the UK's future in the EU. However, Cameron has also made it clear that he believes that the UK should stay in the EU. Markets were relieved by the Tory victory, unsure what a coalition government would bring.

Not so fast, says The Guardian. Cameron is banking on being able to placate the UKIP and manage the rise of the Scots — not an easy task given that the new Scots in Parliament have very little political experience (Tea Party, anyone?). His casual attitude about the momentum of the Scottish independence movement almost cost him the referendum vote. The Guardian does not appear to be convinced that Cameron has learned his lesson.

As it is, the uncertainty of future events is making investors think twice about relocating or expanding in the UK. The serious possibility of a "Brexit" (British exit from the EU) increases investing uncertainty, and an actual exit would clearly weaken both the UK and the remaining EU members — at least in the short-term.

Will Separatism Spread?

Considering that both the EU and Eurozone are facing a groundswell of populist antagonism on the Continent, surging nationalism in the UK is adding fuel to regional tension.

Further tension is supplied by the possibility of a Greek exit (“Grexit”) from the Eurozone. The Greek government blinked on the threat to withhold a May 12 payment to the IMF, but there is still no general agreement on plans to avoid default. Greek withdrawal from the Eurozone would create chaos, as there were no rules designed for such an exit. After all, what would be the motivation for the EU to create them?

Meanwhile the Catalonia region of northeastern Spain is mulling a snap election on Catalonian independence. Catalonia region President Artur Mas claims a referendum is necessary to gauge the Catalonian's desire for independence. Catalonia, which contains Barcelona, is responsible for almost 19% of Spanish GDP. Combine this with the Basque separatist movement and the rise of Podemos, the anti-austerity party in Spain, and the Spanish government faces an enormous challenge.

Other separatist movements — in various stages — may be found throughout the EU, from the Flemish movement in Belgium to the Bornholm region of Denmark. The Wall Street Journal summarizes some of these movements at http://graphics.wsj.com/lists/european-separatist-regions, For the complete anarchist, Business Insider shows a redrawn map of Europe assuming complete separatist movement successes at http://www.businessinsider.com/map-of-separatist-movements-in-europe-2014-9.

Even within the UK, it can be argued that the recent election shows unusual geographical separation. Mimicking the US, the UK results show Labour holding heavily populated urban areas and a few distinct regions while the Tories hold the rest, and the Scots are an entity unto themselves. For the full electoral map and results, see http://www.bbc.com/news/election/2015/results.

The Takeaway

The Guardian may be concerned that David Cameron has not learned his lesson, but we think otherwise. Cameron realizes the high stakes for UK businesses and is likely to find his way to victory, as he has in the past.

We hope that he succeeds, as a Brexit makes all of the above separatist scenarios far more likely. Nationalistic and separatist movements depend on a unique combination of unrest and momentum. Any one of these actions is going to cause significant disruption in the already-jittery markets; any two or more is likely to sink the European recovery before it even starts. It is impossible for the EU's stimulus program to be effective if the cast and rules for the EU and the Eurozone are constantly changing.

We think stability is still likely to rule and the financial markets are unlikely to suffer — but we are not as sure of that as we once were. Consequently, if your investments are in Europe or depend on exports to Europe, you’ll want to keep a close eye on European geopolitics over the next year.

Who will be the ultimate winners and losers of the many separatist movements arising throughout Europe? Investors will clearly gain if separatist movements fade. But if they succeed, there may only be joy in the philatelist and numismatic communities. So whatever you do, don’t sell the stamp or coin collections you inherited from your grandfather.

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