A week has passed since the UK elections, and it looks like we have a new Prime Minister and a new governing party. Unfortunately, the elections didn’t end up with David Cameron and his Conservative Party claiming control in Parliament! Could we see some drastic moves made in order to achieve a majority?
First, here are a couple of neat facts you should know about UK politics.
After three years of claiming residence at Number 10 Downing Street, Gordon Brown of the Labour Party is now on the way out. Unfortunately for Brown, his time as the King of the Parliament Ring coincided with the Great Recession. The UK economy was hit hard and has lagged behind other major economies over the past year. With the Labour Party’s inability to give the economy a smooth ride out of recession, the British public quickly soured on the party, and started clamoring for change.
Enter David Cameron.
Basing their campaign on promised change and reform for the UK economy, Cameron and his Tories won over the British public. However, there was one issue still on everybody’s mind: What was the government going to do about a hung parliament?
As the elections drew nearer, more and more polls showed that the gap between the three political parties was narrowing, highlighting the likelihood of a hung parliament. Many grew concerned that this situation, wherein no party has greater control in parliament, would result to delays in tackling UK’s economic problems. It doesn’t help that their huge budget deficit, which poses a threat to their fiscal stability, needs an urgent solution.
Just as many feared, the elections resulted in a hung parliament. The Conservatives, despite securing the highest number of seats, were unable to emerge as the majority party. Since they were uncomfortable with this situation, they decided to woo the Liberal Democrats into joining forces and forming an alliance.
The Labour party, which came in at second place after the elections, also approached the Liberal Democrats and negotiated a coalition. However, even if they combined the number of seats that both parties held, it wouldn’t be enough to guarantee a majority. Even with Gordon Brown surrendering his spot as the leader of the Labour Party in hopes of getting the Liberal Democrats to give in, this Labour-Liberal Democrats coalition seemed to be the less preferred alternative.
With the UK left with no choice but to create a coalition government, the Liberal Democrats were faced with a tough choice. In the end, Nick Clegg and his Lib Dems decided to side with the Conservatives and formed an alliance. With Clegg taking the position of Deputy Prime Minister, what kind of coalition would we see? If that happens, how would it affect the currencies?
According to BNP Paribas, the formation of a Labor-Lib Dem coalition wouldn’t bode well for UK’s political system and consequently for the pound because they wouldn’t have majority. This means that the approval of bills and laws would take time, which would just prolong tackling the UK government’s ballooning public deficit.
The Britsh public also seemed to agree with this assessment. A survey done by a prominent news organization in the UK revealed that 53% of their respondents believed that a Conservatives led government would be better.
Still not convinced? Take a look at the pound’s price action when rumors broke out that the Conservative Party met with the Lib Dems to form an alliance. Within hours, the GBPUSD soared, before eventually falling down when nothing came out of their talks.
Hopefully, by the end of it all, the UK political parties could put their differences aside and do what’s best for the people and the economy.