Brexit Update – May Takes Over As Pressure Builds

So long David Cameron and hello Theresa May. Today, David Cameron turn over the keys to Britain to Theresa May who became the new Conservative party leader and, therefore, the new Prime Minister, after Andrea Leadsom, her last challenger, dropped out of the leadership race. I’m not close enough to British politics to give you any kind of personal read on May and I would guess that the majority of people in Britain are in the same position. According to press reports, she can be moralistic and difficult to work with, while others say she is always willing to make a deal in the end.  On the plus side, she seems to be trying to encroach on traditional issues of the Labor party, which is now in total disarray, by talking about curbing excessive executive pay and having greater representation for workers and consumers on corporate boards. So it would seem her moralistic streak could be reflected in a more “compassionate capitalism”. Whether this actually creates any results or is just lip service to the disgruntled working class remains to be seen. On the other hand, her tendency to micromanage does not bode well for a well-functioning government and her apparent unwillingness to offer government posts in return for support for her leadership run, while morally commendable, may also indicate an unwillingness to make the necessary deals to get things done in the dirty business of politics.

May has insisted that Brexit will go forward but the road ahead will be difficult. Her party is split in two over the issue so finding the right balance to move forward will be critical. Some poor leave supporter will be appointed the thankless task of negotiating the split with the Europeans but eventually the results will be May’s responsibility. She insists that Britain can maintain its trading relations with Europe while at the same time limiting immigration, an issue that has become a lightning rod with the electorate. But it is doubtful that European leaders will go along with that plan. And, at least initially, any major setback would put her leadership position in doubt – she has not been elected by the people and a significant part of her party still opposes Brexit.

Meanwhile, the fallout from the vote continues with Gerry Adams demanding an Irish referendum on Brexit that would allow Northern Ireland and Ireland to vote on reunification, thereby allowing Northern Ireland to stay in the EU. This follows on a similar threat in Scotland by Nicola Sturgeon. In addition, Parliament will actually have a debate later this fall over whether to have a second vote on Brexit because an online petition to reconsider the initial vote reached 4.1 million signatures, well over the 100,000 to force a Parliamentary debate. Right now, it is doubtful that the debate will lead to any changes, but a lot could happen between now and then.  Although the UK stock markets have recovered, the pound has still fallen over 10% and many economists are predicting a recession for the country as uncertainty over its futures drives business away.

On the continent, the Brexit vote has also created its own set of problems. The slowdown in trade with Britain has put additional pressure on Italy’s overstretched banks, with two major Italian banks on the verge of collapsing with over non-performing loans amounting to 15% of the total on their books. While the Italian government would like to bail out those banks, European rules do not permit that. Instead depositors’ money would be used to shore up the banks, putting the depositors at risk. Needless to say, any move like that would probably create a bank run similar to what happened in Cyprus in 2013 when depositors were “bailed-in” to shore up that nation’s banks. It is highly doubtful, therefore, that the Italians will go down that road.

Because of the economic strains that Brexit is causing for Europe, leaders there are now pushing for a quick resolution to the British exit. Yesterday, Merkel said, “The United Kingdom will need to quickly clarify how it wants its ties with the European Union to be in future.” On the other hand, Britain seems in no rush to invoke Article 50 and begin negotiations for exit until early next year. With both sides feeling pressure from a long period of uncertainty and instability, it is difficult to imagine that something will have to happen much sooner than that.