LONDON (Reuters Breakingviews) - Theresa May’s misery risks infecting the UK economy. The British Prime Minister faces growing challenges to her leadership from her Conservative party’s pro- and anti-European Union factions. Political disarray increases the risks that quitting the bloc will inflict serious harm on the economy. A softer Brexit is becoming harder to deliver.
A clear sign that investors are getting more nervous came on Monday when sterling shed a full cent against the U.S. dollar, falling below $1.31. The trigger was a Sunday Times report that 40 Conservative deputies had agreed to sign a letter of no confidence in May – eight short of the number needed to trigger a leadership contest. A sharp jump in options prices that reflect how much traders expect the pound to gyrate against the dollar in the next month underscores the market jitters.
Fair enough. May is struggling to convince other EU countries that Britain has made enough compromises on Brexit issues they want resolved before moving on to discussing trade. Ejecting her would require the Conservatives to spend weeks choosing a new leader. A general election might have to be called to confirm her replacement’s mandate, possibly leading to a change of government. This would delay negotiations about trading arrangements to allow continued tariff-free movement of goods between Britain and the rest of the EU. It would also make it harder to secure a transition period that would delay the impact of the new arrangements beyond the March 2019 Brexit date.
The longer the clock ticks without tangible progress on trading terms and conditions, the more likely businesses are to move jobs and investment out of the United Kingdom. Investors’ patience will run out even sooner. They have so far assumed that the prime concern of British politicians is to minimise economic damage: the Breakingviews Brexit indicator, which incorporates signals from currency, bond, stock, and credit default swap prices, has been relatively stable in recent months. The more that May suffers, the more that markets will anticipate lasting economic pain.
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