What Would Happen if UK Prime Minister May Suffered a Leadership Challenge?

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What Would Happen if UK Prime Minister May Suffered a Leadership Challenge?
What Would Happen if UK Prime Minister May Suffered a Leadership Challenge?

At the beginning of the week, there was a lot of talk about a potential resignation from UK Prime Minister Theresa May over broadening discontent with how her government was conducting Brexit negotiations. Later today, she is scheduled to speak to a collection of the strongest opponents within her own party. In the interest of being prepared, let’s have a look at what might happen should May’s leadership be formally challenged.

The Process

Leadership challenges are not uncommon and are often how UK Prime Ministers reach the end of their tenure. An unavoidable parallel is that the last female Prime Minister, Margaret Thatcher, also was forced to resign after a leadership challenge.

In the Conservative Party, if 15% of their MPs write letters demanding a confidence vote to what’s called the “1922 Committee” (chaired by Graham Brady), that triggers a “leadership challenge” and requires an internal vote for or against the leader based on a simple majority. If she loses, she must resign as leader of the party.

It should be noted that this is internal to the Conservative Party, and should May be challenged, or lose the internal vote; it does not mean that there will be a general election.

If she loses the support of the largest party in Parliament, she can’t be said to have the confidence of the MPs, so she will have to resign. The Conservatives will then have an internal election for their new leader, who then become UK Prime Minister.

The Numbers

 15% of Conservative MPs comes out to 48, the number of letters the 1922 Committee needs to receive in order to trigger an internal leadership vote.

On Tuesday there was press speculation that opponents to Ms. May had secured all but 2 letters, making a challenge to her leadership very likely.

However, it should be pointed out that these letters are internal, and only the committee Chair knows exactly how many there are. On the other hand, there have been at least 50 MPs who have been quite publically vocal about their dissatisfaction with May’s leadership, and the direction that Brexit is taking.

The Issue

 On Monday, May said that 95% of the issues regarding Britain’s divorce from the EU had been agreed upon with the rest of the countries of the block.

The remaining 5%, however, is proving extremely difficult to resolve, particularly regarding the border around Northern Ireland. Representatives of Northern Ireland steadfastly refuse any border controls (a “hard” border) between the UK and Ireland, and even more so between Northern Ireland and the rest of the UK.

Those representatives of the DUP Party are vital for UK Prime Minister May to keep her majority in Parliament. The steadfast position of the two sides on the issue has led some to speculate that an agreement with the EU would not be reached on time; leading to talks of alternative, such as establishing a “backstop” to deal with the issue, or even extending the negotiations by a few months – the latter being seen as politically unviable.

So What Would Happen?

Should enough Tory MPs consider the situation as unresolvable, May’s leadership could be put to a vote of her party’s MPs. If she were to lose that vote, then internal elections for the party would be called – throwing Brexit negotiations into turmoil. With the Article 50 deadline looming, an internal leadership fight could be protracted, especially if there were several candidates running.

The big question is what would happen to the markets, and well… it would not be good. Markets hate uncertainty, and this would be the UK veering further off into uncharted waters. Even if UK Prime Minister were to survive a leadership challenge, the shock to the markets of her being subjected to a vote might be quite significant, both for GBP as well as FTSE100.

A good deal of the reaction in the markets would depend on the circumstances; the challenges are likely to be from the side seeking a harder Brexit, which would further complicate negotiations with the EU. Given the fracturing in the party over the issue, it could take some time for a consensus to form on a new leader – and there is no obvious candidate (Boris Johnson had led odds up until his own leadership challenge failed in 2016).

Furthermore, there is still the possibility of snap elections; or renegotiations of the governing coalition which could see Labour come to power.

Given these risks, traders are going to be tracking references to the number of “letters” quite closely. Check out the handy twitter list compiled by Orbex, to keep track of the news.

The post What Would Happen if UK Prime Minister May Suffered a Leadership Challenge? appeared first on Orbex Forex Trading Blog.

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