Britain’s negotiations to leave the EU could be thrown off track by domestic difficulties as economists fear the Government could fall apart because of a lack of MPs.
The clock is ticking on the negotiations as the Prime Minister triggered Article 50 in March, beginning the two-year exit process.
Economists had already called on the Government to seek to make quick progress in the talks to give British businesses and households a sense of certainty over the type of future relationship between the UK and EU.
But analysts are now worried that Theresa May’s minority Government could fall apart, resulting in new elections –and potentially a different government with different negotiating priorities, delaying the resolution of the talks even further.
“The first phase of the negotiations over the summer, in particular about the financial settlement, are likely to spark tensions between the UK and the EU and reveal the fault lines between hardline Brexiteers and softer Remainers within the Conservative Party, in our view,” said Guillaume Menuet at Citi.
“With the Prime Minister’s authority severely damaged by the election result, we suspect that these tensions could prove to be the tripwire that brings down the Government and ultimately triggers new elections.”
Given that the Conservatives are relying on an as-yet unfinalised deal with the DUP, Mrs May’s small working majority means she has to avoid upsetting either the ardent Leavers or Remainers in her own party. While that position might mean she has to adopt a moderate position, it might be untenable.
“Should it last, the Government will likely find itself in the position of having to be more conciliatory on policy, particularly with respect to the Budget and Brexit,” said George Buckley, economist at Nomura.
“But reconciling the dramatically opposing views of the Eurosceptic and Europhile wings of the Conservative Party (and parliament more generally), while at the same time negotiating with the European Union will be a difficult juggling act.”
The tensions over the stability of the Government and over the future of the negotiations mean analysts are rallying around indications by Philip Hammond, the Chancellor, that there could be a less disruptive transition agreement put in place to ease the course of Brexit.
That could include membership of the customs union, putting the UK out of the EU overall but still giving it a closer relationship than nations such as Norway which are in the European Economic Area.
“In the long-run, however, staying in the Single Market and the Customs Union without a say about their rules is not a sustainable solution even for Remainers,” said Mr Menuet.
Regardless of the political backdrop to the talks, economists are keen that the British Government softens its stance on immigration.
Theresa May has long backed a target to reduce net immigration to below 100,000 per year, a significantly lower level than the 248,000 in 2016 or 332,000 in 2015.
“The UK Government’s decision to prioritise controlling freedom of movement of people and rule out jurisdiction of the European Court of Justice and thus to forego single market and customs union membership represents a reckless act of economic self-harm,” said Chris Scicluna at Daiwa Capital Markets.
The country’s five biggest business groups, whose members between them employ more than half of the UK workforce, said the priority should be to maintain friendly relations and to settle the status of EU citizens currently in the UK, as well as UK citizens in the EU.
The Confederation of British Industry, Institute of Directors, British Chambers of Commerce, EEF and Federation of Small Businesses all put their names to the letter.
Their wish-list included demands for tariff-free goods trade, minimal customs formalities, a flexible system for the movement of labour and skills, and the protection of existing EU free trade deals with external nations.
CBI director general Carolyn Fairbairn said the UK Government’s current immigration policy is not good for the economy.
That is not solely related to Brexit, but is an issue which will be intensified by the negotiation as a previously easy source of new workers risks being cut off.
“An immigration cap we don’t think is putting the economy centre stage - it isn’t thinking about the needs of the economy in order to grow and to become more productive,” said Ms Fairbairn, particularly noting that this is vital for globally mobile industries such as technology.
“We are seen as a magnet for global talent and one of the reasons that quite a lot of firms set up with their tech operations - we’ve seen the investment coming in from Google and Facebook - is that we are a magnet.”
“It is the reason why we’re speaking up so loudly on the importance of retaining that, understanding there are public concerns about the control of immigration, but not taking any steps that are going to turn that opportunity off. It is going to be such a driver of growing living standards all across the country.”