What 'no confidence' in May and Macron will mean for markets

Published 13.12.2018 01:38
Updated 13.12.2018 08:00

By the time you read this column, the political fate of U.K. Prime Minister Theresa May and French President Emmanuel Macron will have been decided. While the French president does not face the possibility of removal from office like Theresa May does, his tenure as president of the Republic will very much be defined by his reaction to the protests that have engulfed his country. While a loss for Macron's party is practically impossible, a loss of face is guaranteed whatever the final vote count. May, however, faces a real uphill battle and the end of her political life. Will her Conservative Party colleagues dismiss her into oblivion and begin the process of handing the reins to someone else or give her a lifeline and an extension to see it through?

The European Union is fighting every motion in divorce court. It's threatening to keep the kids, telling all the neighbors what a horrible spouse the U.K. has been and making the entire Brexit process as difficult as possible. This is of course by design. The EU is, after all, a plural marriage. If divorce is an easy step, the other spouses may also be tempted to look elsewhere, so it's best to make the process as painful as possible.

The current fight with the EU is about the "Brexit backstop." Should the U.K. and EU be unable to come up with an agreement regarding the future of the Ireland-Northern Ireland border, the EU and the U.K. both want to avoid a reinstitution of a "hard" border between the U.K.'s Northern Ireland and the Republic of Ireland. Such a border would damage trade between the two regions as well as make it more difficult for cross-border travel. An open border between the two regions is specifically called for in the framework of the Good Friday Agreement, putting an end to the fight for the secession of Northern Ireland from the U.K. and any violation of that agreement may raise concerns on both sides of the border.

On Wednesday night the Conservative Party may vote against May, which would almost certainly mean a delay in implementation of Brexit, which would be disastrous for the U.K.'s financial markets. The uncertainty of Brexit is the issue for markets, not Brexit itself necessarily.

President Macron is far luckier than Theresa May in that the "no-confidence vote" his prime minister faces will have no impact on his party's right to govern. His problems are problems easily solved with money. The French government is now forced to face the simmering economic frustrations of the unemployed and working poor. A budget deficit with the backing of the European Central Bank never hurt anyone. Macron will buy his way out of this mess and live to fight another day.

By Thursday afternoon, Theresa May will have escaped a threat to her leadership bruised but not beaten, and Emmanuel Macron will announce his victory and begin to eat some humble pie with a side of fiscal stimulus. Markets will be unimpressed but won't sell-off as they will if my predictions are wrong.

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