The results of last month’s EU parliamentary elections will have significant repercussions on European politics and policymaking, and in turn on the business environment across Europe. Corporates in the UK in particular will need to prepare for a period of increased political risk. The elections have created more uncertainty about the future of Brexit and its impact on the UK and European economies. The results from across Europe have shaken up the European Parliament and the normal carve-up of power between the centre right and centre left. This is likely to lead to a parliament that is less predictable and more uncertainty in the EU policymaking process. The ability of the newly formed Brexit Party to win the election in the UK and the Liberal Democrats, with a “Bollocks to Brexit” pro-second referendum campaign, to deliver a dramatic increase in their support shows an electorate frustrated by the Brexit debate moving to both extremes of the argument. This isn’t the first time that a smaller party has triumphed in the UK. Nigel Farage led UKIP to victory at the 2014 EU elections. What is most significant about this year’s result was the collapse in support for both the Conservatives and Labour. What does this mean for business in the UK and treasury managers in particular? Political uncertainty is likely to lead to further volatility in the currency markets. Uncertainty is also likely to continue the trend that we have already seen of businesses holding off making major investment decisions in the UK.
Treasurers and the business community will have to take account of the risks of a no-deal Brexit, a general election and a second referendum in their strategies. The risks of a no-deal Brexit have increased given promises by most of the leading contenders in the Conservative leadership race to ensure that the UK leaves the EU by the next deadline of 31 October – with or without a deal. There is an increased chance of a general election due the fact that if Parliament were to try to block a no-deal exit, a general election might be the only way to break the impasse. A second referendum is now more likely as the Labour Party (still reckoned to be the most likely winners of any general election) is under significant pressure to shift from its ambiguous Brexit position to one that explicitly embraces a second referendum. UK analysis of the elections has been focused on what it means for the direction of the Brexit debate. The results on the pan-EU level have led to a significant change in the balance of power in the European Parliament. This will have a significant impact on the policymaking process in Brussels, and therefore businesses operating in or trading with the EU. Both the main political groups of the centre left and centre right saw their support fall. The populist right did see an increase in their representation in the European Parliament, but so did the Liberal ALDE group and the Greens. These parties are now well placed to seek to use their increased representation and share of posts like committee chairs and rapporteurs on legislative proposals to steer the European Parliament’s policymaking process. The influence of the Greens is likely to accelerate the trends we have seen in the EU towards a tougher approach to environmental regulation, which could have a significant impact on the EU business and future investment decisions.
Both the ALDE group and the Greens are supportive of the push for the EU to expand its remit in business taxation. Any expansion of the EU’s role in taxation could have significant impacts on the business models of business operating in the EU. Greater harmonisation of taxes would include looking at taxation competition across the block – especially on digital commerce – and increased pressure for the EU to introduce green taxes. In this period of economic and political uncertainty, the skills of treasury managers in mitigating risk to business cash flow and ensuring that businesses can access the capital they need to support European economic growth will be more important than ever.
Andrew Smith is a director at communications company Cicero Group