UK elections, the EU and immigration: Cameron faces uphill battle
With UK elections in less than six months time, the ruling Conservatives are still trailing Labour in the polls, while UKIP continues to steal the limelight and populist platform. Worryingly for Prime Minister Cameron, the sharp fall in real wages alongside generous benefits, has overshadowed the UK’s relatively strong economic performance.
He has thus been forced on the offensive, pushing for a reformed EU with membership terms more favourable to the UK. His goal of a leaner EU is laudable, but he is facing serious headwinds (some would argue a brick wall). In particular, his attempt to control record-high immigration flows from the EU into the UK and curtail social security benefits for foreign workers has so far proved unfruitful.
The failed attempt to legislate a 2017 referendum on the UK’s EU membership before the elections has at best had mixed results. While it has positioned the Conservatives at the heart of the EU debate, its credibility was always in doubt, and it has also irked German Chancellor Merkel.
Therefore, time is the running out for the Conservatives to secure even a narrow margin of victory over Labour in May, and have any chance of being part of the next government (See Figure 1). I would argue that election result uncertainty, compounded by policy uncertainty, will add not subtract from sterling volatility which is still reasonably subdued. More on that in following commentaries.
Olivier Desbarres is a former G10 and emerging markets economist, rates & currency strategist with 15 years experience. He has written extensively on EU membership and is now an independent commentator.