Finance

Brexit: U.K. election makes a painful breakup more likely

U.K. Prime Minister May to seek early election

Reality check: The U.K. snap election will not stop Brexit. If anything, it could remove the last remaining obstacles to a clean but painful break with Europe.

Prime Minister Theresa May stunned the country Tuesday with her call for an early general election. She wants a stronger mandate for her Brexit strategy — within her own party and in parliament.

Opinion polls suggest she should win a clear victory on June 8, an outcome that could reduce uncertainty for investors and businesses. The pound fell sharply before she announced the election but then jumped right back up as she spoke.

"It’s going to reduce uncertainty — no one knew how Brexit will proceed, so having an election might bring more clarity," Kenneth Rogoff, economics professor at Harvard University and former IMF chief economist, told CNN.

It is nearly 10 months since British voters narrowly backed Brexit in a referendum. It will be another two years at least — and possibly much longer — before the terms of the divorce are settled. Business wants clarity so it can plan for the future.

"The last year has been one of considerable uncertainty which, if it had gone on unchecked, would have risked hampering future investment," said Terry Scuoler, chief executive of EEF, which represents British manufacturers.

May has taken a hard stance on Brexit. She wants to take Britain out of the EU and its free trading area so that the U.K. can regain control of immigration.

But she has faced opposition in parliament to this approach. Most lawmakers campaigned for Britain to remain a member of the EU ahead of the referendum last year, and many would prefer a softer version of Brexit — retaining closer links with the EU, staying within its single market trading area and allowing free movement of people.

Mujtaba Rahman, the head of Eurasia Group in Europe, said a big election win would give May "a people’s mandate for a hard Brexit" and destroy any chance of pro-EU politicians joining forces to press for a compromise.

"The growing prospect of a soft Brexit alliance forming… will likely be demolished in one fell swoop on 8 June," he said.

Greater certainty in the short term, though, could mean the economy pays a heavier price down the road. What replaces the current free trade arrangement with the EU — Britain’s biggest export market — is critically important.

Kallum Pickering, senior economist at Berenberg, said a big win for May in the June election would make a hard Brexit more likely.

"The heightened risk of a harder Brexit shifts the risks to our long-term outlook slightly to the downside," he said.

The U.K. economy has held up well in the aftermath of the referendum, but cracks are starting to appear. Prices are rising because the pound is worth 15% less than before the Brexit referendum, some investments have been put on hold, and banks are planning to move jobs out of the U.K.

"There are mounting signs that the economy’s resilience is now fraying — with an increasingly squeezed and pressurized consumer being the main factor," said Howard Archer, chief economist at IHS Markit.

— Chris Liakos and Isa Soares contributed to this report.

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