Ken Clarke recently suggested that if a hung parliament were to emerge, voters will have acted in a 'ridiculous' fashion. His warnings have proved to be false.
The electorate has been subject to repeated threats from the Tories that a hung parliament would immediately result in an equity market collapse, a run on sterling, the end of the UK’s AAA credit rating and an eventual desperate resort to the IMF. Ken Clarke even suggested that if a hung parliament were to emerge, voters will have acted in a ‘ridiculous’ fashion.
Left Foot Forward has argued that though of course a prolonged period of uncertainty regarding economic policy would be dangerous, these warnings from the Tories lacked evidential justification and were primarily made to help usher in a Conservative majority through fear.
This morning’s result allows an immediate, initial assessment of Mr Osborne’s and Mr Clarke’s statements, and there is no doubt that markets have reacted. Equities and the value of sterling have fallen, while the cost of government borrowing has risen. But the key question is by how much?
The equity market is down by around 2%. A significant fall, though entirely in line with global markets given the international circumstances, and certainly not the market crash that Mr Osborne predicted. Sterling is marginally down versus the dollar and the euro but again, the drop has been in the region of 0.5% – 1%. No sensible observer would describe this as a run on sterling.
Though gilt yields have risen, 10-year bonds are still trading below 4%, an historically low cost of borrowing. And it is extremely important to remember that these movements are happening in the midst of an independent, global financial sell-off that at one point yesterday knocked 10% off US equity markets. So beware those who try and create an impression of causality where none exists.
It appears therefore that financial market catastrophe has not materialised – for now.
Given the relative congruence across manifestos in cutting public spending, it is clear that markets are prepared to afford our politicians some time to work out a sensible approach to governing, coalition or otherwise. Both of the main ratings agencies have this morning made clear that a hung parliament does not threaten the UK’s credit rating, though of course if political clarity does not emerge in the next few days then the situation may change.
Three conclusions can be drawn.
First, Mr Osborne and Mr Clarke were playing politics in a manner that should be beneath them.
Second, markets do not appear to mind whether tough decisions are taken by coalitions or by single parties – the important piece of that equation is that decisions are taken. It is down to the politicians to act like adults, and at the very least all three leaders’ statements suggested a recognition of this responsibility.
Finally, the electorate should not be frightened to vote for what it believes in; contrary to Mr Clarke’s argument, democracy should never be subservient to financial markets.
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