ROI-Revolving-door UK leadership leaves no room for remedy: Mike Dolan

The UK faces ongoing economic challenges due to its volatile political landscape, with seven prime ministers in a decade, raising concerns about the country's governability.

British markets seem wearily resigned to a seventh prime minister in the ​decade since the seismic Brexit vote of 2016. But unless this latest government really delivers, ingrained political volatility will only drag on an already ​hobbled economy and further limit the space to fix it. There is a sense abroad that the ‌United Kingdom ​is increasingly ungovernable, with its main parties riven by factions and unable to agree for long on leaders or policy directions, despite popular mandates for five-year governments. Labour leader Keir Starmer is just the latest in a long line of sitting prime ministers to resign or be ousted by the ruling party of the day during a turbulent 10 years. If left-leaning Andy Burnhamsucceeds him, he will be the seventh PM since Conservative David Cameron stepped down after calling — and losing — ‌the referendum on European Union membership a decade ago. For context, Britain had only three prime ministers over the previous 10 years, and just two in each of the two decades before that. Even in Italy — often lampooned in Britain as the epitome of government instability — Prime Minister Giorgia Meloni's four-year tenure will have seen out four UK counterparts. Comparisons with post-war Italy's revolving-door governments and their inability to rein in burgeoning debt and inflation won't be lost on anyone. Nor will the fact that EU membership and euro entry in 1999 proved a critical debt-stabilising force for Rome since the turn of the century. To be fair, upheavals surrounding Britain's eventual EU exit ‌in 2020 and the subsequent COVID-19 pandemic may explain much of the personnel churn in Downing Street since 2016. And yet these had little to do with Starmer's ouster, and there should be anxiety about the growing trend of seeing even hints of mid-term unpopularity in any government as a reason for switching ‌leaders. Either way, it hardly makes for the sort of consistent policymaking that the post-Brexit UK economy requires. That economy is widely seen as dogged by slow growth and productivity, structurally high inflation and rising public indebtedness. REASON FOR ALARM?

So why do financial markets and investors seem relatively sanguine? On the face of it, on Monday at least, the FTSE 100 blue-chip stock index gained almost 1%, UK gilt yields slipped back and the pound firmed against the euro and dollar. Some of that calm is because this was a slow train coming.

Popular Burnham has long been seen as a possible successor to Starmer, and Labour's poor showing in May local elections accelerated his return to Parliament in a by-election last week. But the speed with which that led to Starmer's resignation on Monday was a ⁠surprise, at least ​in timing. Yet even as pressure on Starmer brewed in recent months, 10-year gilt yields ⁠have remained relatively steady since mid-March, buffeted as much by the Iran war and related energy squeeze as by domestic politics. Ten-year borrowing premia versus European peers and the U.S. Treasury have widened slightly since the start of the year. But the pound has been stable and the FTSE 100 is only marginally underperforming other world markets while still at record highs. An immediate focus for ⁠many analysts is whether there will be a protracted leadership battle. But Burnham's move now seems likely to go uncontested as another presumed hopeful, former health minister Wes Streeting, stood aside on Monday. Barclays analysts Jack Meaning and Cian Hennigan reckon Burnham could now be in Downing Street within a month. The focus would then shift to whom he might choose ​to replace Starmer loyalist Rachel Reeves as finance minister, and how fiscal policy is shaped or reshaped. Burnham has already calmed nerves about prior statements on budget policy and his reluctance to have Treasury hands bound by bond markets, preferring instead to restate a commitment to current fiscal rules. Streeting had ⁠been tipped by some as the next chancellor and has talked of wealth and financial income taxes. But he too has insisted on balancing the books.

REWARD FOR INVENTION Here, though, markets are really torn about the road ahead. Fiscal discipline at the cost of growth offers little way out of the UK economy's funk. Unfunded spending splurges would unsettle gilts, and higher taxes risk dampening growth further. Meaning and ⁠Hennigan ​at Barclays say that simply following the standing budget rules without any carve-outs for investment spending leaves little room for expansionary policy and reinforces a "fiscal drag" on GDP of some 1 percentage point over the next three years. And so it could be that a more convincing formula from the new Burnham team brings investors on side. Not least, success there and a more popular Labour government would reduce many investors' arguably bigger worry: a populist, right-wing Reform UK party government after the next election. "While in the short term the fiscal equation is of course paramount, the big underlying issue is the kind of growth model which the ⁠UK wants," wrote AXA Group Chief Economist Gilles Moec.

"It was this lack of narrative which made Starmer's position so difficult (and) the gilt market may forgive some straying into limited fiscal heterodoxy if investors believe there is a 'long term plan' for the UK." Most investors would also warm to greater reintegration with ⁠the EU after a decade of distancing, something Burnham seems as keen on, if not ⁠more so, than Starmer. And yet while all that may explain the benign gloss markets have put on this political transition, changing leaders again in a year or two if it does not work is likely to be a route to nowhere. Without reasonable time and some semblance of leadership stability, little remedial work is likely to get done.

(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential ‌new source for global financial commentary. Follow ROI on LinkedIn, ‌and X. And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in ​markets and finance seven days a week.

(by Mike Dolan; Editing by Marguerita Choy)