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Brexit

5 key risks for UK leader Theresa May as snap election called

Prime Minister Theresa May makes a statement to the nation in front of 10 Downing Street on April 18, 2017 in London.
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Prime Minister Theresa May makes a statement to the nation in front of 10 Downing Street on April 18, 2017 in London.

U.K. Prime Minister Theresa May blindsided political opposition and international spectators Tuesday with a surprise move to call a snap general election for June 8 in a bid to form a unified government ahead of advancing Brexit negotiations.

With May's Conservative party currently dominating opinion polls with a 21 point lead, the move has been widely perceived as an opportunity to garner a greater number of parliamentary seats, giving May a mandate to drive ahead with her intended 'hard Brexit'. However, recent history indicates that opinion polls should be watched with extreme caution and May's decision may have in fact thrown Britain's political path into greater uncertainty.

Judgement day for May

May's 'reluctant' decision to call an early election was a rare departure from her otherwise decisive 'Brexit means Brexit' approach and will be seen as her moment of reckoning.

The prime minister, who had previously said that there would be no snap election ahead of that scheduled for 2020, was elected last year not by the public but by her party after David Cameron's resignation.

A win in June is therefore significant not only for securing greater Conservative power but also validation from the British public, which would allow her to drive ahead with her Brexit vision with renewed confidence. Currently the Conservatives hold a slim majority with 330 of 550 seats. A loss, however, would mark a scathing review of her short time in office and her decision to renege on her previously pro-EU principles.

"The main political risk is that May is taking a massive bet on her own popularity," a research note from Teneo Intelligence said Wednesday.

The most recent YouGov poll suggests that May's Conservatives would emerge from the election in the lead with 42 percent of votes. Labour, the next biggest party but one which is mired with internal divisions, is seen emerging with 23 percent while the Liberal Democrats would likely garner 12 percent and UKIP 10 percent. Other parties are expected to amass 10 percent.

'Hard Brexit' faces turmoil

U.K. parties now have 50 days in which to formulate their campaigns and convince voters that they can offer the best future for Britain.

While May has already triggered Article 50 of the Lisbon Treaty, which formally commences the U.K.'s exit from the EU, pro-European parties may seek to appeal to those who voted to remain – and indeed those who have since changed their stance on the union – by pledging to overhaul Brexit proceedings.

The Conservatives and Labour have both said that they would follow the will of the British public, who voted to leave by a 51.9 percent majority, however, it is anticipated that Labour would aim for a less heavy-handed interpretation of May's hard Brexit.

Meanwhile, the smaller Liberal Democrats and the Green Party, who have opposed May's hard-line stance, could have an opportunity to significantly advance their positions if they focus their campaigning on a pro-EU agenda.

Shifting political landscape

The British public have reason to be disillusioned by the U.K. political system, which has undergone more upheaval in recent months than some previous decades.

Although May leads current polls, this election is far from a shoo-in with indications suggesting that Britons could divert from their traditional party and shift their support – or even place defiance votes. Indeed, the Liberal Democrats, which lost popularity after forming a coalition government with the Conservatives in 2010, gained 5,000 new members in the hours after May's announcement.

This shifting landscape leaves the path open for an entirely new government. While internal divisions within the Labour party suggest that leader Jeremy Corbyn would be unlikely to secure a win, a coalition agreement could throw the Conservatives off course from another five year term.

The co-leaders of the Green party announced Wednesday that they had approached Corbyn and the Lib Dems' Tim Farron about the possibility of forming a "progressive alliance" between the three centre-left parties.

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Further frustration for Europe

The newly scheduled election will add greater turmoil to the U.K.'s Brexit negotiations and, with elections already taking place in France and Germany, will further eat into the two-year time frame instigated at the end of March.

The surprise announcement will also have created greater uncertainty among European leaders, with the President of the European Council Donald Tusk likening the continued saga to an Alfred Hitchcock thriller.

"It was (Alfred) Hitchcock, who directed Brexit: first an earthquake and the tension rises," he said on Twitter.

However, commentators from Europe have insisted that the decision will not derail the EU's plans to continue with its scheduled talks, which will focus first on Britain's withdrawal and, later, its renewed deal.

Increased uncertainty for markets

The final risk will, of course, be for markets, which have suffered a bumpy ride since Britain's leave vote on June 23, 2016.

Sterling jumped to a six and a half month high against the dollar Tuesday, trading at around $1.28, after May's announcement. Meanwhile the FTSE 100 fell to almost three-month lows.

According to Dean Turner, economist at UBS Wealth Management, the reaction was expected but the coming weeks of campaigning will be somewhat less predictable.

"Market reaction we saw yesterday is probably well judged but we'll have to see what the next 50 days bring," he told CNBC Monday.

In the longer term, however, he expects the impact on the economy to be "minimal", with earnings likely to play a more significant role.

Citibank has said that its base case continues to be a hard Brexit, defined as an eventual single market exit (to control immigration) with a long transition period, which will reduce the impact of a "chaotic Brexit". Meanwhile J.P. Morgan Asset Management's global market strategist, Alex Dryden, told CNBC that he expects a greater Conservative majority could allow the party to soften its Brexit stance.

"For us, for U.K. investors, it certainly adds to the short-term noise, but what it might lead to is a softer Brexit. A bigger majority for the Conservatives in the House of Commons might allow Theresa May to talk a softer Brexit stance which is why we've seen the pound nose up since the election announcement," said Dryden.

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