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Busch: Clegg, UK's New ‘King-maker?’

The UK election just got a lot more interesting in a big negative way for the British pound.

As most of you know, the election ended without a clear majorityfor any party. The Conservatives or Tories won the most seats and votes, but would need to create a coalition with the Liberal Democrats to reach a majority. The same holds true for the Labour Party. The Lib Dems had been working with the Tories to hammer out an agreement by which a coalition would be formed.

The Lib Dem leader Nick Clegg was attempting to get the Tories to agree to a referendum on election reform that would allow voters to order candidates in order of preference. Second-choice votes are allocated if no candidate wins 50 percent of the first preference votes.

Clegg had also been pushing for proportional representation.

Sharon Lorimer

According to AP, “under proportional representation — widely used in continental Europe — the Liberal Democrats, with almost a quarter of the vote, would have that proportion of Parliament seats.

Under Britain's current system they won only 57 out of 650, or just 9 percent of the seats.

Cameron's center-right Conservatives won 306 seats and Labour 258.

Smaller parties took the rest.” This would translate into a PM that could be a 2nd unelected leader similar to how Brown took over from Blair.

Tory leader Cameron had been negotiating with Clegg on these issues and appeared to have watered down Clegg's demands and still form a coalition. The major reason Clegg didn’t want to work with the Tories was due to Brown.

Yesterday, Brown announced he would resignin September if the Lib Dems join Labour to form a new government. This sets up a situation where not only could Clegg get his demands for proportional representation, but also he could pick the next PM of the UK. Kingmaker and controller of parliament sounds like a great way to go for a third party, doesn’t it? The US Tea Party must be thinking there has to be a way to do that here.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

What it means for the markets is that the Liberal Democrats are calling the shots and aren’t likely to be focused on enacting tough laws to pay down debt, reduce spending and possibly raise taxes.

Why make the difficult leadership decisions when you can change the rules to effectively be in control of the country?

With stories circulating asking “If Greece is Bear Stearns, then is the UK Lehman?”, the markets see the election uncertainty as a UK currency negative, a UK bond negative, and a UK equity negative.

How could it be anything else?

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.

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