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UK Votes on Reform – Should Investors Worry?

Thursday, 5 May 2011 | 5:43 AM ET

A referendum on voting reform and local elections looks set to test the UK’s ruling coalition as analysts predict that the Liberal Democrats will be punished at the ballot box, potentially creating an irreparable divide within the government.

David Cameron
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David Cameron

With the UK’s third-largest party, the Liberal Democrats, facing defeat on both fronts, the coherence of the country’s Conservative-Liberal Democrat government has been seriously tested by partisan campaigning on either side of the coalition.

The Liberal Democrats made a referendum on electoral reform a key element of their negotiations on forming a coalition government with the Tories.

Senior Liberal Democrats, including cabinet ministers, have been vocal in their support for the “Yes” vote, which, if successful, would see the country’s “first past the post” system replaced with the so-called “alternative vote” – which would allow voters to rank candidates in order of preference.

The Conservative Party have campaigned vehemently for a “No” vote. At times both campaigns have bordered on vitriolic, which some observers say has undermined trust within the coalition.

“The nature of the campaign may be more significant than the (referendum) result,” John Curtice, professor of politics at the University of Strathclyde, said. Curtice believes that the “first phase” of coalition politics – convincing the electorate that a coalition could work at all – is coming to an end.

Although common in mainland Europe, coalition governments are a rarity in the UK. The May 2010 general election provided a major test for the UK’s normally bipolar political system, which saw a partnership between the right wing Conservatives and Centrist Liberal Democrats.

The Tories’ David Cameron became prime minister, with Lib Dem leader Nick Clegg as his deputy.

Although it allowed the Lib Dems to enter government in a meaningful way despite their habitual place as the third man in British politics, entering an alliance with the Tories, no matter how centrist their rhetoric, has been unpopular with many traditional supporters, who look set to distance themselves from the party at the polls.

A weak showing for the Lib Dems on Thursday could well lead to more pressure from the Conservative Party’s right wing to dispense with the niceties of coalition politics and drive a harder line on economic and social reforms, analysts say.

Change in Balance of Power?

A change in the balance of power in the coalition could begin to unravel it, Curtice said. “The further away you get from the center, the more the coalition is vulnerable.”

“The honeymoon period was always going to end,” Alastair Newton, political analyst at Nomura told CNBC.com. “For David Cameron and especially for Nick Clegg, it’s going to get more difficult.”

“The worst case scenario, which I can’t rule out but I would assign a low probability to, is some kind of a leadership challenge to Nick Clegg,” Newton said, saying that there may be several senior Lib Dems who might be amenable to the idea should the party seem to be losing its core support.

“It’s not inconceivable that some Liberal Democrats cross the floor, but I doubt we’ll see any Lib Dem ministers throw in their portfolios and leave the party,” he added. “I also think we’re going to see Clegg under more pressure to differentiate Lib Dem policies from government policy in a lot of areas… but not in economic policy. I don’t think there is any flexibility there.”

Newton said that he “wouldn’t be surprised to see a cabinet reshuffle over the weekend” – a useful way to detract attention from a poor electoral showing.

If this was the case, former cabinet secretary to the treasury David Lawes, a respected Lib Dem politician who fell on his sword last year over an expenses scandal, could return. This would likely be at the expense of a more left-leaning cabinet minister, Newton added.

Political analysts and insiders seem to have enjoyed picking at the frayed tempers within the government ahead of Thursday’s votes, briefing the full spectrum of outcomes from a minor embarrassment to a full blown collapse of the coalition and snap election.

Pepe Egger, head of Western European forecasting at political risk consultancy Exclusive Analysis, told CNBC.com that he believes there is little likelihood of David Cameron calling an election early, not least because new parliamentary rules mean that he would need to find a majority in the House of Commons to do so.

Besides, Egger said “I don’t think that Cameron would do that. He’s doing so well with this arrangement where somebody else takes all the flak… There could be back- bench pressure but so far he’s shrugged it off.”

“The only game changer would be if we have a double-dip recession… that would really break their credibility,” he said, adding that were the government’s cutbacks to fail, it would allow their opponents to rally around the rhetoric of “crazy Thatcherite cuts.”

Those same cuts would equally undermine the Tories' ability to fight an election – electoral budgets tend by nature to be redistributive, rather than tight-fisted.

As Eamonn Butler, director of the Adam Smith Institute, told CNBC.com: “I don’t think it’s likely… they recognize that they’re talking the language of cuts, and that’s not a very popular position.”

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