U.K.'s Hung Parliament Raises Business Hopes for a Softer Brexit

(Bloomberg) -- After the shock comes the silver lining.

Most business leaders are dismayed at the political chaos unleashed by the U.K. election, which left a damaged Prime Minister Theresa May trying to forge a shaky coalition government. But some are quietly hoping that it may lead to softer terms for the country’s exit from the European Union.

U.K. Plc was mostly opposed to May’s hard stance on Brexit, which would mean a loss of tariff-free access to the EU’s single market. Even so, when she called a snap election seven weeks ago, business leaders backed her and poured hundreds of thousands of pounds into her Conservative Party campaign as she gambled on securing a bigger majority to strengthen her negotiating hand. Now a weakened May is trying to form a new government with the backing of Northern Ireland’s Democratic Unionist Party after the Tories fell short of seats to rule alone.

“Most people in the U.K. won’t forgive Theresa May” for calling an early election, said Martin Frost, chief executive officer of Cambridge Medical Robotics, a U.K. company that’s developing a robotic system for surgery. “On the marginally positive side, perhaps it means a softer Brexit."

Hopes the election result will ultimately lead to easier terms from the EU are being damped by the short-term pain of getting there, with the prospect that May might be forced to step down, casting more doubt on where the negotiations are headed. Business optimism in the U.K. economy plunged after the election. A survey of executives over the weekend showed 57 percent are pessimistic about prospects for the next year, according to the Institute of Directors. That’s higher than when Britain voted in June last year to leave the EU and 43 percent of the executives were pessimistic, the business group said.

Single Market

One of the biggest challenges for business leaders since the referendum has been the uncertainty over whether the U.K. would remain in the single market or fall out and face tighter immigration controls, said Michael Garstka, managing partner of Bain & Co. in the U.K.

“From a business perspective, rather than providing clarity, the election outcome just extends the period of uncertainty,” he said. “We might end up with a better outcome if it means a softer Brexit, but with more uncertainty."

Almost all medium-sized businesses want to maintain access to the single market and customs union, according to a study from Harvard University’s Kennedy School co-authored by Ed Balls, a former Labour politician, and Peter Sands, former CEO of Standard Chartered Plc. Executives worry about increased compliance expenses that might come with a loss of common U.K. and EU rules, according to the study.

Slender Majority

If May succeeds in forming a coalition, its slender working majority in parliament would force her to be more practical and business-friendly on key negotiating points, such as a trade accord and the future of EU citizens working in the U.K., said Andy Palmer, CEO of luxury British carmaker Aston Martin Holdings Ltd.

“What this election probably does is demand that the May side’s negotiating stance is a little bit more conciliatory from the beginning, with less saber rattling," he said. “Coming back without securing EU members’ ability to work in the U.K., or coming back without tariff-free trade barriers, is simply not going to be acceptable."

Financial markets seem to have locked on to the idea the result might mean softer Brexit, largely shrugging off the turmoil unleashed by the hung parliament, said Ian Stewart, partner and chief economist at Deloitte. The FTSE-100 Index rose more than 1 percent on Friday, while the pound shed 1.7 percent. Even so, the rise of Remainers may be stopped by anti-EU MPs in the Tory ranks, Stewart said.

‘Brexit Backsliding’

“Soft Brexit forces in the House of Commons have been strengthened and emboldened," he said. “This could reopen Brexit but there will be opposition to Brexit backsliding among Conservatives and the DUP."

Entrepreneurs in London’s burgeoning fintech industry called the result largely positive because it would force the government to rethink. Uncertainty around the next government and the possibility of another election may prompt venture capitalists to hit the pause button on new investments in U.K. startups. But online lenders and other fintech firms have been anxious that May’s vow to pursue a hard Brexit would make it difficult to hire EU nationals and to expand operations on the continent via passporting, which now allows global banks with bases in London to provide services to the rest of the bloc.

"I think a softer Brexit is definitely good for the fintech industry," said Samir Desai, the co-founder and CEO of Funding Circle Ltd., the U.K.’s No. 1 peer-to-peer lender. "We’re more likely to keep single-market participation and access to talent."

Women’s online retailer Boohoo.com Plc, which just raised 50 million pounds to fund a new warehouse, is now more confident it will be able to staff the site with temporary workers from the continent.

“Politically this will temper some of the extremism that has been creeping in around Brexit," said Boohoo Chairman Peter Williams. “Some of the posturing ahead of negotiations has been too anti-European. We hire a large number of people in Europe to temporarily help in our U.K. warehouse. They work, pay taxes, contribute to the economy and then they go home again. We would find it difficult to operate without those people."

--With assistance from Benjamin Katz Edward Robinson and Sam Chambers

To contact the reporters on this story: Stephanie Baker in London at stebaker@bloomberg.net, James Paton in London at jpaton4@bloomberg.net.

To contact the editors responsible for this story: Jacqueline Simmons at jackiem@bloomberg.net, Phil Serafino, Bruce Stanley