That was surprisingly quick and painless.
Britain is about to have a new prime minister: Andrea Leadsom pulled out of the race yesterday, and Theresa May is going to be the new boss.
Three reasons markets are relieved by Theresa May taking over
From an investment point of view, it can only be a good thing for Britain to have a rapid transition to a new prime minister. That way, we avoid two months of added uncertainty, on top of everything else.
We’ll know pretty quickly once Theresa May has taken up her post whether she plans to hold a general election, for example. We’ll also get a better view of how she plans to proceed with regard to Article 50. That’ll hopefully put a stop to all the arcane speculation about what exactly needs to happen to trigger it, and all the technicalities that could get in the way.
This sense of relief that various issues will be resolved more quickly than expected saw sterling bounce as soon as markets knew that Andrea Leadsom was out of the race. But the relief is also because May is the “safe pair of hands” candidate.
Firstly, she is the continuity candidate. It’s worth remembering that before the referendum, both “remain” and “leave” wanted David Cameron to stay on as prime minister, regardless of the outcome. That may have been unrealistic on behalf of “leave”, but Cameron’s immediate resignation was not part of the plan.
This is the closest thing to that original scenario. May is essentially a “Cameronite”. But she is neither a lame duck (Cameron’s biggest problem was always that he’d already told us that he’d decided to go), nor tainted by being a vocal proponent for the losing side in the referendum.
This also means that she can easily justify not calling a general election; she may still want to, but she doesn’t need to.
Secondly, she has the experience. Regardless of your view on Brexit, the problem with Andrea Leadsom is that she clearly lacked a number of the skills a prime minister really needs, media-savvy being the most obvious.
The last thing Britain needs right now is for both its prime minister and the main opposition leader to be lurching from one calamitous headline to the next, with restive backbenchers always ready to stick the knife in.
As it is, May will get a relatively easy ride both internally and externally, with the opposition in too much disarray to capitalise on the Tory upheaval.
Finally, lots of people in the City and the investment markets in general hope that the referendum will not actually result in Brexit (this is particularly the case in the US, whose grasp of our domestic politics is understandably sketchy – politics and its nuances is a peculiarly local business, which is one reason I always hesitate to pass judgement on US politics).
They hope that there will somehow be a reversal or a fudge, perhaps after another bout of negotiation, that will mean we end up with essentially the status quo with perhaps a few knobs on. A re-run of “Grexit”, with worse weather.
Now don’t get me wrong – I wouldn’t be astounded if that’s what we got. But there’s a way to go before that. And it would be an affront to democracy if a deal to stay in the European Union didn’t involve a genuine renegotiation that was then put to the people again.
What next for the pound?
So what happens now? Tomorrow, Cameron steps down and May steps up. Then on Thursday, the Bank of England governor, Mark Carney, has to decide exactly how much the pound should be worth at the Bank’s next rate-setting meeting.
He could hold off doing anything – all else being equal, a move towards more political certainty should take some pressure off the economy. But that would probably send sterling a good bit higher.
He could decide to go the whole hog and print a pile of money, which would probably send the pound lower. But that might seem a bit over the top. So I reckon he’ll stick somewhere in the middle. He doesn’t want the pound to rocket, but jumping straight to added quantitative easing might seem hard to justify.
And of course, the other eight members of the Monetary Policy Committee do have a say in all this. Some of them might not be quite as keen to emphasise the downside of our current situation as the governor appears to be.