Markets Could Set U.K. Agenda in a Hung Parliament

Labour Prime Minister Gordon Brown hasn't even set a date for the British general election yet, but financial markets have already bet on the outcome by, among other things, hammering the pound. And why not, since the markets could end up running the country instead of the politicians.

Recent polls on Britain's election--which must be held by June 3--point to an outcome so close that any incoming government will have no real popular mandate and possibly no majority. Hardly by accident, the forecasts of a hung Parliament have coincided with an abrupt 5 percent drop in the pound's value against the dollar. Of course, the pound has been in decline for months. The state of Britain's economy is no secret: heavily indebted, slow to recover. What the sterling's recent nosedive reflects are concerns in the marketplace that a weak new government, rather than a more robust Tory one, will not be able to muster the political support needed to put into place stringent fiscal measures to address the growing deficit. Paradoxically, however, a truly weak government in the form of a hung Parliament could impose fiscal discipline on Britain's finances. To avoid being punished by the markets and risking real damage to the British economy, the country's political leaders will have little choice but to bow to market forces. A lot can change between now and the election, and a hung Parliament is by no means a certainty. But if that's the outcome of the balloting, ministers won't be writing the next budget--the markets will.