LONDON (Reuters) - When Britain’s coalition government of Conservatives and Liberal Democrats took power in 2010, bookmakers put its chances of surviving a full five-year term at little more than 50-50.
The alliance -- Britain’s first coalition since World War Two -- survived battered but intact in the run-up to this year’s election. But the country now faces more complicated scenarios after May 7.
Just 100 days before the polls, Prime Minister David Cameron’s Conservatives and Ed Miliband’s Labour party are both stuck on 32-34 percent of the vote, opinion polls show, weakened by surging support for alternative parties such as the UK Independence Party, the Scottish National Party and the Greens.
With the two main parties unlikely to win a majority on their own, some investors are worrying an inconclusive election could be followed within months by another, leading to years of weak government as occurred after two elections in 1974.
“At the moment you have so many unknowns, it’s not implausible you end up with a minority government that is hard to sustain in a fractured political system,” said Mike Amey, UK portfolio manager at PIMCO, the world’s largest bond fund.
The pound has fallen against the dollar to around its lowest level since mid-2013, partly reflecting that international observers are unsure about which of several possible outcomes will follow the election.
If Cameron returns to Downing Street, he will come under pressure to honor his promise to hold a referendum on Britain’s membership of the European Union, and possibly bring it forward.
Labour’s leader Miliband does not want an EU vote, saying it would pose too much of a risk to the economy. But his proposed controls on utilities and banks, along with calls for higher pay, have worried business leaders.
Lawmakers on Labour’s left may challenge Miliband’s promises to maintain austere levels of public spending.
Some analysts say the most stable scenario might be another cross-party deal involving either the Conservatives or Labour with the centrist LibDems.
“The taboo has been broken and whatever the electorate thinks of coalitions, they don’t actually regard the prospect of another one as a complete nightmare,” Tim Bale, a politics professor at Queen Mary University in London, said.
While coalition governments are common in other European countries, they have been rare in Britain thanks to its electoral system which gives nothing to runners-up.
The normal order was broken in 2010 by disenchantment among voters with the two main parties as Britain struggled to cope with the effects of the financial crisis.
The pairing of the Conservatives and the LibDems brought together two parties with once very different views on spending, tax and EU membership. But its supporters say concessions by both sides kept Britain on a relatively stable path over the past five years as they brought down a huge budget deficit, albeit less quickly than planned.
Indeed, some pro-EU Conservatives now say privately they would prefer another deal with the LibDems - who also support EU membership - to a small Conservative majority that would leave the party beholden to the members of it determined to take Britain out of the bloc, politics professor Bale said.
“It’s kind of the love that dare not speak its name,” he said.
But a two-party alliance may not be enough to secure power after the May election. With the main three parties unpopular with disenchanted voters, opinion polls suggest a Conservative-LibDem alliance would need support another party’s support in order to rule.
When Conservative finance minister George Osborne said last month he would let Northern Ireland’s devolved parliament set corporate tax rates, it was interpreted as an overture to regional lawmakers whose support could help the Conservatives form a government.
Another option for the Tories is an alliance with the anti-EU UK Independence Party, which has two MPs now but may win more in May. That would come at the cost of a promise to hold a referendum on EU membership sooner than the 2017 date so far mentioned by Cameron.
If Labour emerges from the election as the biggest party but short of a majority, it might turn to the left-wing Scottish National Party, possibly outside a formal coalition agreement.
The SNP has said it would never prop up a Conservative government and would only support Labour if Miliband toned down spending cuts and promised not to base a new generation of nuclear-armed submarines on the River Clyde.
The party is gunning for Labour’s Scottish seats and if it wins them is very likely to make more powers for Scotland a prerequisite of support for any UK government alliance. [ID:nL6N0V04HP]
PIMCO’s Amey said British politics was likely to revert to its traditional two-party system once voters’ wages started to grow and the public felt more secure with traditional options.
But, he warned, “..that’s not to say that it is going to happen overnight. When we get to the 2020 election could quite easily be in the same situation.”
While the worst-case scenario for many investors is a government so unstable that it collapses, requiring another election, an uncertain outlook is welcome news for others.
Bookmakers are hoping for record business on the election, given the sheer range of bets and possible outcomes.
“It’s the political equivalent of the Grand National,” said Graham Sharpe, a spokesman for gambling firm William Hill, referring to Britain’s most famous horse race.
“Normally, you’re just asking whether the Conservatives or Labour will win. This time, you have 11 or 12 potential outcomes.”
Editing by Guy Faulconbridge and Sophie Walker