A hung parliament would push sterling down

The prospect of a hung parliament later this year is worrying the markets. The question is – why? The country faces a number of possible outcomes at the next election but the two most likely ones, according to the latest polling are either a clear win for the Conservative party or a dreaded hung parliament. However, in truth neither of these is set to produce immediate problems.

After all, if the Tories are to be believed, a Conservative win will usher in an era of austerity that will see spending cut and taxes hiked. This should be welcomed by the bond market, which in turn will reduce the long-term cost of borrowing for the UK economy. A lower cost of capital will be good for all of us.

A hung parliament could also produce the same outcome. This is assuming the Lib Dem’s agree with the need for spending cuts. Alternatively, no clear winner could usher in an era of political instability that generates some cuts but not enough to satisfy traders. In this case Gilt yields will rise and sterling will fall. But even here the situation is not that bleak. The falling pound will stimulate exports; arguably, this could even produce a stronger economic recovery than a clear Tory win.

So what’s all the fuss about? Sadly, the fear of a hung parliament is not misplaced – it’s just that the market’s timeline is wrong. Any delay in dealing with our bloated public sector won’t cause pain or problems today or even tomorrow; it’s in the medium to long term that the serious consequences will be felt.

Take a look at what’s happening to Greece right now and you will see why. Germany is resisting bailing out Athens because it understands that unless it takes a tough line now then the cost of borrowing money for every individual or company in the whole of the Eurozone will be higher for a generation to come.

While the Germans won’t let Greece default, Berlin is thinking about the long term while others can’t think beyond the end of their noses. British voters should take note.
Guy Johnson anchors European Closing Bell weekdays on CNBC –