For the past five years, Britain has been a haven of political and economic stability amid the turbulence in Europe. No longer. In the years ahead, Britain will likely be Europe's most politically unpredictable country. This risk, first brought to the world's attention by the Scottish independence referendum in September, has been confirmed by the defeat suffered by Prime Minister David Cameron's Conservative Party in a special election on Nov. 20.
Yet the loss of Britain's safe-haven status is not yet factored into asset prices — especially sterling. The pound is still near its strongest since 2008 despite the country's current-account and budget deficits, the biggest in Europe relative to gross domestic product.
Although Britain faces an unpredictable general election on May 7, most investors and businesses are still behaving as if political uncertainty would have limited impact on economic conditions. This complacency seems misplaced, for three reasons: