UK politics thrown up in the air

As predicted, Britain’s surging anti-EU party UKIP snatched a second parliamentary seat from the ruling Conservatives overnight.

The defeat is a nasty blow for Prime Minister David Cameron who paid a number of trips to the southern England constituency of Rochester and Strood to campaign personally.

UKIP’s first by-election win was in a seat almost tailor-made for it to thrive but this one would in the normal course of events have been viewed as a relatively safe Conservative seat. Of the 650 parliamentary constituencies in Britain, UKIP listed it as only 271 on its hit list.

As the victorious Mark Reckless – who defected to UKIP from the Conservatives – said after taking 42 percent of the vote to the Conservatives’ 35: “If we can win here, we can win across the country.” The caveat is that votes in one-off polls are often not repeated at national elections.

As a result of UKIP’s rise, Cameron’s effort to stop his ruling Conservative party banging on about Europe is failing and obscuring attempts to focus on a robust economic recovery in the run-up to May 2015 elections.

Minds will be focused on the threat UKIP poses to any number of Conservative parliamentarians at the general election, possibly splitting the right-wing vote to the opposition Labour party’s advantage. For many, the answer is to adopt a more starkly anti-European stance. UKIP claims further defections could follow and Cameron’s position could come under fresh scrutiny.

It’s not much better for Labour. It came a distant third in the Rochester by-election, showing that UKIP can eat its vote too at a time when Scottish nationalists also threaten to erode its support. The vote of junior coalition partner the Liberal Democrats collapsed.

It all makes for the most uncertain UK general election in decades and on it may hang Britain’s position in Europe.

European Central Bank President Mario Draghi and the colleague who is most opposed to him pushing the policy envelope further – Bundesbank chief Jens Weidmann – both speak at the European Banking Congress in Frankfurt.

German Finance Minister Wolfgang Schaeuble, who rejects calls for his country to spend more rather than balance its budget next year, will also be there.

For now, it didn’t sound like the ECB is any closer to launching full quantitative easing and it won’t be until it’s had more time to gauge the impact of its programme to buy covered bonds (underway with tepid results so far), asset-backed securities (launching now) and a new round of cheap four-year loans which will be offered to banks next month. Policymakers are hoping for hefty uptake of that now that bank stress tests are out of the way.

Markets seem to be expecting both moderate economic growth and an ECB quantitative easing programme. They are far more likely to get one or the other.

Greece’s government presents its final 2015 budget with the government promising a second year of growth and tax breaks aimed at easing austerity.

The finance ministers of Spain and France meet in Madrid with suggestions still floating around that Paris could be fined for failing to meet EU budget deficit rules. France’s Michel Sapin has dismissed that threat. UK finance minister George Osborne and his Italian counterpart, Pier Carlo Padoan, address a London conference on the future of Europe.

Credit ratings reviews of Turkey, Russia and Greece are due.

U.S. Vice-President Joe Biden will visit Ukraine and then Turkey.

Russia warned the United States on Thursday against supplying arms to Ukrainian forces fighting pro-Russian separatists. U.S. officials told us that Washington plans to increase non-lethal military assistance, including deliveries of the first Humvee vehicles, having decided for now not to provide weapons.

Ankara’s relations with Washington and Europe have been strained by its reluctance to take a frontline role against Islamic State militants in Syria and Iraq, though it has allowed Kurdish fighters to cross the border to fight.

Vienna talks between the six major powers and Iran aiming to reach an agreement under which Iran would agree to curb its nuclear programme in exchange for relief from economic sanctions face a self-imposed deadline on Monday. All the signs are that a comprehensive deal will prove elusive for now. The head of the U.N. nuclear agency said Tehran has yet to explain away allegations it conducted atomic bomb research.

Mike Peacock, based in London, run the economics, economic policy and markets cover from the EMEA region.

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