A Lib-Lab coalition would be democratically preposterous, defying the laws of political gravity. But for that very reason it could, in the medium term, be the best possible outcome for the Tories. It would be losers propping up losers. It would be hugely difficult to keep together, lacking a majority of its own and requiring life-support from various nationalist parties. It would be vulnerable to all sorts of unsavoury Celtic blackmail, enraging the already long-suffering English (whose own voting intentions were very clear.)
It would lead to a second unelected prime minister. It might well trigger serious trouble in the financial markets. It would have to make drastic cuts with no mandate whatever. Electoral reform (which I support) would be discredited, because it would be seen as a cynical gerrymander to keep losers in power. Labour would probably be unable to deliver it, even if they wanted to (and it’s far from certain that they do.)
For all these reasons, a red-yellow alliance would be a political disaster for all those involved. When the inevitable collapse, and new election, came, probably within months, both Labour and the Lib Dems would be annihilated.
The much more sensible thing for Labour to do would be to go into opposition, let the Tories and Lib Dems suffer the pain of having to make cuts, and hope to profit in a future election, which might also come rather more quickly than usual.
The next year or two would have been horrible enough for whoever was in charge, even if they’d had a clear majority. Without one, it will be simply a world of pain. I still think it’s hugely unlikely we’ll end up with red-yellow rule – I should imagine the current Lib/Lab negotiations are just Clegg’s way of getting more from the Tories. But if it does somehow happen, the Tories will have dodged a bullet – and been handed an Exocet for later on.