On February 19th, the EU reached a final agreement renegotiating the United Kingdom’s membership status. The proposed treaty changes would have minor impacts on business, but the result in the upcoming referendum on June 23rd has significant consequences both for the future of Britain and for the future of Europe. As Prime Minister David Cameron embarks on the campaign to sell the deal to British voters, FSG believes that a vote to remain in the EU is the most likely outcome. However, the polls on EU membership have been very close, and prominent politicians and public figures have recently weighed in favor of exit. We now turn to the dynamics at play that will gain the most attention, and which could tip the result of the vote, throughout the next four months.
Key issues in the UK referendum debate
No such thing as a free lunch
Supporters of Brexit argue that the UK is better off leaving the EU, as this would allow them to gain back greater control over regulatory policy, tax policy, immigration rules, and so on. However, this is too optimistic. The other countries often cited as a model for what Britain’s future could look like, Norway and Switzerland, maintain significant trading agreements with the EU on the condition that they are still subject to the EU’s rules, must pay dues, and must accept the principle of free movement. If the UK wishes to retain the same access to the Single Market, it will have no choice but to accept this. If it does not, say by implementing strict new immigration requirements on migrants from the EU, that access could be revoked, leaving trade between the UK and the rest of the EU disrupted.
EU has no incentive to play nice
The degree of Brexit’s impact would vary depend largely on the EU’s reaction. The EU itself has a strong incentive not to give the UK a smooth path to a new trading regime after leaving the Union. Rising populist sentiment across the region means that a Brexit without notable consequences could encourage other member states to leave, destabilizing the union itself. A strong EU stance that makes it difficult for the UK to leave and maintain existing trade relationships without consequence would benefit the EU in the long term, but could destabilize financial markets – and the UK’s economic well-being – in the short term.
It is precisely this financial market uncertainty that would tempt EU leaders to smooth the region’s reaction to a Brexit. Given extensive volatility already at play in currency, commodity, and debt markets globally, the EU may yet extend its welcome to a non-member UK. This would mitigate short-term risk, but would likely jeopardize the value of EU membership in the long term. This issue will not have a clear answer until the UK votes, meaning a prolonged period of economic uncertainty is likely until we know for sure which way the UK will go.
Trade agreements will need to be re-negotiated
An “out” vote would put the UK’s Trade Agreements at immediate risk, which are currently negotiated solely through the EU. The “out” campaign relies on the assumption that the UK can negotiate its own trade agreements to make up for losing access to the Single Market. However, trade agreements take time to negotiate. Large countries like the United States have already said they are not interested in pursuing a trade agreement with the UK, and large processes like TTIP would no longer naturally include the UK’s point of view. Countries that rely heavily on the UK, such as Ireland, would quickly reach new agreements to minimize disruption to their own economies. How ever other countries fall, the result will be immense short-term uncertainty, which will hit exporting companies and international businesses the hardest.
Regulating British business in the EU
The “out” campaign argues Britain will win back control over regulation from over-bearing bureaucrats in Brussels, but continued access to the Single Market requires meeting most of these regulations and standards in any case. Let’s take two examples: finance and health care.
- Finance: Without British input over EU regulation, banking regulations within the EU would likely become stricter. Brexit would put UK banks operating in the EU at a disadvantage (relative to the status quo) due to increased regulatory complexity, especially with competing EU financial sectors that will draw some jobs away from London. In addition, significant deregulation within a post-Brexit UK is unlikely for political reasons.
- Health Care: London is home to the EU’s pharmaceutical regulatory agency, the European Medicines Agency (EMA), which could need to relocate. Whether the industry is disrupted depends on continued membership in the agency, which is possible – Norway and Iceland are part of the EMA without being in the EU. Otherwise, the UK would have to resume its own separate regulation and approval process for pharmaceuticals, creating barriers to entry to the EU market and barriers to investment in the UK. Britain receives more EU funding per capita for medical research than any other country, which would not continue.
Signposts to Watch
Even if the UK ultimately votes to remain in the EU, the cost of uncertainty in the meantime is high. FSG recommends that companies monitor the following signposts, which could impact the outcome of the referendum:
- Deterioration of current EU challenges: EU membership looks less attractive as the region fails to design cohesive solutions to its political and economic challenges. The group’s struggle to address the influx of migrants and persistent eurozone financial crises only adds to the belief that the UK is better off solving such problems on its own.
- “Out” campaign clarity: To convince the 25% of undecided voters, the “out” campaign must provide believable details on how the UK could maintain its economic prosperity and security while cutting itself off from the most prominent avenue for collaboration with its neighbors.
- Parallels from the Scottish referendum: In the 2014 referendum, one of the factors that prevented the Nationalists from winning was the inability to provide a convincing answer on future use of the Pound sterling. Another preventative factor was overly rosy promises related to gaining control over North Sea oil revenue (production of which was already declining before the collapse in oil prices) that could come with independence. A lack of clear and convincing answers from the “out” campaign could lead them to the same fate.
- “Celebrity” endorsements: While the “out” campaign has been extremely successful among conservative voters, the sheer volume of undecided voters means that the endorsement of serious politicians and public figures could have an immense impact on votes from the center. The most prominent politicians to join the “out” campaign so far have been Justice Secretary Michael Gove and Mayor of London Boris Johnson, one of the most popular politicians in Britain.
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