Our Opinion: 2016

Brexit campaign launched

After a period of long and, at times, tense negotiations, David Cameron has secured a deal with the European Union about the terms of the UK membership.

The terms of the deal are enough for the Prime Minister to feel confident in campaigning to remain in the UK. It clearly has not been enough to convince everyone in the Conservative party: six cabinet minister including Secretary of State for Justice, Michael Gove have said they will campaign to leave the EU. But the most high profile defection came from London Mayor, Boris Johnson.

UK markets are likely to be volatile in reaction to the inevitable swings in the news flow around such a large political event. Sterling is likely to bear the brunt of any volatility, but domestically focused equities and gilts may be caught in the currency’s wake.

David Cameron has announced that the referendum date will be June 23. As the referendum is only four months away, the campaign period will be short. The campaigns have already started but they are likely to step up a gear after the Easter break, which should mean around twelve weeks of campaigning.

Agreements have been reached on the four areas set out by David Cameron in his letter to the President of the European Council, Donald Tusk on 10 November 2015. These are:

  1. Economic Governance 
Agreement on single-market safeguards for non-euro members. Measures that support the deepening of economic and monetary union will be voluntary for member’s states whose currency is not in the euro.
  2. Competitiveness
. The EU must increase efforts to enhance competitiveness and regulatory burdens, with measureable targets set.
  3. Sovereignty
. Recognition that the UK is not committed to further political integration into the European Union. Formal acknowledgement that references to “ever closer union” does not apply to the UK.
  4. Migrant and welfare benefits
. Following the imposition of an emergency brake, in-work welfare benefits can be phased in over a four-year period. This applies to new arrivals to the UK and lasts for a period of seven years. On child-benefit payments, EU payer countries can now choose to index these payments to the conditions of the member state where the child resides.

There will undoubtedly be much debate about whether these reforms go far enough, but given the constraints that come with membership of any international union, they are not insignificant. However, the most crucial aspect of these reforms is that the Prime Minister feels they are sufficient enough for him to campaign for the UK to remain in the EU.

The subject of Britain leaving the European Union is so broad, and carries many potential consequences – both good and bad. In the event of a BREXIT, what would happen to specific industries (e.g. financial services)? Would the UK’s own union stay intact or could another Scottish referendum be triggered? Issues around political cooperation, security, and defence have also not been addressed. It is not that these issues are unimportant; they clearly are, as EU membership is about more than economics over the long term. Nevertheless, for determining the outcome of the forthcoming referendum, the crucial question in our mind is what could the impact on the UK economy be as a whole?

A decision to leave the European Union would damage the UK economy in the short-term. Uncertainty about the UK’s future relationship with it largest trading partner would likely slow business investment and hiring. This nervousness would undoubtedly also spread to households, consumption, and housing market activity.

The UK economy would, in time, recover from this shock. The UK is the world’s fifth- largest economy, open in its outlook and enjoys flexible labour markets, strong legal and property rights, and international investor credibility.

Most economists I speak to conclude that avoiding a Brexit will be the best outcome for the economy in the short-to-medium term.

But will this be the last time the UK goes to ballot box over EU membership? Our strategic partner, UBS, recently concluded, “for the EU and the Eurozone to achieve its full potential, more integration on economic and political matters is going to be needed over the coming years.” The success or failure of these efforts could lead to further tensions in UK-EU relationship. If the UK continues to pursue an arms-length relationship, it is likely that future tensions will lead to the UK public being asked yet again if the European vision is really the one they wish to share in.

It is going to be an exciting few months ahead!


Alexander Wade

24th February 2016