From architects and airlines to insurers and accountants, Britain’s services powerhouse has much at stake in Prime Minister David Cameron’s “Brexit” gamble.
A vote to leave the European Union in the June 23 referendum could hamper efforts to make it easier and cheaper to do business in the bloc, potentially costing service providers billions of pounds, analysts and trade experts warn.
“We would lose our voice in how changes in regulation were designed, and we would lose our ability to try and push for more integration,” said Thomas Sampson, a trade specialist at the London School of Economics. “As a major exporter of services to the rest of the EU, the U.K. would stand to gain a lot from completion of the single market in services.”
In jeopardy among other things is a push to establish cross-border recognition of qualifications ranging from medicine to computing. That’s been rejected by Germany and France in the past and is unlikely to happen without U.K. membership in the bloc.
A Brexit could also see the U.K. lose its right to “passport” activity in the European Economic Area, which allows financial-services firms to sell into other EU member states without having to set up a branch there.
And Cameron has warned there is no guarantee that a Britain outside the EU could replicate the sort of trade agreements that have brought down the cost of everything from air travel to mobile-phone roaming charges.
According to the U.K. government, full liberalization of the single market for services could add 1.8 percent to EU growth.
Services account for 79 percent of U.K. gross domestic product and employ more than 28 million people. Just how vital the sector is to Britain was underlined by figures published Thursday showing it drove the expansion in the fourth quarter, as it has done for years.
With exports of services far exceeding imports (the surplus stood at the equivalent of $128 billion last year), the sector also goes a long way toward offsetting the persistent shortfall on trade in goods and limiting the drag on growth.
“It’s the area for Britain where EU action could deliver the most obvious gains,” said John Springford, a senior research fellow at the Center for European Reform. If there was further integration in the single market for services, “you’d see Britain’s proportion of EU services markets expand quite largely.”
There’s a risk that the pressure for reform could slow if Britain left the EU, according to Stephen Booth, co-director of the Open Europe think tank. “Everyone would lose out in the sense that the EU would lose a major liberalizing force,” he said.
Even if Britain did retain access to the single market upon leaving the EU, it would be unlikely to have much of a say in how that integration proceeded. That's the case for Norway, Sampson said, which “participates in integration within the single market but it doesn’t get any say as to how that integration proceeds.”
Oxford Economics estimates that by 2030, a Brexit would imply a loss in gross value added in the U.K. of 2.2 percent in financial services and 1.3 percent in business services, which together account for almost a third of the economy.
The risks to the industry have been highlighted by Bank of England Governor Mark Carney. In recent testimony, he told lawmakers that losing passporting would “add to costs of compliance and costs of doing business” as firms would be forced to establish subsidiaries in the EU.
“The risk that passporting is lost or further conditionality is put on passporting would likely have the most impact on the financial-service industry,” said Simon Hunt, U.K. Banking and Capital Markets leader at Pricewaterhouse Coopers. “For the people who operate via passporting, the referendum is going to create a level of uncertainty about what structure is the right structure for them to have, and how much of their business they can continue to have in the U.K.”