Better Together?

Photographer: Jason Alden

U.K. Businesses Are Ready to Fight to Stay in the EU

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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The debate on whether Britain should remain a member of the European Union is heating up, with British bookmaker Ladbrokes predicting June as the most likely month for Prime Minister David Cameron to hold his promised referendum. The good news for pro-Europeans is that business leaders have learned the lesson from Scotland's near-miss independence vote. The bad news for everyone is that the campaigning is likely to turn nasty, just as it did in the run-up to that 2014 Scottish plebiscite.

Will Britain Quit the EU?

Business leaders were late to weigh in on the financial dangers of Scotland voting to secede from the U.K.; the 10 percentage-point margin by which the liberationists eventually lost fails to capture the rising panic in the days ahead of the vote as polls suggested the race was neck-and-neck.

So the news that Bank of America, Goldman Sachs, JPMorgan and Morgan Stanley are all donating money to the group campaigning to keep Britain in the EU is evidence that business community is awake to the risk of "Brexit" -- Britain exiting the EU.

Here's chart showing the shift in sentiment in a selection of surveys conducted by polling company YouGov during last year:

Economists are already saying that the unpredictability of the referendum gives the Bank of England additional reasons not to raise interest rates, and has contributed to the pound's 3.5 percent drop against the dollar this year. Mike Ashley, a fund manager at Pimco, estimates that the uncertainty following a vote to quit the EU could wipe as much as 1.5 percent off gross domestic product in the following 12 months. Credit Suisse reckons the damage to GDP could rise to as much as 2 percent in the aftermath: 

We think that would mean a sharp fall in sterling and the price of U.K. assets, including equities, real estate and gilts. The fall in currency would raise inflation and consequently squeeze real household incomes, depressing consumer spending.

Credit-rating company Standard & Poor's, which currently grades the U.K. at the top rating of AAA sees the financial services industry as vulnerable to the aftershocks of a decision to go it alone, and warns that a creditworthiness downgrade might be the result:

Financial services attract 30 percent of the inward foreign direct investment into the U.K., equivalent to 17 percent of GDP. Nearly one-half of the FDI into the U.K. financial services sector comes from EU investors. While we think London would maintain its status as a global financial centre in the event of a Brexit, global banks could ultimately consider other locations as bases for their European operations.

Part of any post-Brexit negotiations would involve an issue called passporting -- a system that allows firms in one EU country to do banking and trading business across the bloc. Losing those rights -- and make no mistake, Frankfurt and Paris would love to take banking business away from London -- would make Britain less relevant as a stepping stone into Europe, both for foreign  for U.S and Asian institutions, and perhaps for domestic banks with global aspirations. 

As the vote gets closer, the dirty tricks brigades on both sides of the debate are likely to get busier. A group called Vote Leave, with 13,000 followers on Twitter, posted this earlier in the week:

Source: Twitter

What the Unilever chief actually concluded in his interview with the Guardian newspaper, though, was that "I personally think it would be very good if Britain could stay."  

The anti-EU side already has some prominent supporters from both business and even the ruling Conservative party, including Crispin Odey, one of the country's best-known fund managers, and Daniel Hannan, a member of the European Parliament. And at least one world famous celebrity -- the actor Michael Caine -- is scathing about being "dictated to by thousands of faceless civil servants" in the EU (which ignores the dirty little secret of domestic U.K. policy, which is basically run by the bureaucrats at the civil service whose lifespans vastly outdo the careers of the ministers they ostensibly serve).

Moreover, research by YouGov suggests that smaller businesses are less keen on staying in the bloc than their larger counterparts. Among small- and medium-sized enterprises, 42 percent want to leave the EU while 47 percent favour staying. That in turn could sway the outcome of the referendum, YouGov Chief Executive Officer Stephan Shakespeare said this week:

With SMEs accounting for 60 percent of all private sector employment in the U.K. and 47 percent of private sector turnover, if SME employees are influenced at all by their companies' or employers' interests regarding the EU, then this is the cohort campaigners will want on their side when addressing the business aspects of the referendum.

The truth is that estimating the economic impact of Britain leaving the EU is guesswork at best. No-one really knows what kind of trade deal would ensue. Pessimists claim Britain's partners on the continent would want to inflict as much punishment as possible on a departing member "pour encourager les autres," as Voltaire put it; and they may well be correct. Optimists argue that other countries have healthy trading ties with the EU without the obligations of membership, and that argument also has merit.

Cameron took an enormous political gamble in promising a referendum on EU membership. The danger is that the dust kicked up by opposing forces during the battle will cloud the issue at stake -- what kind of relationship Britain wants to have with the rest of Europe in the coming decades.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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