May 2016 Issue
Until just a few years ago, the prospect of Britain leaving the European Union was unthinkable. Yet the conversation has changed. The burgeoning influence of euro-sceptic groups such as the UK Independence Party, and election of the Conservatives in 2015, has made the possibility of Brexit a realistic one. For ‘Brexiters’, leaving the EU would be a once in a lifetime opportunity to untangle the UK from the EU and its myriad rules and regulations. Sovereignty, the argument goes, would be restored and Britain’s borders would be her own again. ‘Take control’ is one of the main slogans of the Vote Leave campaign.
Supporters of a Brexit also believe the country’s economy, no longer burdened by European rule, would be able to prosper and grow, and to trade freely with Europe et al. Unbeholden to Brussels, Britain would be free to negotiate trade deals with any nation it sees fit, attracting investors and maintaining its place as one of the world’s largest trading powers.
For many, these freedoms are incentive enough for Britain to opt out of the European experiment, and as we inch closer to Britain’s in/out referendum on EU membership in June, the prospect of Britons actually choosing to go it alone looks more feasible.
Brexiters have claimed that the country would be better off on its own; however the process of decoupling from Europe would be longwinded and fraught with risk for the UK, the EU and the global economy. Indeed, this decision, though nominally about Britain, has implications well beyond its borders.
Lies, damn lies and statistics
One of the most telling features of this debate, however, is that nobody really knows what would happen if Britons vote ‘leave’ on 23 June. Both sides of the referendum have put forward considerable claims and statistics about the implications of the vote. Yet it has been extremely difficult for voters to cut through the swathes of data presented thus far.
“A Brexit could create chaos in the global financial services sector.”
One thing is clear: should a ‘leave’ vote be returned there will be significant social, economic, security and geopolitical changes at hand. The EU would lose a world-class financial centre, as well as a major budget contributor, a key defence pillar and an outspoken advocate of free markets.
The UK government would be required to file an application to leave the Union under article 50 of the Lisbon treaty. It would have little to no say over the terms of the country’s leaving settlement. Furthermore, the settlement must be reached with all remaining 27 members of the EU within a very tight two-year timeframe. Given Britain’s current trade relationship with Europe – Britain exports more than 50 percent of its goods to the EU – the effects would be far-reaching.
Risk or reward?
A ‘leave’ vote would have repercussions across a wide spectrum of industries operating in the UK. However, it may be most keenly felt in the financial services space. The scale of the settlement with Europe would be all important for the future of the British financial sector, according to Mark Carney, governor the Bank of England. Should the UK vote to leave, some financial institutions may reconsider their base in the country, given that the UK would lose its influence over the development of EU financial regulations. “One would expect some activity to move. Certainly, there is a logic to that,” said Mr Carney. “There are views that have been expressed publicly and privately by a number of institutions that they would look at it. I would say a number of institutions are contingency planning for that possibility – major institutions, foreign headquartered, which have their European headquarters here.”
Businesses and financial markets across the EU are alive to the implications of a potential Brexit. This dawning reality comes as Europe suffers from inconsistent economic growth, major geopolitical threats and the biggest migrant crisis for 70 years.
Looking ahead
Bloomberg suggests that although UK M&A activity in the first three months of the year was actually slightly up from 2015, we are likely to see a drop with companies reluctant to attach themselves to a country that could soon be outside of the European single market. For comparison UK M&A declined 60 percent around the time of the Scottish referendum when it appeared that the country was transitioning toward independence.
A number of senior Wall Street executives have expressed concerns about dealmaking in the UK, noting that a Brexit could create chaos in the global financial services sector. However, should the UK elect to leave the EU, the impact on share prices would likely create a significant opportunity for overseas acquirers. The day after Mr Johnson announced his intention to back the ‘leave’ campaign, sterling fell to a seven year low against the dollar.
23 June 2016 could mark the beginning of the end for the UK’s involvement in the great European experiment. Should that happen, the global economy will truly be in uncharted waters.
© Financier Worldwide
BY
Richard Summerfield