As David Cameron negotiates a new EU contract in Brussels today, the UK referendum on a Brexit takes place during the summer, with some saying as early as June 23rd. There’s a YES campaign to stay in the Union and a NO campaign to get out., with the question being:
‘Should the United Kingdom remain a member of the European Union or leave the European Union?’
Interestingly, most people in business appear to be supporting the YES campaign, but then that’s not surprising as it makes absolute sense. Leaving the EU would be disastrous for the UK economy, with impacts ricocheting around the corridors of power.
An exit would diminish the influence of Britain in all aspects of commerce. Europe would see us as a divorcee who instigated the break-up and any dumped partner can rapidly turn into a bunny boiler (as made famous by Glenn Close in Fatal Attraction). That means a trade squeeze may occur from the snubbed partner and, with 45% of UK exports going to the EU, that’s a problem. Another problem is that the partner will equally squeeze prices of imports coming into the UK, and UK citizens consume over 53% of their products from EU nations.
Another issue is that the UK economy stands at the centre of Asian-American trade, and is the reason why the City of London is seen as such a strong global trading centre. I remember back in the days of Big Bang thirty years ago that we all feared the strength of markets would move from London to Frankfurt. It didn’t happen but a Brexit could make it happen.
We saw this earlier this week when HSBC confirmed that it would keep its HQ in the UK for a generation, but would move a large chunk of jobs to Paris, if the UK left the EU. It’s not just HSBC. Any global bank would need to reallocate staff and structure into the Eurozone if the UK left. That’s Bank of America, Citibank, JPMorgan Chase, ICBC, China Construction Bank and more. There will also be some shuffling of the European banks in London, and I could see Deutsche Bank and BNP Paribas making a case for rethinking finance from London to Frankfurt and Paris.
All in all, it leaves me thinking that the financial markets and City of London would be heavily hit by a Brexit, and banking contributes 14% of UK’s $3 trillion GDP. Equally, as mentioned, the UK position as a Gateway to Europe for global financial markets would take a big hit. For example, why would China support London as the world’s centre for renminbi trading. They won’t.
All in all, the big impact on UK PLC will be:
- A 20 percent devaluation of GBP£ sterling, according to Goldman Sachs;
- Nomura has warned Brexit could push the U.K. into recession; and
- UBS estimates the loss to the British economy would be somewhere between 0.6% and 2.8% of GDP.
Oooooo. Scary stuff. Or is it? Part of the reason why banks are anti the exit is that all of this leads to a headache for banks. In fact, it is primarily banks who are against a Brexit. They are against a Brexit because, for all the reasons above, it’s going to cost them a lot of money. It’s going to cost them to move staff, offices, systems and structures into a divided Eurozone-UK operation. Equally, it’s going to cost them to shift from London as the Gateway to Europe for America and Asia to London, Paris and Frankfurt as a three-headed structure that challenges their strategies and operations. For these reasons, banks are leading the campaign against a Brexit.
Goldman Sachs, which has its European head office in London, has pumped £500,000 into the Britain Stronger in Europe campaign; and JPMorgan, Morgan Stanley and Bank of America also plan to donate six-figure sums. In an article in The Times, Michael Sherwood and Richard Gnodde, the co-chief executives of Goldman Sachs International, argue that “banks won’t disappear from London overnight, but they will over time if Britain votes ‘no’” to the European Union.
But the real question in my mind is what would be the real consequences of a No win? Would it be the start of the destruction of the Union? Certainly, we played out this scenario when Greece fell apart and decided no, but a major growth economy leaving? What would that mean for the Union itself?
Global Counsel gives a good insight into this - a 43 page PDF. I don’t agree with all of the thoughts – as mentioned, I believe that London’s global financial centre would be hit long-term by a Brexit – but here’s the Executive Summary to give you a more balanced view:
For the first time in a generation there is a serious prospect of a member state leaving the European Union. In Britain, the Conservative government, led by Prime Minister David Cameron, is committed to holding an in-out referendum by the end of 2017. This will be preceded by a renegotiation of the terms of EU membership and a lengthy referendum campaign. The opinion polls suggest that if a referendum was held tomorrow the outcome would be highly uncertain. A vote to remain in the EU is far from assured.
If the UK leaves the EU the impact would depend on the new relationship between the UK and the EU. We consider five models. Those at the extremes in terms of proximity to the EU are unlikely. The Norwegian model, involving membership of the European Economic Area, would not give the UK the political flexibility required to justify Brexit. By contrast, a much looser model in which the UK trades with the EU on a most-favoured nation basis would give flexibility, but seriously jeopardise trade and investment. The most likely models are either a Swiss-style series of bilateral accords governing access to specific sectors of the single market or a comprehensive FTA. Either would require prolonged negotiation followed by compromises and still impose sizeable costs. A lack of clarity over what would replace EU membership is just one reason why the path to Brexit - and beyond - would be long and uncertain, taking ten years or more.
The impact of Brexit through the trade and investment channels would be most severe in the UK. Regulatory divergence would increase over time, affecting trade volumes and reducing the attractiveness of the UK for investment. This would impact on European businesses invested or trading in the UK and supply chains involving UK firms, but the magnitude depends on the specific Brexit model and is impossible to predict.
The rest of the EU would also feel the impact through several other channels. The EU would lose an influential, liberalising member, shifting the balance of power in the European Council. It would become harder to block illiberal measures. Moreover, there would likely be a new regulatory dynamic with the UK outside the EU. The UK may seek to undercut the EU on standards impacting on the business environment; but this in turn may create a healthy regulatory competition by putting pressure on the EU from the outside to be more liberal in its policies.
There is little prospect of London being dislodged as Europe’s leading international financial centre. This is sustained by inherent advantages and a large network of financial and professional services that are hard to replicate. However, existing EU regulations would make it harder for London to serve European markets, particularly (but not only) for retail banking and euro trading. Some business would be likely to move to Eurozone financial centres or be lost to Europe. Competition to take this business would be wasteful. While one or two centres may ultimately benefit, businesses and households across the EU would bear the cost in terms of higher charges and poorer products.
Brexit would impact on the position of both the UK and the EU in the world. In economic terms this would be most evident in trade policy. While the UK would likely be free to strike new trade deals based on domestic priorities it would have less leverage and be a lower priority than the EU for other countries. The UK would also face the huge challenge of renegotiating the existing EU deals that would no longer apply. The EU would likewise be a less attractive partner at a time when it is only second priority for the US and Japan and a lower priority for many emerging countries. The EU may, however, be able to take a tougher stance in negotiations without the UK and make more active use of trade remedies. In addition, the EU would lose substantial hard and soft power assets although Brexit could lead to greater EU political integration and more coherent external representation in institutions and on external policy.
The overall macroeconomic impact of Brexit is hard to quantify. This is because there are several unknowns and macro models do not capture many channels through which Brexit would impact on the economy. The majority of published studies find the impact on the UK would be negative and significant. The impact on the rest of the EU would be smaller, although no comprehensive macroeconomic estimate has been published.
There are three broader ways in which the UK and the rest of the EU would be affected by Brexit, which are not captured by macroeconomic models. The first channel is uncertainty. Surveys find many UK businesses are already worried about the impact of referendum uncertainty. Yet the process beyond a referendum - if the UK votes to leave - to the point of exit and then the establishment of a new stable relationship with the EU would itself be prolonged and highly uncertain.
The second way is through the political dynamic between large states in an EU without the UK. The UK’s influence in the EU has been damaged both by the ambivalence of the UK government to the EU and by being outside the Eurozone. Even so, the UK remains one of the most influential member states. Brexit would change the relationship between other large states including, most importantly, France and Germany. It could bind them together; it could cement France’s position behind Germany in terms of influence; or it could push them apart, with the UK no longer providing political cover to mask their differences.
The third way is through political contagion. Some of the tensions in the UK regarding the EU also exist in other states, even if they manifest themselves differently and to different extents. If the UK leaves, adopts a more independent policy in sensitive areas, and is seen to succeed, this could have far-reaching political ramifications for the rest of Europe. The ‘proof of concept’ of leaving the EU could liberate disintegrative, centrifugal forces elsewhere.
We conclude that the member states most exposed to Brexit are the Netherlands, Ireland and Cyprus. Each has very strong trade, investment and financial links with the UK and in the cases of the Netherlands and Ireland are closely aligned in policy terms. Among the larger member states Germany would be affected through several channels, but perhaps most profoundly by the loss of the UK as a counterweight to France in policy debates. France may welcome the absence of the UK in policy debates, but like Spain has substantial direct investments in the UK. Italy is less directly exposed to Brexit, while Poland’s interests are concentrated on the impact Brexit would have on the EU budget and the large number of Polish residents in the UK. All member states would, however, regret the loss of international influence enjoyed by the EU without the UK and the damage that Brexit would do to the esteem of the EU globally.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...