FEW periods of the UK’s political history have been as testing as the one we are in. This is the third time in as many years that a popular vote portends real alteration to our political and economic landscape.
We thought the Scottish referendum would rid the landscape of uncertainty. Then it was the general election with its crop of misleading opinion polls. Now comes the referendum on the UK’s membership of the EU. As before, the opinions polls suggest that the result hangs in the balance, heralding deep uncertainty ahead.
Some are convinced that a UK exit from the EU would be calamitous. Chancellor George Osborne has warned that a Leave vote would deliver “a profound economic shock”.
For others, the prospect of a Remain vote would condemn us to a permanent loss of discretion, flexibility and the ability to block growth-destroying regulation.
Many weeks of argument now lie ahead – and our ears are already tingling with repetitive stress injury. For households and businesses alike, the prospect is of a paralysing uncertainty as we talk ourselves into a state of blue funk over the outcome. Investment and spending decisions are put on ice. Hiring decisions are postponed. The pound will start to weaken. Interest rate worries will return. And all this when the pace of growth has been slowing and business confidence is brittle.
Opinion within the business community is by no means as clear cut and decisive as it was back in 1975. Asked by the Federation of Small Businesses what would influence their vote, UK and Scottish firm highlighted broadly similar factors – with the governance of the EU and the free movement of people regarded as top concerns. However, slightly fewer Scottish businesses suggested that the cost of the EU was a key issue and slightly more firms north of the Border highlighted EU funding as something that could sway their vote. When Scottish small businesses were asked what factors would influence their vote, 71 per cent said EU governance (eg EU decision making); 70 per cent said free movement of people; 62 per cent said economic impact on UK; 60 per cent said administrative burden on businesses as a result of complying with regulation; and 59 per cent said costs of EU membership.
But the issue, of course, is wider than a cost-benefit calculus on the benefits and disadvantages of membership. The debate will prove emotional and contentious. And what are the realities about which we can really be sure?
It’s often said that the vote will settle our relationship with the EU “once and for all”. Dream on. There is every likelihood that in the event of a Remain’ vote, the operations and decisions of the EU will prove as contentious as they always have.
Nor is there any certainty that there will no chance to vote again in five years’ time. Denmark got a second referendum on the country’s Maastricht deal having voted against it first time around. The moral drawn by Boris Johnson is that we should vote Leave to get better membership terms for a second referendum.
Then there is the wider impact across the EU of a Leave vote. Britain’s departure will encourage other separatist movements such as Catalonia, with the potential to create further disruption, while here at home it would re-ignite calls for a second Scottish independence referendum. It might also give support to more isolationist parties in France and Germany, which both face national elections in 2017.
More immediately, the resulting uncertainty over the economic impact of a Leave vote, says Investec, will encourage markets to seek a higher risk premium for holding sterling assets.
Finally, a vote to leave will not in itself lift the uncertainty but herald the onset of yet further doubt. It would mark the start of a period of negotiation on the terms of exit – and this could take a minimum of two years to complete.
The strain will be felt on the pound. “Any material disruption to the UK economy and international trade”, Investec warns, “would be distinctly negative for sterling. The UK continues to run a current account deficit of around four per cent of GDP, and the money that flows out of the country to buy foreign goods and services needs to be replaced.”
Sterling has already fallen back on foreign exchange markets. The shortfall could be made up by foreign direct investment (in corporate or infrastructure assets, for example) or capital flows (into investment assets, ranging from bonds and shares to property). These investment flows rely on a combination of perceived good value and confidence. “If external investors are unsure on both counts owing to limited visibility on, for example, trade agreements, Investec adds, “then they are likely to sit on their hands.”
Some investment banks have suggested the pound could lose between 10 and 15 per cent of its value in the event of Brexit based on experience during the financial crisis of 2008. However, a full blown sterling crisis looks unlikely: the fiscal position is improving and the country is solvent. And there are many thousands of businesses – particularly in the SME sector – that would positively welcome a lower pound, helping to make UK goods and services more competitive in overseas markets.
And many fear a Remain vote will tie us more closely into a political and regulatory system that has condemned the EU to high unemployment and a lamentable economic performance for decades.
So, not so much a resolution on 23 June – but a “Neverendum”. «