By John Stevens
The possibility of Brexit (British exit from the European Union) is not yet seen as a serious risk factor for British and European markets. This is despite the fact that the referendum on the United Kingdom’s membership of the Union may be barely a year away (September 2016 is currently seen as the most likely date). However, such insouciance cannot last much longer, given the gravity of what is at stake.
Were the British to vote to leave, they would be choosing to impose upon themselves, at the very least, a period of profound and prolonged commercial uncertainty. Though the UK may be already described as a semi-detached member state (not in the euro, not in Schengen etc.) the complexity even of just the Single Market is now so great that the negotiation, establishment and settling in of a new relationship with the EU could not conceivably be completed, even in the most benign and mutually benevolent of scenarios, in much under a decade.
None of the most commonly canvassed templates, Norway and the European Economic Area (EEA), or Switzerland, would really be applicable. This alone must drastically reduce inward investment at a time when Britain’s dependence on capital inflows to fund its trade and fiscal deficits is exceptionally high.
But the resulting political uncertainty, amplified no doubt by such a negative economic impact, could be even more serious and far-reaching. Any British vote against membership would be most unlikely to have included a Scottish majority: thus re-opening the issue of independence in a manner in which Scotland could remain a member of the EU whilst England left (much more attractive than the leaving the EU and being re-admitted as a separate state which was on offer at the Scottish referendum).
How this would impact upon the profoundly polarized and volatile English political scene, of which Jeremy Corbyn’s success in the Labour leadership race is merely the latest symptom, is hard to predict, but cannot conceivably be anything other than immensely disruptive.
Some of those who favour the British (or even just the English) leaving the EU believe that so dramatic a vote of no-confidence, by so significant a nation, would trigger a wave of irredentist resentment of Brussels across the Continent which would shatter the dream of “Ever Closer Union”, break-up the euro and create the sort of European order based only upon free trade with which the UK would be entirely comfortable.
This heroic vision, fuelled perhaps by the anniversary of Waterloo, is entirely fanciful. A British departure from the Union would be a severe blow, to be sure, and would impose a short-term challenge for European assets, but after the initial shock is far more likely to accelerate, rather than undermine, deepening continental co-operation, especially of the eurozone (which is already set on such a path anyway). Indeed its most plausible consequence would be to guarantee that this deepening would take a form inimical to UK interests, notably in the City.
Above all this will be because of the changing patterns of global growth. Keynes once remarked that politicians are too often disciples of defunct economists. The contemporary version of this insight is that they are too often disciples of defunct fund managers.
The world-view which animates Britain’s anti-Europeans is that the last thirty years of globalization and giant emerging economies will continue indefinitely, rendering the EU passé, whereas all the evidence, especially when viewed from Berlin or Paris, or Washington or Beijing, is that we are entering a new phase where growth will come at least as much, and will be far more easily secured, from deepening and increasing technological sophistication in developed markets and within regional blocks. So a UK vote to leave the Union could prove to be, amongst other things, one of the greatest market mis-calls ever.
John Stevens is an Advisory Board member at THS Partners
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