Brexit will lead to 'years of uncertainty' for Britain

By:
Kanika Saigal
Published on:

A referendum to decide whether the UK should remain in the European Union could negatively affect trade and investment into the UK, say economists, though some businesses threw their weight behind David Cameron's announcement.

The future health of the British economy could be compromised due to "years of uncertainty" after UK prime minister David Cameron’s announcement that he will seek a referendum on European Union (EU) membership if the Conservative party is re-elected at the next general election.

The possibility of a referendum in five years' time leading to a British exit of the EU would add to a lack of confidence among businesses and could discourage investment decisions, said Sir Martin Sorrell, chief executive of advertising company WPP at the World Economic Forum in Davos.

"If I am looking at it from the point of view of WPP, [an in-out referendum on the EU] is not good news," said Sir Martin. "It is at least neutral; it is at worst negative. It can’t be positive.

"You’ve just added another reason why people will postpone investment decisions."

Even closer to home, Nick Clegg, deputy prime minister and leader of the Liberal Democrat Party, hit back at the prime minister arguing that "years and years of uncertainty because of a protracted, ill-defined renegotiation of our place in Europe is not in the national interest because it hits growth and jobs".

 

Prime Minister David Cameron at
Bloomberg head quarters

For the UK to remain an active member of the EU, Cameron argued that the problems of the eurozone need to be resolved, that European competitiveness is lacking and that the distance between the EU and its citizens "represents a lack of democratic accountability and consent" that is felt acutely in Britain.

"If we don’t address these challenges, the danger is that Europe will fail and the British people will drift towards the exit," Cameron said.

Once a new settlement has been negotiated, "we will give the British people a referendum with a very simple in or out choice: to stay in the EU on these new terms, or come out altogether", said Cameron.

However, if the UK were to leave the EU, there could be severe damage to trade between the EU and the UK. As it stands, nearly half of all UK exports go to the EU, and more than half of EU exports make their way to Britain.

"It is clear there is a need for the UK to stay within the single market after the reaction from industry bodies following his speech, otherwise there could be severe ramifications on business," said James Knightley, senior economist at ING.

One option on the table is for the UK to exit the union but to remain within the single market through the European Free Trade Association (EFTA). In effect, the UK will become more like Norway or Switzerland, but this will prevent the UK from any meaningful decision-making in Europe, and becoming part of the EFTA is not guaranteed.

There is a tension here, explained Knightley: "The UK is strong in sectors including aerospace and defence, oil and gas, and telecommunications. Those involved in these sectors will want to remain in control. As a result, if the UK were to push harder for Brexit, these groups will lobby harder to persevere with EU membership."

There may also be negative consequences to British foreign direct investment (FDI). According to Simon Hayes, chief economist at Barclays, evidence has shown that foreign firms can increase domestic productivity, innovation and competition, which can lead to longer-term economic benefits – and there has been a lot of evidence to show that decisions by international companies to do business in Europe are driven by whether they are members of the EU.

"When Spain and Portugal joined the EU, there was a huge influx of FDI from places such as America and Asia," said Hayes. "Through Europe, places like Spain and Portugal offer international investors an important platform to reach the rest of the EU, a valuable benefit to have. If the UK were to leave the EU, it might not be as attractive to FDI as it currently is and there could be negative effects on the economy."

Knightley agreed: "The UK has a lot more access to international business because of its EU membership."

This could in turn affect the UK’s position as a leading financial centre. "Financial and insurance services in the UK account for 9% of GDP, so if the UK were to lose its position as one of the world’s leading financial centres, this would be detrimental to the economy," said Knightley. "The government will need to take this possibility very seriously."

Not a problem

Some British business leaders point out that the announcement of a referendum is the wake-up call the EU needs.

In an open letter to the Times, 55 British businesses wrote in favour of a British exit. "We need a new relationship with the EU, backed by democratic mandate," said the group, including chief executives of DIY store B&Q, electrical retailer Dixons, mining group Xstrata and the London Stock Exchange.