Get informed on the Brexit referendum: the facts without fear or favour
Written by Carl Turner on May 04, 2016.
If you have any question or comments on this article please email Carl at cturner@infinitysolutions .com
What is Brexit?
Brexit is media shorthand for the possibility that the UK will leave the European Union. On Thursday 23rd June 2016 the British public will vote in a referendum on the question ‘Should the United Kingdom remain a member of the European Union?’. Voters will select from two boxes marked ‘Remain a member of the European Union’ or ‘Leave the European Union’. The referendum is the fulfilment of an election pledge by Prime Minister, David Cameron, made to pacify members of his own party and the UK Independence Party (UKIP).
Who’s in and who’s out?
What is particularly interesting about this referendum is how both sides of the political spectrum are divided over the issue. David Cameron, who is a Remain man has big hitters within his party in the opposite camp, most notably Boris Johnson. This could lead to a major political shake-up should the result be a leave vote with many predicting that it would be untenable for Mr Cameron to stay prime minister. Divisions have also appeared in the Labour party. While officially the party is for staying in and leader, Jeremy Corbyn has gone on record to say so, many party members are in the ‘leave camp’. The press has seized on the fact that Mr Corbyn has not been a supporter of EU membership in the past. Given these divisions, a leave vote could significantly alter the political landscape in the UK.
As both the ‘remain’ and the ‘leave’ camps are cross-party initiatives, voters will be unable to vote according to party allegiances. According to the polls, the most likely factors to indicate how individuals will vote are based on age, education and where they live, with middle-class, young and educated voters from the South more likely to want vote ‘remain’ and over 55s, working class and unskilled or semi-skilled workers more likely to vote leave.
What do the polls say?
This race is being run neck and neck with the outcome too close to call. The latest ORB poll carried out for the Daily Telegraph indicated that 51% would vote to remain and 46% to leave with 3% undecided. That said, Barack Obama’s statement that Britain would be ‘at the back of the queue’ for any trade deal with the UK has been seen as a big blow to the pro-Brexit camp and may significantly influence voters towards the remain campaign. There is still a long way to go in campaign terms though.
What are the main issues under debate?
The likelihood is that this referendum will be decided on the most emotive subject of them all. Immigration is the biggest political hot potato in the UK at the moment and a subject which divides the British public. It will be the main reason why many voters will choose to leave the Union.
Under EU law anyone from any of the 28 EU member states has the right to live in any member country. This gives Brits the freedom to settle in Europe, and many have done so with an estimated 761,000 living in Spain and 200,000 in France. However, it has also resulted in almost 950,000 Eastern Europeans from Poland, Bulgaria, Romania and the Czech Republic moving to the UK according to the Office of National Statistics.
Net migration remains way above government targets and for many Brits struggling in a landscape of austerity the flow of unskilled workers into the UK equates to competition for jobs and raises the possibility of unemployment. On the other side of the coin, others argue that these largely young and low paid immigrants boost consumption and keep wage inflation low.
Those who vote to leave because they wish to control immigration may be disappointed. If the UK wishes to negotiate trade deals with Europe post-Brexit, labour mobility is likely to be a major bargaining chip. Britain may still have its arm twisted into allowing EU workers to continue to have the right to work in the UK in return for the right to trade freely with EU member states.
Cross border security is a major concern in the UK with the growing threat of terrorist activity throughout Europe, especially in the wake of the recent attacks in Belgium and Paris.
This issue is closely linked to that of immigration with the EU’s ‘open door’ policy allowing easy access into the UK strongly criticised by the pro-Brexit camp who want to be able to control exactly who can come in or out.
However, Metropolitan Police chief, Sir Bernard Hogan-Howe, has warned of an increased security threat if Britain leaves the UK. He claims the current system of shared intelligence with other European countries including criminal history, DNA and fingerprints, would be jeopardised by a vote to leave and that Brexit would cause a ‘bureaucratic nightmare’ which would damage police powers. He predicted that the heightened security risk would last two years while bilateral security agreements were negotiated with countries within the EU.
The EU was originally set up as a common market to allow trading between member states with no import or export tariffs. The EU is far and away Britain’s greatest trading ground with 50% of exports staying within the EU. Another 12% of Britain’s export trade comes via EU trade agreements with a whole host of countries including Switzerland, Norway, Mexico and South Africa. While coming out of the EU will mean that the UK will lose much of this access to trade and will need to renegotiate its own terms with each trading partner (including the US as President Obama made abundantly clear last week), those who favour leaving Europe claim that EU bureaucracy is costly and hampers innovation for many businesses and argue that many British small and medium sized businesses are bound by EU regulations even though they do no direct trade with the EU.
A ‘leave’ vote could affect the way companies operate and invest into the UK. A survey conducted by the Bertelsmann Foundation of 700 British and German companies revealed that 29% would reduce capacity or relocate from the UK and that 80% of the companies surveyed were in favour of the UK staying in the EU. The BMW group, which owns six British companies including Mini and Rolls Royce have warned of job losses in the thousands if Brexit goes ahead although the pro-Brexit camp claim the risk is exaggerated.
Many fear that global banks will relocate elsewhere threatening London’s status as a major trading centre for financial services. The survey reveals that there is overwhelming support in the finance sector for Britain to remain in the EU with many finance companies believing that Brexit would have a negative impact on employment, revenue and investment. Indeed, some of the big Wall Street banks, including JP Morgan, Morgan Stanley and Goldman Sachs are major donors to the ‘remain’ campaign.
If voters choose to leave the EU it is likely foreign investors will be very cautious to lend to the UK at least in the short term until the dust settles, which could take several years. Sterling and the price of UK assets are also likely to fall as a result of uncertainly and increased risk.
What would happen after a leave vote?
As no member state has yet left the EU this is far from clear. The procedure for withdrawal has been laid out according to the Treaty of Lisbon (2009). This specifies a two year time limit for negotiations over the terms with a possibility of extension but only with the agreement of all remaining member states.
The holy grail as far as pro-Brexit campaigners are concerned is to maintain trade links with the EU but without the heavy burden of regulation from Brussels. In reality, this will be difficult to achieve. Analysts point out that the EU has no incentive to make the process easy for Britain amid fears that a successful independent Britain may encourage other countries to follow suit and leave.
Indeed, some commentators have questioned the very future of the EU if Britain, the second largest economy in the EU behind Germany, were to leave. Anti-EU sentiment is growing in France, Spain and Italy and if exit proves successful for the UK, voters in other countries may push to leave. Economically, Britain’s exit and the subsequent loss of trade could be trigger enough to push the EU back into recession and maybe even to break up the union entirely.
What would Britain’s future options be?
Many supporters of the exit campaign cite Norway as an example of how the UK may proceed. Norway is a member of the European Economic Area (EEA) along with Iceland and Lichtenstein. These nations have formed the European Free Trade Association (EFTA) with the EU which gives them the right to trade with member states but they have limited say on rules and regulations and must comply with EU trade regulations in many areas including working time directive and, crucially, the principles of labour mobility. As mentioned above, it seems unlikely that Britain will be able to negotiate a trade deal with the EU without accepting mobility of labour.
The economic consequences of Brexit for the UK
The fact is that we cannot be certain what the economic consequences will be if Britain leaves the EU. Possible consequences could be:
• The weakening of sterling
• Reduction of GDP, at least in the short term, in the range of 0.5 to 2%
• A fall in exports
• Lower growth
• Reduced consumer spending from reduced migration inflows
• Weaker investment growth
• Higher taxes and lower public spending to overcome a bigger deficit
What should I do about my investments?
Much of the media frenzy surrounding Brexit is sensationalist and biased and the reality is that the economic fallout is impossible to predict. There will be volatility for markets and for sterling as a result of uncertainty in the run-up to the referendum but, as Jason Hollands, spokesman from our investment partner, Tilney Bestinvest, points out "The UK stock market is dominated by large international companies, whose performance is not closely linked to domestic UK issues. Markets don't like uncertainty and there are real risks around. But the Chinese economy, US interest rates and oil-price movements are more significant risk factors."
I would give the same advice as I always do when volatility rears its ugly head – stay invested but with a diversified portfolio.
How to Vote
If you are a UK expatriate and have been registered to vote in the UK in the last 15 years you are able to vote in the EU referendum on 23rd June.
You need to register as an overseas voter online at gov.uk/register-to-vote.
Once registered you can then decide how you wish to vote, either by proxy - appointing someone you trust to vote on your behalf or by post.
You need to register by 16th May to vote by post and by 7th June to vote by proxy.
You can read more information at aboutmyvote.co.uk