Beyond Brexit – will the UK be missed if it leaves the EU?
On November 1, 1993 in the Dutch city of Maastricht, the European Union (EU) was established in its current form as an economic and political union of 28 countries that could operate as a single market. Offering the free movement of goods, capital, services and people between member states, its creation and the corresponding increase in trade and general economic activity transformed the EU into a major trading power. But almost 23 years later, on 23 June 2016 the citizens of the United Kingdom (UK) will vote in a popular referendum to end the national debate on their EU membership and consequently, their future relationship with their most important trading partner.
This referendum was the cornerstone of David Cameron’s re-election as UK Prime Minister and over the last few years, polls have indicated oscillating public opinion – the effects now being felt over 15,000 kilometres away where Australian shares are slumping with investors selling out across major sectors1 . This is largely based upon global fears that the UK may exit the EU (dubbed the ‘Brexit’) and augmented by uncertainty over when the US Federal Reserve will raise its funds rates. But right now it is the 23 June vote that has everyone talking. The EU is Australia’s largest source of foreign direct investment and our second largest trading partner after China2, and an exit will most certainly impact the millions of Australians who live, work, study, operate businesses in or travel to the UK and Europe.
If the polls are close and it is unlikely to happen, what is fuelling the debate?
Against the global environment of depressed economic growth and unconventional monetary policy, the continual financial and economic crises of Europe and apparent failures of the migration policies (to which most EU members subscribe) are core to the public debate. In particular, the question of the EU-UK trade relationship has taken centre stage, and given 47 per cent3 of British goods exports are earmarked for the EU market, this relationship should not be understated.
The enshrined free-trade relationship with the EU yields significant economic benefit for the UK. The Organisation for Economic Co-operation and Development estimates a 2.7–7.7 per cent loss to UK GDP4 if they withdraw from the EU while the UK’s own Treasury models actually predict they will be 6.2 per cent worse off5. The UK is already among the least regulated economies inside or out of the EU and major financial decision-makers believe the benefits of an unregulated EU market access outweighs the monetary cost. On the other hand, opponents cite the underestimation of the ability of the UK to negotiate new bilateral trade agreements with current trading partners. Keeping in mind the average accord struck between the EU and its major trading partners has taken six years to collate and implement, there is risk of trade revenue being hampered by loss of access to the EU single market.
But no country has ever withdrawn from the EU, so what could happen?
A Brexit could set a precedent for exit talks by other members struggling in an already unstable union weighed down by a trio of major crises: Greek debt, Italian banking and displaced migrants seeking asylum. An unravelling of the EU could also make the US look more to Asia, increasing Australia’s competition for exports in the region, however it could also in fact increase trade and provide more opportunity.
The Brexit is not the only challenge on the EU horizon. Sluggish economic growth along with immigration and the free movement of people across Europe – controversially augmented by the Syrian refugee crisis – is also being felt in Australia. But the immediate effects of a Brexit would not be a localised economic issue and may permeate across the EU as other members seek to regain autonomy from the mandate of the monetary union.
It is important to note that the referendum is advisory only, so even if next week the citizens of the UK vote to leave the EU, the government has the final say whether to implement. If they do, then significant structural reforms will be required to stabilise the economy, the currency and markets. Capital inflows may remain subdued, placing pressure on the pound over the medium term, while the potential for punitive trade barriers between larger EU economies and the UK may present significant hurdles to future economic growth. Further, there is the potential of a harsh reaction from the EU in the case that the UK does leave as a way to discourage exit attempts by other EU members. All of these issues would undoubtedly contribute to global market uncertainty and instability within the region and may perpetuate slower economic growth worldwide.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.