Should I stay or should I go now?
An analysis of the economic impact and implications for financial markets from the outcomes of the
United Kingdom’s referendum on membership of the European Union by Tom Elliott. 14 April 2016.
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Guest Speaker and Consultant to Whitechurch
Tom Elliott is an internationally renowned consultant, engaged by
Whitechurch for his expertise on political economics. Tom is a visiting
lecturer of the Department of Political Economy at King’s College London; a
frequent commentator on Bloomberg and CNBC and a former Executive
Director and market strategist at J P Morgan Asset Management. Prior to
which Tom held posts at Grieg Middleton and Euromoney, Publications Ltd
the latter as a feature writer, primarily on European corporate stories and
capital markets.
Tom gained an MSc in Economic History from the London School of
Economics after obtaining his first degree in History from The University of
Sussex. He is truly independent, non-political, insightful and entertaining.
14th April 2016
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Agenda
• Section 1: The history of an unhappy marriage
• Section 2:
Some facts
• Section 3:
The near and long-term effect of Brexit on financial markets
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"Should the United Kingdom remain a member of
the European Union or leave the European Union?"
• The wrong question
• The wrong time
• Asking the wrong people
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Section 1:
The history of a an unhappy marriage
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Once upon a time…
• Margaret Thatcher: joining the
EU reflects the ‘need to work
together as a community and an
alliance of nations for the
wellbeing and betterment of
mankind’
Source: FT 1/3/16
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The man who turned the tables
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For and Against
Pro
• Labour Party/ unions (from
1988)
Anti
• Labour Party / unions (until
1988)
• Conservative Party
• Parts of the Conservative Party
• Big business
• Smaller companies
• Guardian/ FT
• Daily Mail/ Daily Telegraph
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And the opportunists …
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Principle arguments - Remain
• Access to single market for goods and labour, enabling faster noninflationary growth in UK
• Better trade deals achieved with rest of world than alone
• UK has helped fashion the EU, away from French design
• Geopolitical security
• Promotes national unity (Scotland and Northern Ireland)
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Principle arguments - Leave
Populist
UKIP - Nigel Farage
Anti-modernity and globalisation
Loss of sovereignty as end in itself
Tricked into entering EEC in 1973
Immigration and effect on public
services
• Cost of membership
• EU as friend of big business
• EU as unaccountable, power grabbing
elite
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•
•
•
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Principle arguments - Leave
Free market
UKIP MP Douglas Carswell, Lord Lawson
• Global ambitions
• EU limits trade opportunities elsewhere,
protectionist
• Interference in the economy (e.g. labour and
welfare)
• Red tape hinders business
• Not interested in immigration limits or
sovereignty arguments
• EU as unaccountable, power grabbing elite
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Section 2: Some facts
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Some facts – sovereignty – Cameron’s deal
Source: SN21/16 European Council.
‘Draft decision of the heads of state and governments, meeting within European Council concerning a new
settlement for the United Kingdom within the European Union’. Page 10 , 19/2/2016.
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Some facts – cost of membership
• UK current net contribution of EUR 11bn/ GBP £8.5bn (after rebate)
• This equates to 1.1% of 2015-16 UK government spending of £760bn
• And equates to 0.4% of GDP
• For comparison, international development budget is 0.7% of GDP
Sources: HM Treasury ‘European Finances 2015’ and ONS
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Some facts - impact on growth
• No empirical evidence available
• UK was ‘the sick man of Europe’ in 1973 when it had free
trade with Commonwealth and much greater sovereignty
• UK GDP growth has outpaced that of Germany, and many
other original members, since 1985
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Some facts - trade
• Overseas trade is equivalent to 28% of UK GDP (compared to
26% for China).
• 63% of goods exports by value are linked to EU membership.
• 3.5 million jobs in UK exporters linked to European
manufacturing orders of over EUR 400 bn.
• EU is largest destination for UK investment & UK is largest
destination for EU investment.
Source: World Bank and Capital Economics
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Some facts – World Bank survey
Best places to do business in 2016
The top
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•
•
•
•
•
•
•
•
•
1) Singapore
2) New Zealand
3) Denmark
4) South Korea
5) Hong Kong
6) UK
7) US
8) Sweden
9) Norway
10) Finland
Others
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•
•
•
•
•
•
•
•
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12) Macedonia
15) Germany
26) Switzerland
27) France
33) Spain
34) Japan
43) Belgium
45) Italy
51) Russia
60) Greece
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Some facts - ‘red tape’
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Some facts - alternative arrangements
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Some facts - Norway and Switzerland
Norway EEA
Switzerland EFTA
• Has market access
• Applies rules after ‘negotiation’
• Pays 0.15% of GDP to EU
• Pays 0.1% of GDP
• Has to apply EU laws
• Hasn’t secured passporting for
its financial services
Both have to apply free movement of labour
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Some facts - immigration
• Non-EU migration to UK is greater than
EU migration: of 8m foreign born in UK,
3m from EU
• Employment: EU migrants have higher
employment rates in UK, at around 85%,
than non-EU migrants
• Benefit claims: 18% of UK citizens, 9%
non-EU migrants, 5% EU migrants
• EU immigration has helped alleviate skills
shortages and has helped keep wage
inflation own, and interest rates low
Source: ONS
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Some Facts - UK Gov’t policy & EU migration
• No moratorium on Eastern European migrant workers imposed in
2004.
• No re-investment of increased tax revenue in services used by
migrants.
• Increase in adult minimum wage to £9 approx. by 2020.
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Section 3.
The near and long-term effect of Brexit on
financial markets
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Neil Woodford / Capital Economics on Brexit
Gains
Losses
• Less regulation
• Savings on EU contributions
• Ability to strike new trade deals
• Skills-based migration policy
• Possible tariffs on exports to the
EU
• Loss of access to the single
market
• Damage to the City
• Drop in investment caused by
uncertainty
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Brexit in the City
• Financial services: £19.4bn surplus with EU (equivalent to 0.9% of GDP)
• No EU tariffs on financial services
• Passporting rights would probably go
• Renewed efforts by France and Germany to seize euro trading from London
• 2017 Markets in Financial Instruments Directive II, will force non-EEA
institutions to have equivalent levels of regulations in home country before
doing business in EU
• Bilateral trade deals may compensate
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PwC on Brexit
• Two scenarios that depend on different levels of market access and
migration from EU.
• Best case - 3% off GDP growth by 2020, 0.5% by 2030
• Worst case - 5.6% off GDP growth by 2020, 2.7% by 2030
• However: ‘The UK would remain a relatively large, affluent, and
growing economy in both our exit scenarios, just not quite as large or
affluent as in the counterfactual’.
Source: Financial Times, 22 March 2016.
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Effect of Brexit on UK – first six months
General
• Economic shock: FDI put on hold, exporters face uncertainty (esp. in
sectors in which we run a trade surplus ), inflationary concerns rise on
fall in sterling, slower growth reflecting uncertainty
• Political shock: will Conservative Party split and lose its majority? Will
Scotland leave UK? Will Ireland/Ulster issue re-emerge?
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The first six months – market shock
Financial markets
• Sterling falls sharply. Buy dollars and US-based assets
• Equities: FTSE 100 outperforms small and mid caps in downward market
due to foreign earnings
• Gilts: Down in price (yields higher) due to uncertainty in domestic politics,
fall in sterling and rise in inflationary concerns
• UK Corporate bonds: Underperform gilts, on account of increased risks
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The first six months - market shock (cont.)
Interest rates
• Bank of England policy rates: no change until greater clarity
• Bank lending rates: up, reflecting higher market rates as gilt yields rise
and interbank lending costs rise
• Bank deposit rates: no change, as banks increase their margins
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The first six months – market shock (cont.)
Property
• Mortgage rates rise, and banks limit new
lending
• Demographers downgrade immigration
and population growth
• But property prices outside London
appear resilient
• Buy to let and overseas purchasing will be
made harder if Brexit populism becomes a
dominant political culture
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Effect of Brexit on EU economy and markets –
first six months
• Economic shock if UK leaves: a large net contributor, trade partner &
proponent of free-markets.
• Political shock: how to stop further break-up of the EU? Populist politicians
pursue UK-like strategies.
• Market shock: euro and regional stock markets will weaken.
• Geopolitical shock: undermines EU credibility on trade, security etc.
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Effect of Brexit on UK – long term
• We don’t know, but difficult to see UK richer.
• At best, no change.
• What will UK politics look like?
• What will European economy and politics look like?
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Summary
• If Brexit happens, near-term disruption to economy and financial
markets is inevitable.
• But that is not an argument for voting to Remain, if long-term
benefits look good.
• Long-term benefits are impossible to know, particularly given the
uncertainty as to which strand of the Leave campaign will dominate
UK politics.
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