Much of the debate around the EU referendum in the UK has focused on the impact on Britain should it vote to leave the union in June.
But are there enough reasons for the EU to want to maintain relations with the UK? During this economic and politically turbulent time, surely a united Europe could tackle some of the issues it faces better together than if the UK was operating separately?
Edward Smith, asset allocation strategist at Rathbones, observes: “From an existential or political angle, it would be better if the UK stayed in because, while there is still some discord among [EU] members about continuing to complete a single market in services - continuing to bring down the remaining barriers to trade and investment - the UK is actually one of the big champions for the free market and it is Germany’s biggest ally there.”
If ‘Brexit’ does take place, Stephanie Flanders, chief market strategist for Europe at JPMorgan Asset Management, asserts growth and investment in the rest of the EU would suffer as a result, with Ireland one of the most heavily impacted countries.
She says: “The UK is the eurozone’s single largest trading partner, with exports to the UK accounting for 2.5 per cent of GDP, on average, but that figure is more than twice as high for Belgium, the Netherlands and Ireland.
“JP Morgan Chase analysts see a hit to eurozone GDP in the order of 0.2 to 0.3 percentage points over 18 months following a vote to leave. Eurozone inflation might well be slightly lower on this scenario, due to the greater strength of the euro against sterling.”
But Mr Smith believes in this scenario the UK might come off worse than the EU in terms of trade because roughly 50 per cent of the UK’s exports go to the EU, whereas just 8 per cent of the EU’s total exports go to the UK.
He explains: “Clearly, as a relative importance, the UK has a disadvantage there, even though the monetary amount of those 50 per cent and 8 per cent [export figures] are similar.
“Relative to the total amount of trade the UK or the EU does, it’s clearly the UK that’s going to suffer a lot more uncertainty than the EU, where 92 per cent of their exports are totally unaffected.”
There are risks because a British exit means other politicians would ask for the same right to have a referendum Max AnderlOne of the difficulties in measuring the impact if Britain were to exit the EU is that, so far, the ‘Out’ campaign has not submitted any detail on what leaving would entail.
“There are risks because a British exit means other politicians would ask for the same right to have a referendum, too.
“Then it could also mean a further deterioration of the union, which may have quite significant effects on the total stability of confidence in European equities and assets generally,” cautions Max Anderl, head of concentrated alpha equity at UBS Asset Management.
Several European countries outside the union have been held up as potential models for the UK to follow should the country go it alone. One of these is Norway, which maintains its membership of the European Economic Area (EEA).
| EXPERT VIEW |
Will asset management firms have to make changes to the way they operate if Britain votes to leave the EU? Alex Haynes, partner at Stephenson Harwood LLP, explains: “The loss of EU passporting rights following an exit would be more important to some UK-based asset managers than others. “For managers with a UK-centric business, the ability to open a branch in the EU, or to market their products and services on an EU-wide basis, is probably not crucial to the short-term development of their businesses. “For others, the loss of an EU marketing passport in respect of their products could represent a challenge throughout the transitional period to an exit. “A key question will be whether they have significant assets under management in UK-based structures which have, to date, benefited from EU-wide distribution through passporting. For those funds, it might be necessary to consider reconstruction to be domiciled within the EU – that will involve time and cost, and might result in outflows as part of the process.” |
“But this is important for the financial sector because only EEA membership would guarantee the continuation of ‘passporting’ rights for UK financial services firms to do business in the EU.”
She adds: “Switzerland is often cited as a model for Britain’s relationship with Europe outside the EU. Switzerland has negotiated around 20 bilateral agreements with the EU and dozens of sectoral deals. But, in return, it has had to accept free movement of labour and has no deals on financial or any other kind of services.”
Mr Smith also notes those suggesting Switzerland’s financial services sector offers a model Britain could follow are missing one crucial point. “Actually, most large Swiss firms have been able to participate in the EU market by operating through their subsidiaries in London.
“So it’s ironic people who are campaigning to come out are offering that up as a model when, if we did come out, there would be major ramifications for the Swiss financial services sector as well.”
Perhaps a clue as to how important it is for Europe that the UK remains part of the union is whether it steps in to influence the vote.
Mr Anderl suggests: “There is probably a chance that if surveys show it’s close, the EU may throw in extra concessions to get the voters on board, that’s basically what happened in the Scotland referendum. All of a sudden the UK government gave some late concessions.”
Ellie Duncan is deputy features editor at Investment Adviser
