Brexit: a risky leap into the unknown for the UK economy?

May 10, 2016

Peta Grewal, digital marketing manager of Kontainers looks at the impact if the UK chooses to leave the EU on June 23

With a referendum on EU membership set for June 23 2016, the business community can be forgiven for being nervous about the results.

Prime Minister David Cameron said before the last general election that he wanted to avoid Britain being, “sucked into a United States of Europe.” He made renegotiating the UK’s role in the EU a cornerstone campaign pledge, a promise he sort-of delivered on.

A renegotiation did take place in February, which POLITICO Europe described as Cameron doing “an excellent job of playing a weak hand well.” So far, polling numbers show consistent public support from the public for staying in the EU.

Shortly after the renegotiation was announced, Chancellor George Osborne, a strong advocate for staying in Europe, was allegedly overheard asking colleagues, “So, are you supporting Leave, or do you prefer to have a career?”

The outspoken Boris Johnson wrote in 2013 that “most of our problems are not caused by Brussels, but by chronic British short-termism, inadequate management, sloth, low skills and a culture of easy gratification and under-investment.” And yet, it didn’t take long for the former Mayor of London to announce his support for the Out campaign, insisting that leaving Europe would be like a prisoner escaping jail. Claiming that, “it would be wonderful. It would be a huge weight lifted from British business.”

Many suspect his leadership of the Out campaign is more about political ambitions than serving British interests, with one Guardian journalist wondering, “How can the mayoral position be Brexit when London has not been asked? Johnson is not London and the apparently irresistible charisma is looking, well … utterly resistible.” His recent comments that U.S. President Obama’s statement about Brexit indicate “a symbol of the part-Kenyan President’s ancestral dislike of the British empire,” have done little to help the Out campaign.

It seems that the British business community largely disagrees with Boris Johnson. A letter signed by one-third of FTSE100 leaders, including BAE Systems, Shell and EasyJet, states that “Britain will be stronger, safer and better off remaining a member of the European Union.”

The majority of Institute of Director members also support staying in the EU, along with 60 per cent of EEF members (representing 40,000 businesses), the manufacturers’ trade body.


Putting Trade at Risk

Trade with Europe has always been vital to the economy of the UK. Right now, this represents billions – £62 billion to £78 bn annually (£3000 per-household) – according to a detailed Confederation of British Industry (CBI) report. According to a more recent CBI study, conducted by PwC, the “cost to the British economy of leaving [could be] as much as £100 billion – the equivalent of around 5 per cent of GDP – by 2020.”

Perhaps unsurprisingly, eighty (80%) percent of CBI members (including 77% of SME’s) would vote to stay in Europe.

Campaigners to get Out of Europe were shocked to hear, from President Obama on a recent trip to the UK, that trade with America could also be put at risk. We would lose the collective bargaining power we currently have through the EU, putting us at the back of the line for lengthy and complicated trade negotiations. The IMF also considers Brexit a serious risk to the UK economy.

The Economist, using IMF and HMRC data, points out that “the EU now takes over 51 per cent of British exports of goods, and close to 45 per cent if services are added in.”

European trade would not dry up overnight. Germany derives a significant amount of export revenue from the UK too, so reciprocal agreements would need to be hammered out.

UK Trade & Industry (UKTI) wants SME’s to export more, which is something Kontainers, a British technology startup is helping with, since booking a freight shipment is now as easy as buying a plane ticket online. Until recently, there was no transparency for customers and no way to accurately compare prices for freight shipments. This is all positive for UK exporters; however, with Brexit on the horizon, many are wondering what a vote to leave could do for trade with Europe.

Tariff wars and red tape are one possible consequence; the results of a messy, visceral and painful divorce from a partner the country has been at peace with for decades.


Another looming problem is the potential impact on the financial services sector.

Depending on how Europe reacted to the UK leaving, some cities like Frankfurt could seek to capitalise on the uncertainty and lure banks away from London. Financial services are responsible for £126.9 billion Gross Value Added (GVA) to the economy, supporting 3.4 per cent of the countries jobs.


European Money in Action

The North East is one of several regions that has benefited extensively from European money, provided by the European Investment Bank and the European Regional Development Fund (EDRF). Hundreds of millions in investment funds, that constitute a slice of the £3000 per household in benefits the country receives, compared to the £340 annual (per-household) cost of membership, according to The Economist.

Start-ups and SMEs, particularly in regions outside London, would be more fragile without European funding, less inclined or able to take long-term risks, such as recruit graduates or invest in marketing, sales and growth activities. Take Europe away, as a funding source, and where would the money come from? That isn’t a hypothetical question.


Brexit: What are we gaining?


World leaders, including the US President and Chinese Premier have urged the UK to stay in the EU. Politically, economically and militarily, the UK has always benefited from its place within the EU on the world stage.

Closer to home, Germany’s finance minister, Wolfgang Schäuble, said Brexit would be poison to the European economy. Negotiating new trade agreements would be more difficult without a seat at the table. He said in an interview, “Whenever you break an agreement you know what you are going to lose, you do not know what you are going to gain in the next agreement.”

Leaving is a leap in the dark. For businesses and trade, there is no apparent upside and invaluable downsides to supporting Brexit. Walking away from the EU is simply too big a risk, a risk that this country can not afford after years of recession, not when the export of goods and services to Europe are so valuable to our economy.

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