What Happens if the UK Leaves the European Union?
On the 23rd June 2016 the UK will hold a referendum on whether or not to remain a member of the European Union (EU). What happens if the UK leaves the EU?
3 March 2016
On the 23rd June 2016 the UK will hold a referendum on whether or not to remain a member of the European Union (EU). The implications of a “Brexit,” the name pundits are giving a UK exit, are huge, both domestically and internationally, and there is support for such a move from politicians and businesses across the UK. A December 2015 poll by ICM found 42 percent of British voters would prefer to remain an EU member, while 41 percent want independence, with the remaining 17 percent yet to decide. Up to two-thirds of Conservative MPs are said to privately support Britain’s exit from the European Union, including the outgoing London Mayor, Boris Johnson, despite Prime Minister David Cameron’s clear preference for staying in, say senior Conservative party officials.
As of yet there is no clarity about the preference of large UK businesses. A recent letter sent out by David Cameron asking FTSE 100 companies to sign in favour of staying in the EU only gathered 36 signatures (Inc. British Telecom, BP, Royal Dutch Shell and Rio Tinto). Whilst many might take this to mean only 36% of FTSE 100 companies favour EU membership, in reality to garner the public support of 36 businesses is a real win for David Cameron with no FTSE 100 companies yet to publically come out in favour of an independent Britain. While the large, typically international companies that make up the FTSE 100 appear skeptical of an independent Britain, another group of firms, a group that employs over 60% of people in the UK, SMEs, are currently split on the topic. A YouGov poll released in January 2016 of 500 SME business leaders found that 42 percent would vote for UK independence while 47 percent want to remain in the EU.
There is great uncertainty associated with the consequences of a UK exit, primarily because it would be a first, no country has ever left the EU in its current form. Would the UK be better off staying inside the once prestigious club or should they go it alone, and what are the implications for Europe, and the rest of the world?
One of the principal advantages of being an EU member is access to the EU single market that includes goods, services, capital, and people — meaning British companies are currently free to export and import as they wish. Should the UK leave, this privilege will be revoked and whilst some business leaders believe the billions of pounds in membership fees Britain currently pays annually outweigh the advantages of free trade with the EU, there is little doubt that Britain would have to negotiate trade agreements with the EU should it leave.
There are several existing trade models that Britain might hope to replicate, including:
- The Norwegian model — Britain joins the European Economic Area (at a cost), giving it access to the majority of the European Union’s single market but keeping it free of EU rules on agriculture, fisheries, justice, and home affairs.
- The Swiss model — Britain chooses to negotiate trade treaties on a sector-by-sector basis, probably putting more emphasis on access for financial services than the current Swiss model does.
A report released on 2nd March 2016 by Philip Hammond (UK Foreign Secretary) stated that the Norwegian model would give the UK the greatest access to the single market but concluded that the UK would none-the-less be “weaker, less safe and worse off” outside the EU.
The UK also risks losing its status as an international power and with it any power it has left at the international negotiating table. The “better off in” camp, claim a Brexit would expose UK firms and workers to new levels of competition from low-cost producing countries. Whilst the Hammond report further warns that the cost of exporting would increase significantly with likely double-digit tariffs imposed, citing a potential 20% on Scotch Whiskeys and 10% on British made cars.
On the other side of the fence, the “better off out” campaign believe that an independent Britain would be able to control its own trade policies, and establish bi-lateral trade agreements with fast-growing exporting countries (Inc. China, Singapore and India) through the World Trade Organization. From their perspective, EU membership makes it harder for Britain to penetrate emerging markets, and an independent Britain would be more attractive to foreign capital if it were freed of EU shackles. Whilst no country has ever left the EU, an independent Britain would be no different to other countries external to the EU including the U.S., Canada, India, China and Japan, all of which export and import to and from the EU.
The ultimate success or failure of a British exit will depend on how Britain can compete as an independent nation, something it has not had to do since it joined the EEC 43 years ago in 1973. Euro-sceptics believe that the UK has the potential to become a freewheeling hub for global finance, trade and prosperity, while the pro-EU campaign says that vision is simply a fantasy.
With regard to an impact on M&A volumes the latest Intralinks Deal Flow Predictor (DFP), which accurately predicts the future volume of announced M&A, implies that the UK remains a bull market with an increase in early-stage M&A activity in Q4 2015. However, this was before a date for the referendum was set and practitioners will be awaiting the results of the next Intralinks DFP (to be released in April) to see if UK early-stage activity remains high as the referendum date approaches — uncertainty is rarely cited as a reason for an increase in M&A activity.
James Whitehurst is an Associate in the Strategy & Product Marketing team at Intralinks. Based in London, James works in the Strategy and Product Marketing team at Intralinks. He holds an MSc in Accounting and Financial Management from the University of London and a BSc in Geography from University College London (UCL).