Britain on the Brink

Britain is now [less than] a week away from its crucial June 23 vote on whether to remain in the EU or to leave. As the day nears, campaigning for both sides is intensifying, and polls of voters are showing a neck-and-neck race. Canadians are concerned: on my recent coast-to-coast export forecast tour, the issue labeled ‘Brexit’ was a close second to questions about the US election. We’re not the only ones; the world is watching this key debate, as its outcome could have a profound impact on the decades-long global move to greater integration. So, what’s at stake?

The issue ignited during the 2015 UK general election, when a promise was made by Conservative leader David Cameron that if his side won the election, there would be a referendum on EU membership. This was in response to growing discontent among his own MPs and the UK Independence Party about the costs and consequences of EU membership. The Conservatives won, and the clock started ticking.

Preconditions for the referendum culminated in the February 18-19 EU summit, where the Prime Minister negotiated and secured a deal on Britain’s EU membership. The deal did not achieve some of Britain’s key demands, but did make changes to immigration rules, the issue of EU laws and closer integration, and reestablished safeguards for countries choosing to opt out of the Euro as a single currency. Since then, the merits of this deal have been hotly debated. The official ‘Leave’ campaign asserts that the stipulations do not go far enough, while the ‘Remain’ side hails the deal as a good one, and the best that can be achieved by any UK negotiator.

Polls tracking since January 10 initially revealed a consistent lead for the ‘Remain’ camp. Occasionally, polls showing a dead heat were published, but the ‘Remain’ camp was rarely the runner-up. However, the last 8 polls taken show that for awhile, the ‘Leave’ campaign had the upper hand, and the most recent two polls are evenly split. This has financial markets concerned; Brexit is cited as a key factor in a very recent flight to quality financial assets, and Monday’s stock market turmoil.

The worry is not just a fear of the unknown; there are palpable concerns that a more isolated Britain would cause it to lose influence over decisions that affect its flows of goods and services, while having to conform to those decisions. If so, it risks losing out on key industrial investments, and holding on to the ones it has. Critically, leaving the EU would threaten London’s status as a global financial centre, given, among other things, that Britain’s influence over the proposed Capital Markets Union would be at risk.

The ‘Leave’ campaign addresses these concerns by highlighting the sluggish pace of European progress on these fronts, the diminishing importance of the union over time, the ability of the UK to ‘go it alone’ and actually do better, and the financial costs of the current arrangement. On the latter, dissenters cite the fees that the UK is remitting, and questions the value received for this. Those spearheading the ‘Leave’ campaign are tapping into a sense that the European experiment has lost its way, fears that immigration laws are too loose and are putting the UK at both financial and physical risk, and likely also the frustration of a Continental – and global – economy that has been sclerotic for far longer than usual following the Great Recession.

The stakes are high. If the ‘Leave’ vote succeeds, withdrawal would not be instant, but would have to take place by mid-2018 at the latest. It would be akin to a vote of non-confidence for the Prime Minister, the face of the ‘Remain’ campaign. It would likely throw the pound into a zone of volatility, as the implications for its reserve-currency status are debated. And it would put flows of goods and services at risk – not so much final goods, but moreso those connected more closely to the UK’s global and Continental supply chains. Canadians connected to the 3.1 per cent of our goods that flow there, the services and foreign affiliate activities are watching the debate and analyzing effects with keen interest.

The bottom line? Brexit is on centre stage, globally. All eyes are on this debate. It’s a pivotal moment for globalization, and indeed for modern economic history. And with all that’s at stake, it seems, by the polls, to be coming down to a coin-toss.

This was written by Peter Hall, EDC Vice-President and Chief Economist.