Thomas White Global Investing
Britain’s Hitch with EU Rests on a Referendum?
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February 2, 2013
A Postcard from Europe
Britain’s Hitch with EU Rests on a Referendum?

UK and the European Union

Will the United Kingdom leave the European Union? Britain finds the EU’s anticipated new rules and regulations and a possible change of treaty meddlesome. With many Britons saying they would be better off without the EU, the U.K.’s Prime Minister David Cameron has promised a referendum to decide whether the U.K will be ‘in-or-out’ of the EU. But the referendum is worrying for U.K. businesses, which depend on the EU as their largest export market and a source of talent.

Last week Europe was on the front pages of financial news dailies across the world.  No, it was not the case of bond yields soaring yet again in the periphery of continental Europe. The issue that brought Europe to the front pages was more epochal.

Britain, one of the largest and powerful members of the European Union (EU) was thinking aloud whether it should continue to be a member of the EU itself. The man who deliberated the thought was none other than Britain’s Prime Minister, David Cameron. In what many observers and media commentators termed ‘eloquent’, Cameron’s speech ended with a promise to offer the people of Britain a referendum to decide whether the U.K. will continue to be member of the EU. The simple ‘in-out’ referendum, of course, will not come in a hurry. It will only happen in 2017.

Cameron’s speech about Britain’s role in the EU was not a bolt out of the blue. In articulating his views about the EU, Cameron was simply reflecting the views of Britons on the ground. Sadly, the English have started viewing their relationship with the EU less favorably. Britons find the EU meddlesome, holding the alliance responsible for cumbersome regulations, inflexible work rules, and a rising number of immigrants to the U.K. In fact, at present, most opinion polls indicate that Britons favor their country opting out of the EU. Understandably, the pressure on Cameron to address the issue was immense.  Cameron now intends to negotiate a relief for Britain from some EU rules and regulations before going to the referendum. And the British prime minister believes that if Britain can attain a special status within the European Union, British citizens may be persuaded to vote to stay in the EU, should there be a referendum.

Still, one important group is already wringing its hands even at the mention of the word ‘referendum’: the U.K.’s industry and small businesses. While large parts of Britain’s industrial sector acknowledge that the EU’s regulations are indeed restricting, many favor the U.K. remaining a part of the European Union rather than exiting it completely. They have reason to be worried about their country’s current course. After all, the EU, for all its regulations and interfering ways, provides the United Kingdom with a single market with 500 million consumers. The EU is the U.K.’s largest export market, with more than 50% of the country’s exports ending up in the hands of one of the 27 EU members.

For argument’s sake, let’s imagine the United Kingdom exiting the EU. The country’s products, ranging from the well-loved Stilton cheese to heavily-engineered aircraft parts would face immense tariffs and duties within Europe. According to a calculation cited by the Economist magazine, tariffs on products like cheese could soar anywhere between 50% and 200%.  No wonder English cottages specializing in the production of cheese are a worried lot.

Even big industries like car manufacturing would not be free of troubles in this scenario. Not only would British car makers have a tough time selling their cars in the EU, but they would also find it tedious to deal with the import of sophisticated European-made car parts needed for their automobile production lines. And then there would be the potential loss of human capital. The City of London mainly depends on highly-talented young individuals from all over Europe to navigate the world’s complex financial markets.

Some business leaders have urged caution over the referendum. Sir Martin Sorrell, the chief executive of one of the world’s largest advertising companies, WPP Group, is of the view that the anticipated 2017 referendum will only prevent companies from investing in the U.K. Speaking to the Guardian, a British newspaper, Sorrell opined that “a referendum adds to uncertainty – it doesn’t diminish uncertainty.”

But other businessmen point to the Prime Minister’s speech and support his cause. They argue that despite the talk of referendum, Cameron not only spoke of his desire to keep Britain in the EU, but of the European Union’s important role in fostering peace and prosperity throughout Europe. They say that the only challenge that Cameron poses to the EU is to raise its game in the face of competition from Asian economies such as China and India, calling for a more business-friendly EU with less cumbersome regulations.

The EU, which is envisioning a more political and fiscal union, is deeply aware of the sensibilities of Britain and the country’s concern over surrendering more power to EU. Although Britain has some strong supporters in the European Union, many doubt that Britain will get relief from some of the regulations or a special status from Europe before going to the referendum in 2017.

Businesses across the U.K. and those across the world that intend to use U.K. as a gateway to Europe have their fingers crossed. Until then, the question will remain:  To be or not to be.

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