Investors less worried about a British EU exit

Investors less worried about a British EU exit

What do perceptions of the economic consequences of a British EU-exit mean for the prospects of a referendum? In a climate of political uncertainty in Britain and the EU, can consensus be achieved on the consequences of an exit?

Matters of European integration are famously not decided at the European level. So when David Cameron, in addition to facing a defeat in the nomination of Jean-Claude Juncker to the presidency of the European Commission, saw his foreign secretary resign in the year before a general election, it came as no surprise that he nominated Philip Hammond to replace him.

Hammond, who remarked in a recent interview with the BBC that Britain intends to renegotiate its membership, or else leave the Union, comes with Eurosceptic credentials. A more radical move would have been to name a Eurosceptic EU commissioner; however, Cameron stuck with the relative neophyte (and Europhile) Lord Hill.

These days, against the backdrop of growing disagreement over Britain’s place in Europe, a debate about a managed British exit from the European Union is again being launched in public.

In the medium-term, British Conservatives have promised to hold a referendum on EU membership if they are re-elected in 2015.

In the short-term, Britain’s leaders have focused on negotiating for greater concessions from the Eurozone, and with these negotiations, they hope to address a perceived power imbalance vis-à-vis the Eurozone.

Non-UK decision makers not worried about the Brexit

Surprisingly, economic decision makers in other European countries are not making much of the consequences of a British exit from the European Union. A recent poll conducted by the German newspaper Handelsblatt revealed that only 19% of German executives believed a British exit would be very damaging for the economy, while 57% predicted some consequences to an exit, and 20% none at all.

Moreover, whereas 65% of Germans had suggested they trusted Britain as an international partner in the European Union in March 2014, in June that figure dropped to just 50%. It seems economic decision makers are once again on the fence about Britain’s role in the EU.

The very sudden change in others’ calculations of the utility of a British decision to stay in the European Union is surprising. How do we explain these changing perspectives on a British exit?

Consequences for foreign investment and political risk

First, economic decision makers are generally motivated by calculable risk: since Britain depends more on the European Union for trade than the reverse, investors may believe that the economic effects of a British exit on the European Union are unlikely to outweigh the effects on the United Kingdom.

Greater stability across the single market over time, the stabilization of the Euro and the emergence of a kind of Franco-German political consensus, have made it unlikely that the so-called Brexit would shatter the confidence of investors in the EU in the medium-term. A counter-argument to this point, of course, is that Britain will not go easily if it does decide to leave the EU.

Second, observers also distinguish between the political and economic risk factors of a British decision to exit the European Union: On the one hand, several political factors could be in play before a re-elected Conservative Party would follow through with a referendum in 2017.

On the other, the perceived consolidation of the Eurozone stands in opposition to the precariousness that faces British economic interests if Britain decides to exit the European Union.

It also remains open whether a British exit could scare foreign investors, who might see in the exit a negation of Britain’s commitments to its European neighbours, and with it, a sign of the country’s lack of seriousness.

While the level of foreign investment in the British economy was almost $26.5 billion in 2013 (the highest in Europe), this figure represented a 35% decline from 2012.

Different exit strategies for Britain

As the debate over the British exit from the European Union gains more steam, a far more radical debate about an exit from the single market lags behind.

This is because while the options for a British exit are all complicated, observers distinguish between a political exit — which might harness significant political capital normally attached to British isolation on European matters — and an exit from the single market — which both UK and EU decision makers recognize would have devastating consequences for the United Kingdom.

The single market contributed 130 billion GBP to the British trade balance in 2013, and in 2014, British exports to the EU decreased 0.2%, while its imports of goods grew by 1.6%.

Still, it is worth challenging the narrative of political capital vs. economic doom a little. Geopolitical scholars like Ole Waever have argued that Britain, Denmark and Switzerland, by virtue of their historically isolated positions, tend to find strategies to reject or adapt to the premise of further integration.

Political risks of leaving the Union

The idea of backtracking from integration that already exists is highly risky: How will Britain craft its foreign policy in a meaningful way, not least when it forfeits its influence over the burgeoning European foreign policy apparatus under the Treaty of Lisbon?

How does Britain plan to extricate itself from customary agreements like the European Convention on Human Rights, if it, say, closes its borders to foreign migrants?

And how will Britain exert influence in the European neighbourhood, especially as the influence of the EU rises with its growing investment in the developing world?

This, and much more, will have to be decided in the next few months. However, it is clear that investors would caution Britain from making all-too-tough judgment calls.

Categories: Europe, Politics

About Author

Amelie Meyer-Robinson

Amelie has worked at the German Committee on Foreign Affairs, the OSCE and the G8 Research Group at the University of Toronto. She is a graduate of the London School of Economics and the University of Toronto - Trinity College.