20 Apr 2016

The Day After: Three big, unanswered questions if the UK votes to leave the EU

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Politics Insight


As of Friday, the referendum campaign became official. There is a designated campaign team for the Remain side (Britain Stronger in Europe) and for the Leave camp (Vote Leave). The Treasury has put out its assessment of the costs to the economy if the UK were to terminate its membership of the EU, an assessment which triggered the charge of ‘scare-mongering’ from its opponents. A new set of rules relating to spending and free media access are now in effect and while campaigning will not hit top gear until after the various elections held on 5 May, the contest is today well and truly on.

This means the issue of how a Brexit would actually work will inevitably become more salient. This has already triggered a cottage industry of individuals and institutions offering (well, selling mostly) advice to companies as to what the impact on them and their sectors might be in the event of the Leave campaign carrying the day on 23 June. While much of this material is doubtless useful it is also inevitably speculative. There is no relevant precedent for a nation such as the UK exercising its right to depart from the European Union.

The only parallel of any kind is Greenland in the 1980s which, once it had won foreign policy autonomy from Denmark, chose to bolt from the then EC. This was not a straightforward affair: even though Greenland then had a population of about 30,000 people and there was but one policy matter to be settled (fish) it still took three years to organise.

Taking Britain out of the EU would be a far more complicated exercise. That is not an overwhelming argument against withdrawal. After all, it took a long time to dig the escape tunnel at Colditz but this does not mean that the POWs concerned were ill-advised to engage in that engineering. There are, nevertheless, three big, unanswered and inter-linked questions if the UK votes to leave the EU.

Who would conduct the negotiations over departure?

David Cameron has stated several times that a Leave vote would not trigger his resignation. He has to say that. If he did not then it would be an open invitation to any citizen who has stronger negative views about him being their Prime Minister then they hold about the UK’s membership of the EU to throw their lot in with the Leave team. He will keep saying that he will stay right to the last moment.

His statement is, however, absolute tosh. The Prime Minister would be political toast in the event of a Leave vote and he knows it. The notion that he could lead the negotiations on departure would be utterly ludicrous. He would probably be obliged to announce his resignation within 72 hours of the vote being declared, even if it were several weeks or a few months before he formally left Number 10. If the Remain side loses it is very close to inconceivable that he would still be PM by Christmas. It is more likely that he would be out by the time of the Conservative Party Conference in October. It is also highly likely that George Osborne would cease to be Chancellor at exactly the same instance. The stakes at this referendum will be as high as they are at a general election. It is that big a deal.

Political credibility would demand that both the Prime Minister and the individual designated to be the chief negotiator over the terms of withdrawal would have been senior advocates of leaving. The most probable outcome would be that Boris Johnson would become Conservative Party leader and thus in these circumstances Prime Minister.

The pro-Cameron contingent in the parliamentary party might seek to convince Michael Gove, the Justice Secretary, to stand against Mr Johnson as a less polarising personality but he has always insisted that he would not wish to be Prime Minister, and having known him since we were students together and having been his colleague at The Times, I am convinced that (a) he is sincere in his disavowal of this ambition and (b) even if he was tempted to change his mind his formidable wife (Sarah Vine of the Daily Mail) would not allow him to do so. Besides which, the Conservative membership would be strongly inclined to elect Boris as leader.

The most plausible scenario, therefore, is that the by then ex-Mayor of London would be the new Prime Minister but as details are not really his speciality (to put it diplomatically), someone else, quite likely Mr Gove, would act as the chief negotiator while serving as either the Deputy Prime Minister or Foreign Secretary or with some bespoke title to match the mandate and the mission.

How long would it take?

Almost the first decision that would need to be taken would concern timing. As indicated earlier, the negotiations over an exit would not be swift or simple. In order to leave the EU, Article 50 of the Lisbon Treaty requires that notification to that end is issued and then sets out a two-year timetable for negotiations at the end of which, irrespective of what point that dialogue had reached, the UK would be out of the EU. The arrangements for this ‘divorce’ would have to be thrashed out within the remaining 27 EU member states and agreed unanimously by them in order to be legally in order.

This would beg an important strategic consideration. If the new PM/chief negotiator believed that it would be impossible to conclude the negotiations within two years (or that any arrangement that could be completed in that timetable would involve deeply unsatisfactory terms) should they hold off invoking Article 50 until they had conducted at least one round of informal negotiations to acquire a sense of what the final bargain might look like? How viable would this delay be politically? Would those who have been campaigning to remove the UK from the EU be willing to tolerate that exit being deferred until 2019, 2020 or later while highly technical deliberations were undertaken?

A further unknown is what the atmosphere surrounding those talks would be. The Leave camp has asserted, not without some reasons, that as the rest of the EU does more trade with the UK than the UK does with the EU-27 that it would be in the interests of all concerned for Brexit to be a benign affair, conducted in a similar accord to that in which Czechoslovakia was dissolved in the 1990s. The Remain lobby, by contrast, insists, again with some logic behind it, that it would hardly be in the interests of the EU to agree a relatively attractive departure for the UK for fear that it would stir up demands for an exit referendum in the likes of Denmark, Sweden, the Czech Republic or the Netherlands. The blunt truth is that no one can be sure how long exit would take or what the spirit of it would be.

What would be the economic model for a post-EU UK?

This is in many ways the most important question of the lot as it would have a seminal influence over the negotiating process. It is also a hard question to answer because the Leave fraternity is by no means united on it. There would seem to be three distinct economic models for a post-EU UK.

The first might be described as EU-lite. It would involve moving from the EU to the EEA (European Economic Area) or creating a separate but similar arrangement. The UK, much like is true for Norway and Switzerland, would be detached from the EU as a political institution but have intimate links to it. The second option would be a far closer economic relationship with the Anglosphere, the United States and Commonwealth countries. The third view might be branded ‘Globalist’, and it would contend that the UK should be focusing on the likes of China and India, the VIPs (Vietnam, Indonesia and the Philippines) and other advanced emerging economies such as Brazil (if it recovers from its present economic and political meltdown), South Africa (ditto) and Mexico. Boris appears to favour the first of these. Much of UKIP prefers the second option. Mr Gove and Douglas Carswell, the sole UKIP MP, seem tempted by the third. Which model would it be? Perhaps we could hold another referendum.

Tim Hames, Director General, BVCA


Sector Insight


Digital technology

Last week Google’s leading executive in Europe warned that the continent risks falling behind global competitors in digital innovation, due in part to excessive and burdensome regulations. Speaking to the Financial Times, Matt Brittin, President of EMEA Business and Operations for the multinational technology company, argued that a “maze” of EU regulations were holding back European tech businesses, which were in increasing danger of being overtaken by China.

Whilst this criticism was aired against the backdrop of the European Commission’s investigation into whether Google has broken antitrust rules by allegedly abusing its dominant market position in web searches, Mr Brittin’s comments do reflect a wider concern about Europe’s current and future competitiveness in the digital technology sector.

Many tech executives, including from the other US giants Apple and Facebook, have complained that the EU does not appear to appreciate the new business models that are used by nascent internet-based technology start-ups. These companies quite often have a global focus from the outset, especially given the vast opportunities that arise from the digitalisation of products and services. As Mr Brittin warned in his FT interview: “If the services and products they are using are not made in Europe then they will be made in China, and Asia-Pacific and Silicon Valley, and that will be a big missed opportunity”.

Whether accurate or not, the EU appears to have developed a reputation for producing stifling regulations and inhibiting enterprise when it comes to digital technology. Indeed, the fact that Europe has not given birth to digital tech companies on a scale similar to the United States is a notable cause for concern and of much frustration. Although there are certainly areas of promise - particularly in London, Berlin, Stockholm and Helsinki - the overall feeling is that the EU simply does not provide an environment which encourages tech businesses to not only establish themselves in Europe, but to remain on the continent once they have scaled-up and succeeded. It is also not a coincidence that much of the potential talent in the industry still opts to head for Silicon Valley in the US.

Innovation nation

That is not to say that there have not been successes over the past few years. Venture capital funding for Europe’s digital businesses almost doubled from US$4 billion a year to US$7.75 billion between 2010 and 2014. Similarly, at the start of 2015 companies raised over US$2.5 billion, the highest level of investment for a quarter since the start of the decade, according to Dow Jones VentureSource. The UK in particular has seen strong growth in digital technology funding, as showcased by the BVCA’s Innovation Nation campaign. Analysis by London & Partners found that Britain’s technology sector attracted a record US$3.6 billion in 2015, an increase of 70% on the previous year. London-based companies unsurprisingly received the vast amount of this investment, securing US$2.28 billion.

One could argue that this impressive growth in venture capital funding reflects a positive outlook for the sector in the UK and Europe. This growth has however been coupled with a growing anxiety over the valuations of many tech companies, with the rise of so-called ‘unicorns’ beginning to be met with scepticism and wider fears over the emergence of another ‘tech bubble’. Speaking at the World Economic Forum in Davos earlier this year, Marc Benioff, the founder and chief executive of cloud computing company Salesforce, went as far as to say that “there are going to be a lot of dead unicorns” over the coming years. Such a scenario, combined with an assumption that the EU stifles rather than encourages digital innovation, may have the potential to weaken and undermine growth in the sector at a time when it is so desperately needed. The result very well could be that venture capitalists no longer view European start-ups as fertile sources of investment and instead hold back funding or look elsewhere.

Arguably, these predicaments are further compounded by the considerable uncertainty surrounding Britain’s referendum on whether to remain in or leave the European Union. Without the ability to sensibly prepare for what comes after the vote on 23 June, businesses and investors alike may delay or even cancel growth and investment plans. If the UK votes to withdraw from the EU, the corresponding negotiations and trade arrangements are likely to take years to finalise – leaving digital businesses in an increasingly precarious and uncomfortable position. Do they, and their venture capital investors, keep calm and carry on in the hope that Britain retains its relatively strong competitive edge, or do they opt for the safer haven of Silicon Valley? The decision is by no means simple, but at a broader level it reflects a deeper uncertainty about whether Europe holds back digital companies or whether it can provide an environment for them to compete and flourish.


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