EU vote set to cast shadow over Square Mile

UK Parliament
By Angus McCrone, The CA magazine

27 January 2016

The forthcoming referendum on the UK's future relationship with the EU is looming into focus for The City.

Another year brings another round of political uncertainty for investors and the City of London. Following the Scottish independence referendum in 2014 and last year’s General Election, 2016 could be more troubling for the Square Mile than either, if we see, as many expect, the in/out vote on the UK’s European Union membership.

As in 2014 and 2015, City concerns will centre on the possible economic outcomes, and the possibility of a sudden and sweeping political change. In the case of the EU poll, economic issues are to the fore.

“Brexit” might lead to a sharp curtailment in immigration and the departure of many EU nationals without UK residency rights, and this in turn raises the possibility of higher inflation and interest rates.

Meanwhile, if some international companies decide that investing in the UK would not give them access to the EU market, that would have an impact on growth.

One scenario is that a UK vote to leave could be followed by agonised discussions in Brussels, a more radical proposal to reshape the UK’s relationship with other member states, and a second referendum on that package.

The permutations are almost unlimited. Unless polls start to indicate a clear win for “stay in', uncertainty could cause many businesses to delay decisions.

Figures from the Office for National Statistics show that business investment in the third quarter of 2015 was £44.4bn, some 6.6 per cent higher than in the same three months of 2014.

The detail of the data showed investment in IT equipment, machinery and 'intellectual property products' all strongly up year-on-year.

Mergers and acquisitions

In its bulletin for the third quarter of 2015, the Office for National Statistics reported that "the number of completed domestic and cross-border mergers and acquisitions involving UK companies continued to show much lower levels of activity compared with those seen before the 2008 to 2009 economic downturn".

But it is hard to see the recent period as much different to other years since 2008.

In addition, some very large deals are yet to appear in those figures. These include the merger between Anheuser Busch and SABMiller, and Shell's agreed £47bn bid for BG Group, still not final at the time of writing.

It would be surprising if this uncertainty was not also causing any hesitation in the City itself about investment programmes and 2016 hiring.

The Square Mile has prospered during the 30 years since Big Bang in 1986, becoming the European time zone hub for many global banks and investment houses.

Since 2000 in particular, it has been a magnet for scores of thousands of continental European financial and business services workers, from the chief executive of the London Stock Exchange (a Frenchman) downwards.

More or less entrepreneurial

Some big figures in the fund management and stockbroking industry, including hedge fund manager Crispin Odey and stockbroker Peter Hargreaves, say a vote to leave would make the UK more entrepreneurial and less bound by red tape.

But leaders of the some of the City’s biggest battalions disagree. Gary Cohn, president of Goldman Sachs, said last year that Britain should stay in the EU to ensure London remains a "great financial capital of the world".

Deutsche Bank, which employs 9,000 in the UK, said last year that it was considering whether it should move some activities back to the euro area if Britain voted to leave.

It promises to be a fascinating debate. But do not expect it to be cost-free in the short term.

* Last year, ICAS published detailed research on Britain's relationship with the EU in key business areas and the results of a survey of ICAS members on the issues surrounding the Britain's future relationship with Europe.


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