Brexit And The 2015 Business Vote

David Cameron has pledged that, if he wins the 2015 election, he will spend the next two years renegotiating the UK’s terms of membership, and then hold a referendum by the end of 2017. The Labour opposition has declined to match this pledge. The UK business community, particularly those involved in trade, is broadly against UK exit from the EU (‘Brexit‘). This reflects the economic consensus, as outlined in a recent CEP study, that exit would do serious harm to the economy (summary, paper). Yet, as I noted recently, sections in the Labour party warn that some of the opposition’s positions appear anti-business. I think events in recent days indicate that the real concern for UK business should be a Conservative victory.

When Cameron’s referendum pledge was originally made, I think many regarded it is essentially a short term political device to appease sections within the Conservative Party and UKIP voters. They assumed that UK renegotiation would be a largely symbolic affair, with any concessions the UK received being in practice minor but enough for Cameron to claim something far more substantial. Cameron would then be able to fully recommend staying within the EU, and the referendum would be won.

I think that is a reasonable statement of Cameron’s original intentions. The problem with this scenario is that it relies on a deceit: portraying minor changes in EU terms of membership as somehow fundamental. Traditionally a Conservative government can get away with this kind of thing because it has the majority of UK newspapers behind it, and a BBC which is influenced by that press. In this case, however, exactly the opposite will be true. Large sections of the UK press are virulent in their opposition to EU membership.

The Juncker affair illustrates the difficulty of the game being played. To attract the UKIP vote, Cameron has to promote the idea that EU membership on current terms is a major problem for the UK. He also seems to think that appearing as the only EU leader prepared to stand up for principles, and portraying his EU colleagues as cowards in the face of German dominance, plays well with the parts of the electorate he wants to win back. So having marched the country to the top of the hill before the election, he has just two years to march them back down again. That will be two years in which large sections of the UK press will be throwing everything they have at achieving the opposite, and where the news will be dominated by this renegotiation.

It is possible, of course, that he may actually achieve some major changes to the UK’s terms of membership. But again, the recent episode shows how difficult that will be. It appears as if Merkel changed her mind and supported Juncker as a result of domestic political pressure. Even if she is personally disposed to try and be helpful to Cameron, this experience suggests she will not risk that much to do so. In addition, the more Cameron plays the ‘bulldog battling the EU monolith’ line, the more he builds opposition abroad to ‘giving in to UK blackmail’. Calling potential allies cowards does not seem like a wise thing to do.

There must also be risks on the other side. It is said that almost half of all Conservative MPs will campaign to leave the EU. Conservative party activists are likely to be much more anti-EU than MPs, so considerable pressure will be placed on Cameron to tone down his eventual support for a yes vote to stay in the EU. It is conceivable that he might refrain from clearly backing continued EU membership, in frustration with his EU colleagues after two years of negotiation and to keep safe his own position in the party.

The current betting is that any referendum will result in a vote to stay in, but the odds are close. What is clear is that a Conservative victory that brings with it a referendum will lead to two years of heightened uncertainty, and what business leaders always say is that they really dislike uncertainty. The risk that the end result will be exit from the EU are considerable, and that would lead to a further period of uncertainty as the UK tries to negotiate favourable trade deals as an outsider. Is all this risk really worth it just to ensure a lower top rate of income tax?

The blogpost was first published on Mainly Macro