Yesterday Hedgeye Potomac hosted a timely call with Alexander Nicoll to discuss Brexit – will the UK vote to stay or leave the EU on June 23rd?
Nicoll, a consulting member of the London-based think tank International Institute for Strategic Studies, walked through a seven point framework to contextualize the events leading up to the UK vote and what the outcome of the vote spells for the UK and EU.
The call included a very lively question and answer session that was moderated by our own James Taylor (on the financial and political implications of the vote) and our own Lieutenant General Emo Gardner (on security and defense considerations).
Replay of the one hour call (click here).
Presentation Materials (click here).
While opinion polls currently reveal a near dead heat on the Brexit vote (see the Poll of Polls below), ultimately, Nicoll shares our opinion that UK voters will tip towards the Remain camp. To review our thoughts on Brexit, including the market and FX impacts, see our note titled Got Brexit? Nope!
Below we summarize some of the salient points discussed in Nicoll’s prepared remarks and the Q&A.
Summary Points:
- No country has ever left the EU. Should the UK leave, it would deal a huge blow to the ‘European Project’, namely a common market for free trade and a customs union, and the shared set of values, laws, and regulations established to increase security and advance democracy.
- Why the Referendum? Grounded in domestic politics, it resulted from a long standing split in the Conservative Party. Since 1990 there has been a strong anti-Europe/Eurosceptic wing of the Conservative party. Given the rise of the right-wing populist party, the UK Independence Party (UKIP), PM David Cameron has made a series of concessions to prevent conservative members of Parliament from defecting to UKIP. Cameron’s Remain or Leave vote is therefore not coming from a popular groundswell of opinion but rather Conservative politics.
- Eurosceptics. Main Positions: 1) The UK has lost its sovereignty - Brussels overrules Westminster, and 2) Immigration - overrun by excess immigration, especially from Eastern Europe. Eurosceptics are running a very emotional campaign, tapping into sentiment that a European identity doesn’t exit. Their slogan: “Take back control”.
- Remain Camp. Strongly focused on the British economy argument, it states that the UK is economically stronger in the EU vs outside. This position is supported by hundreds of independent economists, the Bank of England, IMF, and OECD. There's strong support from key partners of Germany and France to Remain.
- Who Will Win? Cliffhanger. Poll of Polls show a near dead heat between Remain and Leave parties. Bookmakers’ odds suggest stronger probability of Remain.
- Defense Stronger in EU? On defense, the EU has not made much progress on military matters, so UK’s presence in or out of the EU does not make much of a difference.
- Security. Given terrorism through the world, global threats need international cooperation. In crisis, a UK in the EU is better able to bring resources together that can be impactful in negotiating with other nations. However, should the UK Leave, its main alliance option may be a closer cooperation with NATO.
- Impact on Relations and Business with the U.S.? The EU is seen as a much more important entity under President Obama vs prior administrations. Washington’s view is that the UK is isolating itself if it votes Brexit. Manufacturing, including Aerospace & Automobiles in particular, and Financial Services (London enjoys Financial Capital status) would be the industries most impacted from a Brexit.
- Contagion? There’s no exact parallel to the UK’s current Brexit vote. The National Front in France is a big threat, yet France and Germany remain very strong Pro-European countries. Euroscepticism, however, is percolating in Finland and Denmark, and also in Spain and Italy – should the UK exit, it throws the entire framework of ‘what is the EU’ into question, and the extent, if any, of a splintering across the continent is difficult to determine.
- Roadmap for Trade Relationships if the UK Exits? The Leave camp says it can strike agreements with whomever it wants – and in general presents the UK as having much more freedom in how it deals with countries throughout the world. In contrast, the Remain camp presents the benefits of the huge free trade agreement afforded to all EU member states. The Remain camp underlines the ~ 45% of British exports that go to EU and the ~ 53% of imports to the UK that come from the EU, suggesting that by all estimates, this relationship has increased trade and investment. It presses that the alternative, namely no knowing what future trade agreements could be completed and under what terms, as a great risk to fade.
