“I think our support for the EEC has been very half-hearted. You really cannot join any group of nations and spend all your time criticising it. The EEC is free Europe getting together. Had we had some vision like that after the First World War, we might never had the Second. My son does not have to go and fight as his father had to fight. Surely that is the most valuable thing of all, the reason for keeping Europe together.”

― Margaret Thatcher, 15 April 1979

An Epic Loss

Even though Britain has established itself as a leading European player, it missed out on one of the biggest events to ever occur in this region – the creation of the European Economic Community (EEC) in 1957. Only 16 years later, in 1973, would the UK accede to the EEC. But the process was relatively shy, and just two years later the country was on the brink of leaving the community, when a referendum was pushed through by Labour. At that time, the efforts of Prime Minister Harold Wilson and some important members from his cabinet, along with the invaluable support of the majority of the Conservative Party led by Margaret Thatcher, significantly contributed towards a victory of the “Yes” vote, thus saving the country from a premature exit. For the next 40 years, Britain would stay inside what now constitutes the European Union (EU) but with a presence always guided by scepticism, which assured the country a secondary role in the continent’s policy making.

Forty years later the scepticism is still alive, as an “in-out” referendum is scheduled for 2017 while the Prime Minister tries to extend the list of exceptions the country has always demanded from the Union. But at a time when trade with the EU represents a 50% share of Britain’s global trade and the City is the most important financial centre inside the EU (if not the headquarters for the Euro), the country stands to lose much more than it can ever benefit from opting out of the Union. Cameron is playing with odds against, as the risks to the country clearly outweigh the expected returns. If a “No” wins in the 2017 referendum, the UK will most likely cease to exist as such and instead be turned into the countries that constitute it, as Scotland will soon ask for independence. At the same time, saying bye-bye to the City is highly likely, as is a huge loss in the country’s trade with the EU. But, the worst of everything is that, no matter what the electorate’s decision is in 2017, Britain’s loss had already started, as the uncertainty regarding the future is leading companies to take decisions that aren’t necessarily in the country’s best interests. More will follow.

Opting Out Comes at a Cost

Scepticism is the word that summarises 40 years of UK integration in the EU. From the very beginning a mix of distrust and fear of losing sovereignty has guided the relationship of the country with Europe. Even though Winston Churchill called for a “United States of Europe” soon after WWII and was at the very first roots of the European Union creation, the whole country stayed apart from the project for long, thus missing the creation of the European Coal and Steel Community in 1952 and then the European Economic Community in 1957. Only in 1973, and after two failed attempts, did the UK join the Union.

At that time the Union was dominated by an ineffective Common Agricultural Policy that served only to protect French agriculture, which was delivering products at much higher costs than Britain could get from Commonwealth markets. The Union was guided by heavy protectionism while Britain was more aligned to free markets. At that time there were very strong reasons for the country to carefully inspect the benefits that would derive from joinging, as the costs were very high. But in 1975, after a “Yes” vote in the referendum, the country decided that being part of the Union would be the best route to follow.

For the next 40 years the Union would engage in a profound change, which saw integration increase up to the point that a Monetary Union was created. Britain spent most of the time trying to make “à la Carte” choices for its membership, which one way or another have been largely granted. At the same time, the country significantly contributed towards the Union’s decision to give up its protectionist stance and embrace competition and free markets. During this process, global trade increased and the UK now sees in the EU its main trading partner representing a 50% share of its trade.

Even though the UK opted to keep the pound instead of adopting the euro, such a decision has not prevented the country from growing its trade relations with the EU. At the same time, the City regained relevance as an international financial centre. The strong ties between the US and the UK made London the best European location for US companies, but what was decisive was the EU membership retained by the UK, granting access to the single market. The City became one of the most important financial centres in the world and the country currently hosts more than 250 foreign banks, which generate a financial service trade surplus of around £70 billion. One third of this surplus is directly related with the EU. If the UK were not part of the Union, the City could very well be established in Dublin or Paris as an alternative. If the UK decides to opt out of the EU, it is to be expected that some EU-members would push for the creation of a new financial centre inside the EU to replace the City. Even though the ties between the US and the UK are strong, many banks will relocate from London to Dublin, Paris or Frankfurt, in case the UK detaches from the Continent. That would be a major loss.

Uncertainty Hurts

Forty years after joining the Union, and during a time Britain is able to gain the most from it while guiding the Union in the direction of free markets, there’s no material reason to put its membership at stake. After all, the country benefits from a generous regime of exception, keeps most of its sovereignty and is the financial centre for the Union. What else can be demanded?

This whole referendum process is a means for Cameron to assuage dissenters within his own party, but it is nevertheless a high stakes game. I believe a “Yes” vote is going to prevail but that doesn’t mean everything will stay the same. It most likely won’t.

One thing financial markets don’t like is uncertainty. Companies need to make long-term decisions, which are based on alternative scenarios. The Brexit scenario, even if less likely, entails a profound change in the way business is conducted. Access to the single market may be at stake or imply much higher costs. There’s no assurance that the UK would retain “passporting rights” if opting out of the EU; banks will massively desert the City. But two and a half years until the referendum, banks have to start weighting that possibility in their decision making. Some may opt to relocate now before it is too late instead of waiting for the final outcome. A decision to relocate to Dublin, for example, would assure smooth operations while eliminating the unnecessary risk created by the referendum. Many banks are already pondering the relocation scenario. Deutsche Bank said last month it had begun initial preparations for a possible Brexit. HSBC, the largest UK bank, is also considering moving its headquarters out of London. I bet Dublin and Paris wouldn’t mind getting a share of the City’s business, and the more Cameron tries to renegotiate with the EU, the more some member countries would push in that direction.

But the risk coming from the referendum doesn’t just affect the financial sector. With 50% of UK trade being conducted with the EU, and with the future being uncertain, many international companies that have their European branches located in the UK may decide to leave now. At the same time there is likelihood that some bigger projects will be delayed, as the additional risks decrease the value of the expected future cash flows. All these weight negatively on Britain’s GDP.

At a time the EU is struggling to grow, Greece is threatening to leave the euro, and there is a massive migration problem in the Mediterranean area still to solve, no one will take Cameron’s demands seriously on the Continent, as he attempts to push for opt-outs. It is very unlikely that anything material will be renegotiated before the referendum occurs, which means said referendum is largely unnecessary at this point. But still, the fact it is scheduled is a major drag for the British economy, at a time the country needs to concentrate on creating growth and manage its twin deficit instead. Scheduling a referendum for 2017 was a huge mistake.