Milford's David Rigby looks at the big issues facing the UK in its June referendum on whether it should stay in the European Union

By David Rigby*

The issues involved are numerous, complex and often emotive. They include potential repercussions for the UK’s largest trade relationship (over 50% of all imports and exports, worth c.NZ$750bn pa), for it’s ability to attract foreign investment and for it’s global political clout, as well as uncertainty about the UK’s position in international treaties signed by the EU and the status of UK citizens living in the Eurozone. But for many voters the debate will be defined by just three topics: migration, the future of the City of London, and sovereignty. All are thorny, long term concerns. All have returned to prominence in the aftermath of the GFC.

Issue 1: Migration

The UK has one of the most flexible labour markets and generous welfare systems in Europe. Largely by virtue of having it’s own currency, a proactive Central Bank and a commitment to public debt reduction, post the GFC it is also seeing some of the fastest GDP and job growth in the bloc. Yet under EU law there is no way to effectively control intra-State migration.

UK voters have seen their own entitlements cut, libraries and police stations closed, and their armed forces downsized to balance the books. So for many, EU expansion into poorer parts of Eastern Europe and the resettlement of large numbers of Middle Eastern refugees is seen as a considerable economic threat. Running almost exclusively on a tough stance toward migrants and the EU, the right-wing UK Independence Party (UKIP) secured a startling 13% of votes in the 2015 UK general election (from 3% in 2010). It was probably the popularity of this approach that ultimately forced the Tory led government into an explicit pledge to reduce net migration and the promise of an In-Out referendum.

Issue 2: The City of London

If finance is the lifeblood of a modern market system then The City of London is Europe’s beating heart; a success story that is at least partly built on easy access to the EU. Global banking has taken the brunt of the blame and retribution for the damage caused by the GFC, arguably nowhere more so than in the UK. While the finance industry is a massive employer and tax generator for the country, successive governments and regulators have been at pains to reform and de-risk it.

Yet the pace of change has been markedly slower on the Continent. Worries remain about the creditworthiness of European banks and large parts of the population are still enduring a painful post-GFC lurch downward in living standards. There are votes in pursuing ever tougher restrictions. Such actions applied EU-wide would impact the UK more than most.

In 2015 the UK finance industry employed 1.1 million people, equivalent to 3.4% of the UK’s workforce (or c.45% of NZ’s). In the same year it contributed NZ$145bn to public finances in the form of tax. That’s 11% of all UK tax (equivalent to a whopping c.60% of NZ’s GDP).

Issue 3: Sovereignty

Even after joining the EU, the idea of ever closer integration has never been overwhelmingly popular in the UK. The ability to craft its own laws to suit its own specific circumstances is viewed as too important. The UK has frequently negotiated opt-outs to significant EU legislation designed to centralise authority, and today it has (alongside Denmark) the largest collection of such agreements in the Union: to the Schengen Agreement, the Euro, the Charter of Fundamental Rights, and a common approach to Home Affairs & Justice.

To many in the UK the GFC appears to have proved the worth of this historic scepticism, and may well justify further disengagement. In part because it was less integrated, the UK’s response to the crisis could be more proactive than that of the Eurozone and as already mentioned this approach appears to be paying dividends in terms of economic performance and market confidence. 

Part II of our Brexit blog looks at the UK’s new deal inside the EU and what it does to address these key issues.

David Rigby is a senior analyst at Milford Asset Management in Auckland. It was originally published here, and is reposted with permission.