March 2015 : The United Kingdom in 2015: Drifting out to sea?

Commonwealth. Seven decades later, it is ironic that exiting the European Union should have come to be regarded as a credible option if the results of the elections on 7 May 2015 make an in/out referendum unavoidable.
This scenario – known initially as “Brixit”, then as “Brexit” in allusion to the existing term “Grexit” – was announced two years ago as one of Morgan Stanley’s ten “Macro Surprises for 2013”. Several Wall Street banks have also drawn up plans to relocate their European operations to Dublin, Frankfurt or Paris, which would be pushed as “onshore” markets compared to London’s diminished status as an “offshore” centre. Forecasting is a school in modesty, but it does permit one to construct alternative scenarios.
So what is the UK’s “open sea” today? The special relationship between London and Washington is no longer as deep as it used to be. Strategically, Paris, with its diplomatic and military capabilities, has replaced its European ally, and David Cameron is accused of presiding over a decline in geopolitical influence that has been exacerbated by his plans for closing the budget deficit. Financially, New York competes with London as much as it uses the City as a hub. Britain’s recent decision to join the Asian Infrastructure Development Bank - based in Shanghai and funded primarily by Beijing - raised hackles in Washington, which is doing its level best to nip these plans for a rival to the World Bank and the Asian Development Bank in the bud. However, Paris, Berlin and Rome have also signed up. Does the “open sea” mean that the City, Britain’s think tanks and world-class universities, and the Anglosphere will concentrate solely on the world beyond Europe? Shouldn’t they instead focus on the great European market that absorbs 30-60% of the country’s exports, depending on the sector (35% for the automotive industry; 42% for financial services, with a £20 billion surplus; 45% for aeronautics; and 57% for chemicals, according to a recent report by Open Europe[1])?
David Cameron has promised a referendum on Britain’s EU membership in 2017 to stave off pressure from Eurosceptics in his own ranks and the growing popularity of the United Kingdom Independence Party (UKIP), but business leaders will wheel out the same tried-and-tested arguments in favour of the status quo as they used in the Scottish referendum. There has been a shift in public opinion, with 45% now supporting continued membership – the highest level since May 2012 (28%) – compared to 35% in favour of leaving the EU[2].
Lastly, the most reliable election polls - such as those published by the New Statesman, complemented by those conducted by Lord Ashcroft[3], former deputy chairman of the Conservative Party and now a pollster renowned for the accuracy of his predictions for a hundred of so key marginal constituencies – suggest that no single party will obtain the 326 seats required for an absolute majority in the House of Commons. A slight slide by the Conservatives and a very heavy fall in support for the Liberal Democrats (the current coalition partners) are offset by some Labour gains and a huge surge by the Scottish nationalists (+ 49 seats for the Scottish National Party). Despite potentially winning 15% of the vote, UKIP will have to make do with 6 seats. Though Labour has ruled out formal coalition, the SNP could support a minority government led by Ed Miliband on a case-by-case basis (under a “confidence and supply” agreement). This would presumably exclude any referendum on the European Union, given Scottish voters’ attachment to Europe, as demonstrated in 2014.
Any new government will have to take steps to reduce the public deficit and, since the health and pensions budgets are ring-fenced, defence cuts will be the main means of balancing the books (-36% between 2015 and 2020). This will reduce Britain’s military capability abroad, and with it the country’s capacity to rule the waves. Britain’s sole remaining means of influencing international affairs will be through European cooperation. One of the priority projects announced by Juncker’s Commission could really do with Britain’s expertise and that is the implementation between now and 2019 of a capital markets union, as set out in the recent Green Paper[4]. Keeping our British friends and allies in the Union is in all of our best interests, in every field.

Michel Foucher
Ancien Ambassadeur
Senior Advisor

[2]YouGov, 24/02/2015
[3] and
[4]Green Paper: Building a Capital Markets Union, COM (2015) 63 final