Incoherent arguments leave CFOs in the dark as Brexit D-Day looms

23 JUNE 2016 is set to be a politically and economically momentous day for both the UK and the EU. And possibly even the world.

For on that mid-summer day, the British electorate will express their desire – through the ballot box – as to whether they wish to remain inside the union or go it alone and plough a lonelier, more ‘independent’ furrow.

It’s a date ripe with historic echoes that have continued to reverberate throughout the corridors of time. Perhaps most notably, the planet’s first parliament – the Icelandic Althing – was established on that very date, way back in 930AD.

And it’s not such a leap of faith to compare the potential impact of the forthcoming result in June to that of the first parliament and the birth of the long road to democracy.

For while the two sides of the divide – like greyhounds fleeing their slips – are cavorting through our consciousness to persuade the nation which way to vote, the impact will be significant.

Much has been made of the big business case, which essentially – and with few exceptions – takes the line that leaving the EU would negatively affect existing and future jobs while putting the UK’s wider economy at risk.

In a in a letter to The Times, a number of Britain’s biggest companies, including the leaders of Vodafone, BT and Marks & Spencer stated that a vote to leave the EU would act as a dramatic brake on inward investment in the UK.

But as a counterpoint, campaigners arguing for an exit, highlight the fact that around two-thirds of FTSE 100 companies were noticeable from their absence on the letter, and did not back any of the points.

But Neil Woodford of Woodford Investment Management, one of the UK’s best-performing and respected fund managers – who spent 25-years at Invesco Perpetual – has publicly stated that leaving the EU would not automatically cause damage to the UK economy.

He says it is fraught with difficulty to make a credible economic case for the UK to it remain inside or leave the union.

Immigration and sovereignty central to debate
Woodford believes the politically-charged issues of immigration and sovereignty, are more central to what the debate is about.

Taking his characteristic long-term view, he believes that the lasting economic implications will in all likelihood not be as punishing as the most negative soothsayers have intimated.

Goldman Sachs for example, is predicting that the value of Sterling will fall by 20% if we leave the UK.

Another somewhat dystopian view emanates from lieutenant-general Frederick “Ben” Hodges, the head of the US Army in Europe, who believes Brexit could undermine efforts to resist Russian expansionism not only in Europe but also the Middle East.

However, Woodford is adamant that whatever the result of the vote on June 23, the effect will be deeply felt.

A vote to leave could also spark a crisis for the EU project, which Woodford said was facing an array of challenges on a macro-economic and political level.

Woodford told the BBC that a UK exit would “shine a brighter light” on certain issues currently afflicting the EU such as the fact that the “ECB chief Mario Draghi is printing money and trying to do his bit, but the macro headwinds are intense and unemployment remains high”.

On a global level, a British exit from the EU will do little damage to the country’s business ties with the rest of the world, a new survey conducted by CNBC indicated.

CFOs from some of the planet’s biggest firms were largely sanguine about the prospect of a “Brexit” and how it might affect any current or future trading conditions with the island nation.

Over 70% of global CFOs – across a wide range of industries – said there would be “no change” on their perspective on how likely they would be to do business with the UK in the event of an exit.

Despite this, some 15% said they would be “slightly less likely” to do business with the country while 2% thought it would be “significantly less likely.” The same percentage – 2% – said they would be “slightly more likely” to forge ties with a breakaway UK.

But what about SME’s? According to a recent survey of owner-managed businesses commissioned by Top Ten accountancy firm Moore Stephens, 60% of SME owners would vote to stay in the EU with less than one in five (17%) supporting ‘Brexit’.

Moore Stephens says SME owners worry that an erosion of the UK’s position within Europe could harm growth opportunities as the cost and complexity of trade increases for UK goods and services.

Mark Lamb, a partner at the firm said: “Owner-managed businesses are concerned that future growth will be disproportionally hit by a UK exit as they would no longer compete on a level playing field in the EU. Economic and political uncertainty is already impacting trade for some SMEs, and there is a fear that leaving the EU could severely destabilise business growth in the long-run.

“The pound is already under pressure following London mayor Boris Johnson and other political heavyweights coming out in support of ‘Brexit’ – which could lead to volatile financial markets in the run-up to the referendum. A Brexit is also likely to rekindle the Scottish independence debate which SME owners predict will further impact business – as we saw in the run up to the referendum in 2014.”

Lamb is adamant that small businesses continue to benefit from unrestricted access to European markets and any increases in tariffs and potential trade restrictions could prove tricky to overcome, stifling international growth.

EU countries will look to punish Britain for its treachery
A vote for Brexit would in all likelihood set off a train of events that would end in an application to pull out under article 50 of the Lisbon treaty.

Article 50 declares that the EU will thrash out a new agreement with the withdrawing nation over a two year – and possibly longer – period. It also stresses that when forging a new deal, the EU acts on its own terms and with no input or involvement of the departing country. That’s unlikely – even in the minds of the most upbeat optimist – to be a favourable outcome for Britain.

The remaining EU countries will look to punish Britain for its treachery and weakening of the already shaky union that is already in deep trouble. It will want to show others thinking of a adopting a similar exit, that such a move will not be free of serious consequences.

Current market worries about the UK’s sizeable current-account deficit, its credit rating and Brexit fears have already led the pound’s recent southerly fall.

This would seem to confirm recent warnings from Citibank and Goldman Sachs that both inward investment, growth and the sterling would reduce following a vote to exit the EU.

Meanwhile an October 2015 Bank of England analysis held that the British economy had benefitted from EU membership.

Academic historian John Gillingham, in his new book, The EU: An Obituary, finds the idea of a political and economic union was “once great notion that soured long ago”.

He believes the European Union to be a besieged institution.

“It struggles in vain to overcome the Eurozone and refugee crises,” he said. “The Schengen Agreement is a dead letter, and Britain stands on the brink of leaving altogether. The EU is also unfit for the challenges of the coming age of high tech and increased global competition. The drive for an ‘ever closer union’ has set Europe on the wrong course: plunged it into depression, fuelled national antagonism, debilitated democracy, and accelerated decline.”

The Leave.EU campaign, which includes Hargreaves Landsdown founder Peter Hargreaves, has cited the world’s biggest investor, BlackRock, as its latest reason to vote for an exit.

“Anyone who looks into BlackRock’s history will see their support for EU membership as a very good reason to support the Leave campaign,” said Leave.EU spokesman Jack Montgomery.

“It’s a crony corporation which bought more access to the EC than any other firm in 2015, after increasing its lobby spending ten-fold. It’s employed by the European Central Bank to advise it on purchasing asset-backed securities – a hilarious conflict of interest, given its status as the world’s biggest asset manager.”

“Most damning of all, it was BlackRock which acted as the Troika consultancy of choice during the financial crisis, stress testing the banks in Ireland, Cyprus and Greece, getting its numbers embarrassingly wrong but pocketing tens of millions of euros regardless.”

“Like the disgraced American investment banks bankrolling the Remain campaign, BlackRock is a selfish actor in this referendum, looking out for its own vested interests, not the public interest. Fortunately, it’s the public who have the final say in June, not them.”

Writing in his weekly Daily Telegraph column, London mayor and avowed exiter, Boris Johnson, said: “It is the European court of justice, with its vast new remit over the charter of fundamental rights that is making it harder month by month for the security services to get on with their job – whether it be expelling murderers or monitoring terrorist suspects. It is the border-free Europe, obviously, that makes it so much easier for our enemies to move around. As Ronald K Noble, the former head of Interpol, has said, the Schengen area is ‘like a sign welcoming terrorists to Europe’.”

Meanwhile, Scottish first minister, Nicola Sturgeon, a devoted fan of the EU for its ability to deliver “solidarity, social protection and mutual support” for its members and citizens, has said that should Britain vote to leave, despite a majority Scottish vote to stay, the SNP would embark on a renewed independence referendum.

New research from a number of professional services firms shows broad support for remaining in the EU. One, conducted by Grant Thornton, found that UK businesses – large, small and mid-sized – are largely in favour of remaining in the EU, but few had considered the practical implications of ‘Brexit’ and are unprepared for a potential vote to leave.

Figures from Top Six accountancy firm, BDO, intimated that while medium-sized businesses are in favour of staying in Europe, they want further reform to help UK businesses, including better trade agreements, less red-tape and liberalisation of markets to increase UK job creation.

Whatever the fallout or otherwise from a potential EU exit, perhaps we can all take some collective comfort from the fact that the latest Economic Intelligence Unit’s global risk assessment, found that Donald Trump winning the US presidency is rated as riskier than Britain leaving the European Union or an armed clash in the South China Sea.

The top research firm warned that so toxic is the abrasive Republican that he threatens to not only disrupt the global economy but heighten political and security risks in the US.

Its rankings use a scale of one to 25. Trump becoming president is deemed as big a risk as the rising threat of jihadi terrorism destabilising the global economy – both with equal pegging at 12.

Britain leaving the EU is at number 8.

All of which will be worrying for the occupant of Number 10.

Alistair Darling, former chancellor of the Exchequer will  talk about his experiences as chancellor, and his thoughts on the impact upon business of the UK’s EU Referendum at the CFO Agenda 2016. Financial Director’s conference for senior finance professionals will be held on 28 June, days after the landmark referendum.