Political uncertainty over the EU is bad for business

Anna Sonny, 15 May 2015

After riding high on an unexpected majority victory in the general election last week, Prime Minister David Cameron must now deal effectively with the uncertainty that looms over the UK’s relationship with the EU. Political uncertainty is bad for business, and Bank of England Governor Mark Carney warned this week that it would be better for the UK to hold a referendum on its EU membership sooner rather than later, as a number of UK businesses have expressed concern that a drawn out referendum campaign will lose them thousands of pounds in investment.

The main concern for foreign investors seems to be that the UK acts a gateway to the rest of Europe; free trade with the EU makes it easy for firms to manufacture in the UK and then export to the rest of the 28-member bloc. But if the UK were to leave the EU, negotiating a free trade agreement (FTA) would be in the interests of both parties. It is unlikely for either side to impose high tariffs on the other when they are such important trade partners.

Carney described the EU as a major investor, the largest economy and our largest investor in the UK. While the EU is certainly important for UK trade, the UK is locked into a customs union with the EU, and so it is not free to negotiate any FTAs with other booming economies such as China. Other European countries such as Norway and Switzerland have opted for looser, more economic and less politically binding contracts with the EU, still benefiting from free trade but without the hefty, expensive legislation, and retaining the freedom to pursue their own economic agreements with other countries.

There has been talk of the referendum being brought forward to 2016, but there are concerns that this wouldn’t give the ‘out’ campaign enough time to build support, and Cameron would also have to speedily negotiate getting powers back from Brussels to convince the British public that he can keep Britain strong in the EU. So far, his wishes to see treaty change to cement reforms on limiting freedom of movement and stalling ever closer union have been rejected by Germany – but the four freedoms of movement, labour, capital and goods are solid cornerstones of the EU and any tinkering with these pillars was unlikely to be accepted.

Perhaps clamping down on the amount of benefits EU immigrants can claim in the UK will be enough to convince the British public that Cameron can keep Britain in the EU whilst getting a good deal for the UK. But more needs to be done to give confidence to businesses in the case of Brexit.

Uncertainty and confidence are mutually exclusive; campaigning to change the status quo always needs an edge to combat the uncertainty involved in ushering in adjustments. Cameron has to be prepared for both outcomes of a referendum in order to sustain confidence in the UK’s ability to thrive in either eventuality, both at home and abroad.