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UK Prime Minister, David Cameron has declared that the British people must have their say on the country’s place in the EU and has pledged an in/out referendum if the Conservative Party wins the next general election, a pledge that is already having a ripple effect domestic ally and throughout Europe. Here, Bob Lyddon, General Secretary of the IBOS Association – the international banking network – dissects Cameron’s motives and looks ahead to determine the various impacts the proposed referendum will have on the UK/EU economies.

Cameron – Man of Destiny & Legend in His Own Country Supper Time

David Cameron has signalled his determination to proceed with an In/Out referendum on the UK’s membership of the EU. It is a political manoeuvre, and seems a risky one on the surface, because it ushers in several phases of uncertainty that could have negative economic drag. However, an examination of the phases – and how the key stakeholders may react in each one – shows that all the risks for Cameron are in 2013-14, and are about delivering slightly better economic data than the rest of the EU up to 2014, and seeing off Scottish independence. These are two good bets, as long as the rest of the EU can be relied upon to deliver a sluggish economic performance.

Political Manoeuvres

The key economic stakeholders are UK business, EU business, and inward investors looking at Europe.  Cameron’s big risk is that they will invest much more in the rest of the EU in 2013-2017 than in the UK.  Taking that risk is the price to be paid for the political benefits of signalling a referendum only after the next General Election (due in 2015), and there are good grounds to believe that the risk will not materialise.

Cameron books an immediate and substantial premium for taking on the risk:

  • It defuses pressure from the Tory right wing and the tabloid press
  • Fends off attacks from those who still ask why the “cast-iron guarantee” of a referendum on the Lisbon Treaty was dropped when he became PM
  • Draws the teeth of the UK Independence Party under a strapline of “why support them when you will get what you want by voting Tory?”
  • And the subtext is “if you vote UKIP then the Tories will lose, and you will have either Labour or Labour/LibDem, both of whom are committed against a referendum”
  • Characterises Labour and LibDem as both being unconditionally pro-EU
  • Sets Europe as being the “clear blue water” issue in the 2015 General Election campaign

That’s the good bit. Cameron has no direct answer to the simple question: “if it is an In/Out referendum, why can’t we vote now?” The real answer is that the referendum issue is very useful to him: he can make it the donkey pulling the cart of his re-election campaign. The referendum timing – after the election – is thus obligatory and must be justified on the thin grounds that there is no time prior to 2015 to negotiate the New Deal between the UK and the EU that the referendum will adjudicate.  Were Cameron interested in an EU exit he would not bother with any New Deal.

Phases Between Now & 2017

A. Now to 2014 – The referendum on Scottish independence means there could be no UK in its current form as a negotiating partner for the EU to deal with by 2015-17

B. 2014 – 2015 – Run up to the General Election latest May 2015

C. 2015-2016 – Negotiation of the New Deal

D. 2017 – Referendum campaign

E. 2018 – Implementation of the New Deal or UK exit from the EU

Phase A: Now to 2014

There are no grounds for optimism that the current limp recovery in the UK and the rest of the EU will abate. The UK at least has more elbow room to set its interest rates and to allow its currency to adjust.  The EU’s Lisbon Agenda has completely failed, as has the Single Market project, but the European project will be pushed forward in the hope that ever greater integration (SEPA, Single Banking Supervisor etc) will eventually deliver, but it won’t.  During this period the UK will look a slightly better bet for investment than the rest of the EU, but there will undoubtedly be caution:

  • UK investors won’t be keen to take high risks in Scotland or in the rest of the EU, with the prospect of disruption of market access
  • EU investors would be looking more to outside the EU and likewise there would not be much incentive for non-EU investors to direct their resources into a low-growth EU – but then the UK looks slightly more attractive amongst a rowd of unprepossessing EU candidates.

Phase B: Run up to the 2015 General Election

Scottish independence has reputedly lost considerable support over the last year. It looks unlikely that voters will select the Scottish Nationalist Party’s nationalist/socialist vision of a kilted people’s community. A Cameron redux – buoyed up by the consolidation of the UK and the prospect of the New Deal negotiations – would be an unstoppable force against a colourless Ed Miliband and the shop-soiled Nick Clegg:

  • Outpouring of optimism (however misplaced) in the UK, leading to sharp increase in investment and consumer spending, creating a feel-good factor that propels Cameron back into Downing Street with an overall majority
  • Remaining EU still stagnant
  • EU and non-EU investors board the train for the UK: champagne corks start popping again

Phase C: Negotiation of the New Deal

Cameron can go into the negotiations with reinforced personal authority deriving from several sources:

  • Parliamentary majority in the UK
  • Upswing of economic activity in the UK, compared to stagnation in the remaining EU
  • Pressure on other EU politicians from their voters at home: “look at what Cameron and the UK are doing compared with what is happening here”

Cameron’s second big risk (and it is a risk because he wants to stay in the EU) is that this phase is too long, the UK recovery flags because it was not based on very much to start with, and he makes little progress in the New Deal negotiations.

His aim must be to create (between now and 2015) a connection in the minds of other EU politicians, EU and non-EU investors that the UK’s continued membership of the EU is vital to the EU’s future, but that the UK could have a reasonable future autonomously outside the EU… and others could follow it out of the door.

Cameron has to fix this notion in the popular perception in other EU countries, and crank up the pressure on EU politicians. Maybe it is not part of Cameron’s plan but it seems a quite likely scenario that, against the background of a positive economic perception of the UK and a correspondingly negative perception of the rest of the EU, investment monies will flow into the UK and not into the rest of the EU, creating a self-fulfilling prophecy.

Mistakenly the EU politicians, in my opinion, will do a deal with Cameron that they are confident Cameron can get a Yes vote on, in the hope that this will bury the issue and allow the rest of the EU to continue on the integration path. Instead it will simply be an encouragement to like-minded groups in other EU countries to demand the same repatriation of powers as the UK has negotiated.

Phase D: Referendum Campaign

Cameron will want a very short campaign: there’s the deal, vote Yes or No. The campaign could be 60 days at most, and there will be a large coalition in favour: business, all Labour and LibDem adherents, all mass media except the Daily Mail and Daily Express. The scare story will be loss of market access and UK jobs and investment. The idea that market access to a stagnant area has little value will be drowned out in the enthusiasm.

Phase E: Implementation of the New Deal or UK Exit from the EU

Against the above scenario it is hard to see how a UK exit could be the result. Sketching out this positive and plausible scenario I have convinced myself that the economic downside risks to the UK that might materialise as a result of a UK exit are in fact highly unlikely to materialise, and the main period of uncertainty is until the Scottish referendum.

A UK still in the EU but enjoying its New Deal will be an attractive proposition: alleviated from some of the high costs of EU regulation, but still enjoying market access into the rest of the EU.


Despite the UK possibly being in a triple dip recession, Cameron holds all the cards: the LibDems are almost out of the game and will have to keep the coalition going until 2015. Labour have no EU policy at all or an economic policy that is substantially different from that of the current government.

If Cameron can show even a modestly better situation in the UK than in the rest of the EU by 2014, and win the Scottish independence referendum, he will ride the crest of a wave of optimism in the UK, boosting investment and increasing the divide between UK and rest-of-EU economic performance. Then he is on a home run.

By contrast the rest of the EU’s politicians are bereft of ideas for improving their situation: very high unemployment, no economic growth, a socioeconomic model that expects a high standard of living without the accompanying performance, and the Euro. It all plays into Cameron’s hands.

Bob Lyddon, General Secretary of the IBOS Association – the international banking network

IBOS stands for International Banking – One Solution. It is an association which fosters inter-bank cooperation. Currently active in 27 countries and rapidly expanding, its members include Santander, HSBC France, Intesa SanPaolo, KBC, Nordea and UniCredit Bank.


Link to full article in Finance Monthly, February 2013