Will we stay or will we go?

Following months of speculation, we now know when the referendum on Britain’s membership of the European Union will go ahead. With David Cameron’s negotiations concluded, we can predict that in practical terms a vote for ‘remain’ would mean little change. 

But it is still an inherently risky time for infrastructure investors. A possible ‘leave’ vote would create significant policy instability and macroeconomic risk in the short-term and a myriad of uncertainties in the longer term. 

What would Brexit mean? Politically, a ‘Leave’ vote would almost certainly necessitate a resignation from the Prime Minister, despite his assertions to the contrary, and a potential change of direction for the currently centrist Conservative party. The process of disentangling the UK from the regulations and institutions of the EU would inevitably take time. 

Article 50 of the Lisbon Treaty signals a two-year period between notification being given to the European Council and the formal withdrawal of a state from the Union. It could potentially take a decade or more for the dust to settle and for new relationships with Europe to be fully established. A ‘Leave’ vote could precipitate a second Scottish referendum, causing further domestic instability, perhaps with precedent for separatist movements across Europe. In short, a ‘Leave’ vote would be neither quick nor clean. The political and economic implications would be monumental. 

There are a number of ways that the UK could seek to redefine its relationship with the EU should it vote ‘out’ in June. The UK may leave the EU but remain part of the European Economic Area, allowing the UK to participate in the Single European Market. It could seek to negotiate access to the single market in specific sectors. It could negotiate a bilateral free-trade agreement with the EU. These are the principles on which Norway, Switzerland and Canada trade with the EU, respectively. Or the UK might seek to negotiate a totally different settlement. As we note below, it is by no means clear which option would be taken.   

There will clearly be some specific risks and headaches for infrastructure investors. They will have to consider the extent to which their ability to fundraise and deploy capital within the EU will be restricted. Certain sectors for investment may be affected by policy risk in a Brexit scenario. Energy provides an example. Political opponents of the UK’s decarbonisation agenda tend to believe that the UK’s policies are being driven by Europe. Brexit would kick off an even more vigorous debate about the direction of energy policy, and with it further investor uncertainty. While many sectors may emerge with relevant policies largely unchanged, there would undoubtedly be a period of confusion about long-term policy direction.

The UK will of course remain an attractive investment environment for many. EU membership is hardly the only reason the UK has enjoyed such high levels of foreign direct investment in recent years.   

The UK’s relatively stable government, credible institutions, competitive labour market and quality of life will ensure that it continues to remain an attractive option for investment, even in the event of Brexit. Indeed those in the ‘Leave’ camp see Brexit as a leap into the light – an opportunity for the UK to de-shackle itself from Europe’s slower rate of growth. With a more explicit focus on Britain’s needs, they argue, key decisions to unlock investment – in energy, transport, communications infrastructure and more – would be easier to reach.   

Despite this, the ‘Remain’ camp and the government will spend the next few months attempting to discredit this view, invoking their campaign message “stronger, safer, better off in”. Who is currently most likely to win?

WHAT’S THE LIKELIHOOD OF THE UK LEAVING THE EU? 

Currently, while the risks outlined above should not be ignored, the fundamentals do point to the UK remaining in the EU. Polling seems to indicate that the race is tight, with a large group of “undecideds”. It is most likely that as polling day approaches, many of these undecideds will head towards the Remain camp, for a number of reasons:

The British public is a largely cautious, pragmatic and small conservative entity. The outcome of the May 2015 general election was a useful reminder of this. Voting Leave requires a significant desire to depart from a lived reality and embrace a wide range of uncertainties – a big step even for Eurosceptics.   

David Cameron is the most trusted politician in Britain today. He will spend much of the next four months vigorously making the case for Remain. So will the formidable SNP machine and a Labour party led in this instance by the popular Alan Johnson.

Lined up behind them will be a great deal of the British establishment. It has become fashionable to argue that the UK and Western world is experiencing a revolt against establishment elites. Jeremy Corbyn’s radical Labour leadership and the rise of Bernie Sanders and Donald Trump across the pond is cited in support. This doesn’t yet translate on a national scale in the UK. Many undecided voters will listen to those who keep us safe, provide employment, manage our financial institutions and run our charities. 

The Leave camp by comparison feels a miscellaneous group of unpopular and largely unknown individuals, with Boris Johnson the obvious exception. UKIP’s Nigel Farage inspires some, but repels many more. Michael Gove is an intellectual heavyweight, but is best known for being widely loathed. Other key figures in the Leave campaign are largely unknown, or have minimal popular appeal. 

Remain has a clear and resonant message that we will hear again and again and again until polling day. “Stronger in, safer in, better off in” is clear, simple and will strike a chord with those who worry about whether ditching the status quo could be risky.   

The out camp has no similar clarity. Leavers are riven between two world views. Firstly, those who see Brexit as an opportunity to create a Singapore-style, hyper-globalised liberal modern economy. Secondly, those for whom it is a chance to crack down on immigration and recapture Britain’s self-rule and sovereignty. Few undecided voters will choose an option whose own protagonists cannot agree what it means. 

Success for Leavers depends on being able to persuade the electorate that we cannot at present achieve an adequate settlement from Brussels, and in the event of Brexit, we will get the trade agreements that we need from Brussels with minimal fuss. The Remain camp will press at this problematic contradiction at every opportunity. 

The Scottish referendum is instructive. It generated huge passion and intense engagement from previously non-political members of the public. But even with this passion and one of the most formidable party machines in living memory, the Scottish nationalists lost by a solid margin. On the same basis, it unlikely that Britain will vote for a major change on an issue that (outside of a vocal and principled minority) arouses neither passion nor interest.
In referenda the electorate tends to veer back towards the status quo as the vote draws closer and caution kicks in. To be really confident of Brexit, Leave would need to be in a solid leading position right now. It is not, and it has a mountain to climb.

But is Brexit still a possibility? Yes, clearly. Some factors point in favour of Leave. Cameron’s renegotiation is widely regarded as having been poor. Boris Johnson, the most popular politician in the country, supports Brexit. There may be a ‘black swan’ event in the coming months, like a terrorist attack, or a development in the refugee crisis that pushes the electorate towards Leave. It may prove the case that the British electorate is more anti-establishment than we have judged.   

Our view is that at present infrastructure investors should be reasonably confident of a Remain vote in June. Given the lead in time, the period of uncertainty is as short as it could have reasonably been. Whether this resolves the issue of Britain’s relationship with the EU in the longer term remains to be seen.