The Great Brexit debate

Andreas Koutras
7 th June 2016
The birth of EU
Seventy two years ago to the day, 6th June 1944, the allies embarked on a huge operation to liberate and save Europe.
Operation Overlord, the code name for the D-Day landings was a success albeit with high cost of human life. The
operation names of the beaches, Utah and Omaha where the Americans landed, Gold, June and Sword where the
British and Canadian forces landed are now mythical places of sacrifice for a free Europe.
After the war, the novel idea of not killing each-other led many European politicians to propose a kind of union or
cooperation. Thus, the European Coal and Steel Community were born in 1951, which led to the European Economic
Community (EEC till 1993) and now to the European Community (EU). Battles would be fought from now on, in
market exchanges and smoky corridors.
First Referendum
Britain was not an initial signatory and when Ted Heath (then minister) approached De Gaulle, Britain was vetoed out.
Later on, Heath as Prime-Minister convinced the French to lift the veto and Britain became a member of the EEC
along with Denmark and Ireland. But the story did not end there. In the election manifesto of 1974, Labour had
promised a referendum. Harold Wilson formed the government and a referendum was held in 1975. At the time it was
the Labour government ministers that were split.
The issues were similar to today, Economy and Common agricultural policy (CAP), sovereignty. Most of the leading
conservatives were in favour including the newly elected leader Margaret Thatcher. On the No side there was an
unholy alliance of the ultra-conservative Enoch Powel (famous for his Rivers of blood speech), and of left hardliners
Tony Benn and Michael Foot.
In a similar fashion to today, there were false claims, scaremongering and misleading numbers. Tony Benn was
branded Minister of Fear after claiming that half a million jobs were lost and food prices had gone up as a result. In
the event, 67% voted to stay in Europe with a rather high turnout of 65%. It was claimed that the NO lost because of
the rather extreme and eccentric personalities leading the campaign.
Second Referendum
Fast forward 41 years to 2016 (1st referendum was held 5th June 1975). Now it is the Conservative cabinet that is split.
The issues are again, Economy and Jobs, Sovereignty and Nationhood and we added Immigration. The colourful or
eccentric characters are still with the NO or Leave campaign and the main establishment forces with the IN.
False statistics and extraordinary claims are flying around and scaremongering is an accepted political tool by both
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sides. European politicians are kind of begging Britain to stay whereas many Europeans (especially on the left side)
wish to see Britons out.
Main Issues
The following is by no means an exhaustive list of all the issues and arguments. Inevitably, many things were left out.
Most of the data are from the British parliament and the Oxford migration observatory.
1. Economy-Trade-Jobs.
This is the main battleground and the signs are that the In Europe has won most points on this front.
Britains prosperity and growth the past 30 or so years is the result of Thatchers drive to free up and liberalise
the economy. When Europe adopted these principles and opened up the European market, British businesses
were ready and profited most. Close to 50% of British exports go to Europe.
The Leave campaign lost many points when Mr Gove compared the trading position of Britain with that of
Albania. Leave campaign seems also to have lost credibility by quoting misleading numbers with regards to
the British contribution to the EU budget. The nominal contribution of 17.8bln is quoted heavily by the
Leave campaign. This fails to include the 4.8bln rebate, the 4.4bln public receipts and the 1.4bln private
receipts. Thus the total net contribution is around 7.2bln or 0.6% of GNI. This is the lowest in Europe, since
most other countries contribute close to 1% of GNI per annum.
The truth is that it is very hard predict with any confidence what would happen to the economy long term if
Britain were to leave. Short term is easy. There would be job losses, volatility, possibly a recession as the
people and the economy tries to re-adjust to the new environment. Much of course will depend on the deal that
will be negotiated with Europe and the rest of the world.
In the financial sector which is a major component of the GDP, any changes would affect the economy most.
For example, Britain has a financial services trade surplus of around 71bln, 41% of the global FX market and
more than 1trillion or 12.5% of the total UCITS funds. The sector has gained most from the so called
European passport and the common de-regulation. Settlement and custodial services may suffer too as they
need to be on EU soil (EMIR). On the other hand, hedge funds would probably gain most as Britain may not
adhere to the Alternative Investments Fund Management Directive (AIFMD). Also any market volatility is
good for hedge funds. Bankers pay would improve too as the current cap on pay imposed by the EU has been
resisted by the British government. So, everything depends on the post-leave agreement.
A frequent scare story that is propagated by the IN camp is that house prices would fall following leavevote. That may be true for some small localised regions but the high real estate prices have to do more with the
small supply which seems to be intentional in order to keep artificial high prices.
On the economy, the Leave campaign has not produced any credible plan for the day after. Most of what
they said is wishful thinking or lacking hard evidence. Their scare stories involve immigration, the NHS and
sovereignty.
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2. Sovereignty-Regulation
This is one area were the battle seems to be even. The take back control slogan is very effective as it is
populist. Sovereignty is never absolute unless you are in North Korea. It is defined and is delimited by
constraints treaties and agreements. For example, Britain is a member of NATO and under Article 5, Britain is
forced to declare war to any country that attacks a fellow member (remember the recent skirmish between
Turkey and Russia over Syria?). By the way, in-family conflicts are excluded, so if Germany attacks France,
the UK can stay put.
Similarly, World Trade Organization agreements bound Britain in many ways and so do other treaties.
Supporters of the Leave campaign claim that Britain has lost sovereignty and is about to lose more as the EU
pulls powers away from the national parliaments. The main point is the European Communities 1972 Act
which surrendered powers to the EU. The other side, points out that the British parliament is supreme. In
other words, it is not an irrevocable change. Parliament can always vote the powers back home.
Another contentious point is the European Convention of Human Rights. Now, one cannot easily understand
why Human Rights are a problem but Abu Qatada made it so. Supporters of the Leave campaign point out to
the delay (many years) that it caused in extraditing him to Jordan. On the other side, supporters of the IN
campaign point out that this is a worthy price if Britain wants to adhere to the high standards of the
convention. Leaving the convention would damage the international reputation of Britain.
Finally is the issue of extraditing British citizens to EU countries. British citizens can be s end to face trials in
countries that allegedly do not have the same judiciary high standards as in Britain and serve jail sentences in
appalling conditions. Although a valid criticism, it is by no means without remedy. The British government
already said that they would engage the 100 or so opt-outs they have with regards these regulations. They
could also follow the Dutch example and refuse to extradite anyone for actions that are not crimes in Holland.
EU Regulation
From prawn cocktail crisps to the definition of real chocolate the EU is full of regulations. Most of them
mundane and boring, occasionally they find life on the front pages of newspapers. Many of the stories like the
one of banning prawn cocktail crisps from pubs are distorted (there was never any ban. There was a
bureaucratic error on the side of Britain that was quickly corrected). Others like the definition of chocolate are
true. British chocolate manufacturers use vegetable fats instead of cocoa butter. It took around 15years for the
EU to accept British chocolate as chocolate.
Then there are the PDO, Protected Designation of Origin. French cannot produce Dorset blue cheese or
Italians cannot produce Roquefort or the Spanish Feta. Or rather you can produce it and sell it as long as you
dont call it as such.

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Thus many of the regulations touch upon the small things of everyday life and can be easily mocked or joke
about. No-one likes regulations especially if they infringe on personal choice and freedom. On the other hand,
they are necessary if you want to have some order in market of 500mln people or indeed in any market. And
here is the problem. The balance between balance and intrusion is not always struck. Also many nationalistic
interests get in the way of protectionism. For example, the CAP (Common Agricultural Policy) was constructed
with the French farmers in mind rather than the Spanish or the British or the consumers.
The Leave campaign wants to do away with EU regulation. The IN supporters point out that whether
Britain is in or out it would have to abide by EU rules if British manufacturers want to sell products in the EU.
And currently 50% of British exports go to the EU. In addition Britain would lose a seat on the table and thus
it would have to accept whatever is pushed by Brussels with no recourse.
3. Immigration
Immigration is the subject that the Leave campaign feels the strongest. It touches people in many different
ways and has high sentimental value. Lets look at the numbers. Total population is around 65mln. Around
8mln have been born outside the UK (This must include Prince Philip as he was born in Greece) but only 3mln
of them are EU citizens. EU immigration has seen the greatest increase of 1.9mln in the years after the EU
expanded eastwards (2003).
So clearly we see that there was a marked increase in the last decade. In terms of nationalities there are around
Poles 800k, Irish 390k, Germans 280k, French 150k, Spanish 137k, Romanian 223k, Italian 176k, Portuguese
140k, Hungarian 96k etc. The reasons why they are in Britain are as follows: 68% for work, for study 21% and
11% family.
The main attraction of coming into Britain is the level of pay which is higher than in many EU countries and
the high levels of unemployment in Europe. One could say that immigration is the result but also a
contributing factor to the successful and growing British economy.
However the argument that they are arbitraging benefits or take advantage of the welfare state is not supported
by numbers. The majority of 80% have jobs and do not claim jobseekers allowance or incapacity benefits.
Many however claim tax credits as they are in low paid jobs.
The Leave camp says that a new point system would be introduced similar to the Australian one limiting or
rather targeting immigration. The IN camp touts the new deal that was struck by PM Cameron as the only
way forward.
There is however one big problem. If Britain wants to trade freely with the EU which comprises 20% of the
global market then it would have to accept free movement of human capital too. This is the so called Norway
model. The EU is unlikely to give free trade without something in return as it has done in the case of Norway.
Thus even if Leave campaign wins they may find that the realistic approach is to allow immigration.
In fact, it is highly possible that a successful Leave vote becomes an IN vote in practice albeit after losing
many of the benefits. This is what happened in the Greek referendum last year. The Greeks under the populist
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Mr.Tsipras voted overwhelmingly NO only to find out that a YES was implemented albeit with much-much
harsher terms.
Conclusion
The most recent polls published show that the IN campaign is ahead but the Leave is closing in. The difficulty
with polling is twofold. Firstly, as it is a referendum and not a general election it is not possible to use historical
patterns or prediction models. Secondly, the outcome would be conditioned on how many actually vote. It is
claimed that a high turnout favours IN whereas a low turnout favours the Leave.
Although the question asked on the ballot paper is simple, in order to make an informed decision it is extremely
difficult. The issues behind are very complex and information is not always available. Even if we assume that all
information given to the public is correct (far from the truth) it is still hard to decide as the issues are technical.
It is thus inevitable that people look for simplifications and credibility in those who promote the case. Here lies
the main conundrum. Most of the main stream politicians and what one might call the establishment are in favour
of staying IN. The problem is that the credibility of the establishment has suffered a lot since the crisis of 2008
(saving bankers and not people etc.) and there is popular discontent against the old regime. We have seen this
not only in Britain but globally. Thus even if their arguments are based more on facts and figures voters are
sceptical.
On the other hand the leaders of the Leave have two issues. Firstly, they know that their economic proposal is
full of known unknowns and unknown unknowns and they prefer generalities. They play on the sentiment and
nationalistic feeling (Sovereignty, take back control etc) and the signs are that their strategy is working. The
second issue is eccentricity and credibility. The main leaders of the Leave campaign (as was the case in 1975)
have serious credibility deficit.
It is thus understandable why the polls have not given a clear guidance on the referendum. One thing is however
certain. Geopolitically a Leave vote would be a game changer. Markets have been very complacent so far and
have not priced in the possibility of a Leave vote. More on the markets in our next note.

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This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by i t or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.