Yes, yes, yes: Margaret Thatcher campaigning before Britain’s last European referendum in 1975

    Yes, yes, yes: Margaret Thatcher campaigning before Britain’s last European referendum in 1975

    Bray new world

    14 November 2015

    The City will crumble as major banks decamp for Frankfurt and Paris. Japanese car makers will rip up their British factories and take them to Spain or Germany. A million people, maybe two million, will lose their jobs as trade freezes up. In the 12 — or heaven help us, 18 — months before the referendum on whether we stay in the EU or get out, we can expect endless dire warnings about what will happen in the event of ‘Brexit’. But there’s another, actually more likely, outcome — and that too will have huge long-term consequences for our economy. Let’s call it ‘Bray’: that is, Britain stays.

    No one yet knows when the referendum will be held, nor what kind of deal the government will be able to secure in the renegotiation of membership terms that will precede the vote. Even so, the smart money has to reckon that in the end, rather grumpily, a majority of Britons will opt to remain in the EU — and it’s easy to imagine that outcome as a no-change non-event. Easy, but wrong. So, apart from picturing Nigel Farage consoling himself with a line-up of pints, what should we expect if the Bray side wins?

    First, there will be a big relief rally in the FTSE. It never takes much to get the stock market into a funk and in the months leading up to the vote, there will be nervousness and short-selling aplenty. But once the issue is decided, stocks and the pound will go up sharply, simply because the threat of disruption has been removed. That happened in a small way after the Scots voted to stay in the UK. There will be a much bigger impact if we stay in the EU.

    Next, key sectors will get a big boost. Whether the British economy overall benefits much from EU membership or not is hotly debated. The reality is that it probably does not make much difference either way, but there’s no denying it makes a big difference to a few specific industries. It matters to the City, as the hub of Europe’s capital markets. If we stay in, expect banks and insurers to benefit. Car manufacturing depends on the EU, as does aerospace. Not many of the companies in those sectors are British-owned, but lots of their suppliers are. Look as well at firms that benefit from free movement of labour: how would coffee chains cope without Poles, for example?

    Thirdly, by then we will have probably have secured better membership terms. The Scots won a better deal out of the UK at the last moment, and Brussels will surely toss us a few last-minute concessions as well.

    Such as? We might get an opt-out on expensive energy policies or social legislation. We might reclaim some of the rebate that Tony Blair gave away. Again, that will benefit a range of industries, and should help the government’s finances too.

    Finally, after voting to stay in, the UK will be a far more committed member of the EU. With increased authority at the negotiating table, we might be able to nudge the whole contraption on to a more liberal path, and that will benefit companies right across the continent, as well as UK exporters for whom Europe is a hugely important market. The British have always wanted a free-trading, outward-looking EU: we just haven’t been able to make it happen. You wouldn’t want to bet on this, but there is a chance we might be able to shift the agenda slightly in the Anglo-Saxon direction if we decide to stay in.

    There will be endless arguments about the likely consequences of Brexit. Pretty soon we will be fed up with them. But investors should keep an eye on the fact that Bray remains the most likely outcome — and if the markets wobble just before the vote, that’s one dip you’ll probably want to buy.