By Charles Curran, Principal and Market Data Analyst, Maskells
We must never forget that the ultimate goal of the Treaty of Rome was political union amongst its member states. To be clear, political union by definition means giving up sovereignty and adhering to the rules of a supra-national authority.
We signed the Treaty.
Whilst this may have been a bitter pill to swallow, our relationship with Europe has always been difficult; from De Gaulle blocking our initial entry to the EEC in the 60’s (twice) to Sterling’s expulsion from the ERM in 1992 through to the Prime Minister’s very public spat with Jean Claude Juncker and everything in between. We put up with this as we wanted access to the world’s largest single market and to have a say as to how it was run.
In the long term, Britain may well benefit from leaving the EU.
In 2015 the Office for Budget Responsibility maintained that Britain may save up to £54bn until 2019-20 from an Exit but, as most commentators have noted, these numbers are based on Britain enjoying the same trading conditions as we do at the moment – if the EU allow us to. This is a big IF as the final terms of the exit that we will be voting on in June will only be decided upon much later down the line; so in reality we don’t really know what we will be voting for, which is a huge gamble for Britain.
There is no doubt that uncertainty post Exit will reduce investment in the UK for the short term. Research done by Reuters Datastream suggests that there will be almost a 1.5% fall in GDP in the first year post Exit and the CBI has estimated a loss of £100bn to the UK Economy by 2020. Sterling has already lost ground to the Euro and Dollar (by nearly 10%) and will undoubtedly fall further post Exit until there is clarity on the terms.
In our opinion, currency risk is the biggest short term problem.
Post Exit, there will be a run on Sterling as our economic future would be uncertain, making our imports more expensive (increasing our balance of payments deficit) whilst making our exports and also our companies cheaper to buy.
The currency will most likely be propped up (as it was in 1992) by an increase in interest rates making mortgages unaffordable and hurting the housing market. Buyers will wait (including Foreign buyers, who have traditionally supported Prime Central London) leading to a freeze in trading – exactly at a time when higher interest rates will produce forced sellers.
With this lack of volume SDLT receipts will also fall, and bank balance sheets may become overwhelmed by repossessions or modified loans. Company borrowing costs will also increase at a time when the economic outlook has just been downgraded and the additional costs such as the work place pension and increased national minimum wage take effect.
The British economy is not yet ready to take on this burden.