The United Kingdom’s In/Out referendum on continued membership of the European Union on June 23 may serve as a welcome distraction from the interminable circus of a campaign that precedes every US presidential election, with wall-to-wall coverage throughout the world, but it may also have some significant and unexpected consequences for the British economy and the goods it creates, including metal products.
Sterling fell dramatically on Monday, once it became clear over the weekend that the ruling Conservative Party is as split as it was in the 1990s under Prime Minister John Major. Major referred to the so-called Euro Sceptics within his ranks back then as “bastards” and it was the fault line through the middle of the party over Europe that contributed significantly to it losing the general election of 1997 by a landslide and the ascendancy of Tony Blair’s New Labour into power.
But the fall of the pound could prove to be a mixed blessing for the UK economy in making exports of its manufactured goods more competitive on international markets, including elsewhere in the EU and also in the US. The EU and the US are the UK’s main trading partners.
The downside is that the weakness of sterling will make it more expensive for UK manufacturers to import raw materials. But that downside may be limited, given China’s ability to flood the world with more steel and aluminium than we know what to do with.
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The weakness of sterling, if sustained, may also prove to be a boost to the UK financial services sector — a pillar of the UK economy. Legal fees and investment banking fees from law firms and investment banks based in London are likely to become a lot more competitive compared with the fees charged by their counterparts in New York, for instance, for any company considering an acquisition, merger or an IPO.
Given the general climate of international financial and economic uncertainty, an IPO or an acquisition may not be too high on the agendas of many companies, but competitive costs of financial services in London may help encourage such activity at a time when it would otherwise be highly unlikely.
Given the complete unreliability of the opinion polls in last year’s referendum in Scotland on whether it would remain part of the United Kingdom, it is reasonable to say the likely outcome of the EU membership referendum is a total crapshoot.
What happens if the referendum results in a “leave” vote? Will the UK automatically become a member of the World Trade Organization, and will its goods sold in the EU and elsewhere be treated fairly, or will they be subject to hefty tariffs? Will a UK outside of the EU automatically be considered a part of the European Free Trade Association again, preserving its tariff-free, free market trade status with the European Union and the rights of its citizens who have chosen to live and work in other parts of the EU? Or will those people suddenly find themselves out of work and out of immigration status and be forced to move back to the UK? Likewise, what happens to all those people from other parts of the EU who have chosen to live and work in the UK?
The UK was one of the founding members of EFTA but left it when it became a member of the European Economic Community — a precursor to what is now the EU — in 1973. It is unclear whether the UK would automatically regain EFTA membership, or whether it would be dependent on the four remaining members — Norway, Iceland, Switzerland and Lichtenstein — to vote the UK back in.
There is a parallel to last year’s Scottish referendum, given there are so many unanswered questions from the “leave” campaign, before we even get to issues such as defense, border security, agriculture subsidies, social welfare and the UK’s budget contribution to the EU. Uncertainty, market turbulence and pressure on sterling appear to be the only certainties between now and June 23.
If the UK votes to remain in the EU, sterling and the euro are likely to rise sharply and any benefit manufacturers see on the export markets, or London’s financial services sector sees, will be washed away. If the UK leaves, more uncertainty and sterling weakness is likely, until such time as the UK figures out how to go it alone.