Political and social uncertainty has economic costs too, time to move forward

Let’s not have a “Neverendum”…

In the immediate aftermath of the UK’s vote to leave the European Union (EU), there have been a significant number of calls for a second vote. The press have runs stories about people who either apparently tried to change their votes, as they either didn’t expect the UK to vote to leave, or claimed they didn’t know what they were voting for, or felt they had made a mistake. Alongside this, some commentators have stated that Parliament is sovereign and the vote could be over-turned. Others have outlined scenarios where Article 50 is never activated and the UK moves to either a general election or second referendum before deciding to stay in the EU.

There seems little if any evidence to support the claims of the widespread voter angst that have been made based on individual statements. Opinion polls conducted after the result was announced have shown that the public generally still stand by their decision and there is roughly a 2 to 1 majority against another referendum.

…it is time to move on…

The reality is that, given the choice of “the best of both worlds” as the Prime Minister put it being in the EU but also outside by virtue of the UK’s various opt outs and the additional guarantees secured by the PM in the run up to the campaign – a majority of people voted to leave the EU.

The issue of EU membership has been a feature of British politics for more than four decades.  Several politicians in the EU have observed in the last week that the UK has spent a great deal of time criticising the EU, blaming EU policy for some of the many problems that exist in the UK today, and a positive case for Remain was not a major feature of the referendum campaign. As our work with the CBI[1] indicated, the UK has perhaps not taken all the positions available within Brussels, weakening the UK’s ability to shape policy and hence increasing the likelihood of EU proposals then not meeting the UK’s objectives – a vicious circle.

…and avoid creating further doubt for investors and businesses.

The die is now cast and the UK’s attitude to the EU is there for all to see. Many businesses made their positions clear before the vote and are now starting to work through what the implications of the vote may be. It is very hard to go backwards and so even if there was a move to change the UK’s position, it would most likely require a major swing towards favouring EU membership in order for investors to believe that the situation was stable. Further campaigning and uncertainty may well unsettle investors more than the current uncertainty as a new Prime Minister is selected and more details emerge on the UK’s approach to exiting the EU. Some delay in activating Article 50 is sensible to ensure the UK is prepared, but indefinite delay is likely to have economic costs.

Foreign investors have consistently told us that the UK’s diversity, culture and language, the stability and transparency of the political, legal and regulatory environment in the UK and the stability of the UK’s social climate are three of the UK’s most attractive attributes. In 2015[2], these three qualities were ranked in the top six of the UK’s attractiveness attributes with even the lowest ranked rated as equally attractive as access to the European Single Market. It is clear therefore that continuing to create an environment of uncertainty, which might well lead to increased social tension, is not going to have a positive impact on investor perceptions of the UK.

The Attractiveness of the UK on selected attributes.

A positive reform agenda is urgently needed…

It would seem there is a realistic chance that access to the European market will be on less favourable terms in the future. If there are reductions in the level of immigration into the UK, then the availability of skilled labour in the UK may fall, at least in the short-term. It is important therefore that alongside working to minimise any potential negative impact in these areas, the UK does what it can to protect and even strengthen our position on other attributes.

From the list above, delivering world class education, improving labour skills and boosting both telecommunications and transport infrastructures would seem important areas. This view is confirmed when we look at what investors tell us are the priorities driving investment. Skills and infrastructure stand out as the areas for policy makers to focus on to boost productivity and increase the UK’s attractiveness.

…and we need to start talking about it now.

Businesses, investors and the EU have got the message: the UK is a reluctant member of the EU and this is unlikely to change. Continuing to look backwards and trying to unpick the referendum result will just add to short-term uncertainty. The UK’s new status will provide opportunities to do things differently and we need to embrace this and to begin working to strengthen the UK’s competitive position. The trade and domestic agendas need to be developed in parallel, with skills and infrastructure at the heart of them.  Detailed thoughts on the required future activity will follow in subsequent blogs.

[1] Our Global Future, CBI
[2] UK Attractiveness Survey 2016, “Positive Rebalancing?”, EY

@MarkGregoryEY

markgregoryeconomics.ey.com

Our Economics for Business programme provides knowledge, analysis and insight to help businesses understand the economic environments in which they operate. For further EY analysis on the EU referendum click here.