Bloomberg News

Cameron Gamble on EU Seen Threatening U.K. Recovery

January 25, 2013

Prime Minister David Cameron

Prime Minister David Cameron said, “Today, public disillusionment with the EU is at an all-time high.” Photographer: Matthew Lloyd/Bloomberg

David Cameron’s pledge to hold a referendum on Britain leaving the European Union may damage investment and jeopardize an economy facing an unprecedented triple-dip recession, executives and economists said.

The prime minister, who announced the plan for a vote by the end of 2017 in a speech in London two days ago, yesterday defended his move at the World Economic Forum in Davos, Switzerland, saying it won’t undermine the country’s appeal for global investors.

“The prospect of an EU in-out referendum will have a chilling effect on investment in the U.K.,” Adam Posen, a former Bank of England policy maker, said by e-mail from Davos. “If people thought Greek risk hung uncertainty on the euro area or the fiscal cliff risk clouded the U.S. investment climate, this will be every bit as bad for the U.K. To stretch it out until 2017 is madness.”

Cameron said that, if he wins the 2015 general election, he’ll seek to renegotiate membership of the EU before putting it to a popular vote. The move, which was criticized by Germany, France, the U.S., and Cameron’s Liberal Democrat deputy, Nick Clegg, marks an attempt to solve a three-decade predicament that has haunted Conservative Party leaders.

Triple Dip

Confidence in the U.K. economy is being damaged by a fiscal squeeze that’s denting demand at home while exports are suffering from the crisis in the euro area, Britain’s main trading partner. The fragile recovery is also under question as the contraction in the fourth quarter of 2012 could pave the way for its first ever triple-dip recession.

Data today showed that gross domestic product dropped 0.3 percent in the quarter from the three months through September, according to the Office for National Statistics. That compares with the median of 38 estimates in a Bloomberg News survey for a decline of 0.1 percent.

The prospect of a referendum is adding to an already difficult business climate, according to Martin Sorrell, chief executive officer of London-based WPP Plc (WPP), the world’s largest advertising and marketing company.

“It can’t be positive,” Sorrell told a panel in Davos earlier this week. Cameron “just added another reason why people are going to postpone investment decisions and the last thing we need is people postponing them. There’s a lot of uncertainty.”

About 3 million U.K. jobs rely on trade with other EU countries, according to British government estimates. Cameron said yesterday the U.K. remains attractive to investors.

‘Excellent Things’

“The arguments for investing in the U.K. are the same, we’re part of that single market, we have very low tax rates, we have a very competitive labor force, we have all sorts of excellent things like our brilliant universities, the English language and the time zone that is so central to the world,” Cameron said in an interview with Bloomberg Television’s Francine Lacqua in Davos. “On top of that, we have a plan for making Europe more competitive, open and flexible and securing Britain’s place within it.”

Half of Britain’s exports go to the EU, and 38 percent of services exports went to the bloc in the first three quarters of last year, according to Citigroup Inc. Exports account for 15 percent of U.K. GDP while the rest of the EU relies on trade with Britain for just 2.5 percent of GDP.

‘Favorable Terms’

“The uncertainty is likely to make it harder to attract inward investment, and may even prompt U.K. firms to expand operations in other EU countries rather than domestically,” Barclays Research said in a briefing note. “If the government were able to persuade companies that the U.K.’s future lies within the EU, and on more favorable terms, the harm might be kept to a minimum.”

While it’s “healthy” for the U.K. to debate its EU membership, an exit from the bloc would be “detrimental,” Goldman Sachs Group Inc. (GS:US) CEO Lloyd C. Blankfein said during a panel discussion in Davos today.

A poll by Populus Ltd. for the Times newspaper found 40 percent in favor of leaving the EU and 37 percent against, with the remainder saying they didn’t know how they would vote in a referendum. The company surveyed 2,024 people on Jan. 23 and Jan. 24. No margin of error was given.

Auto Exports

Among the largest investors in the U.K. are automakers including General Motors Co. (GM:US), Tata Motors Ltd. (TTMT), Nissan Motor Co. Ltd. (7201), Toyota Motor Corp. and Honda Motor Co. Ltd., which gain tariff-free access to the EU market of 500 million people. About 80 percent of the 1.5 million vehicles made in the U.K. are sold overseas, the majority of them to the EU, according to the Society of Motor Manufacturers and Traders.

Companies that import vehicles from outside the EU currently face tariffs of between 4 and 10 percent for vehicles and as much as 4.7 percent for parts, the European Commission in Brussels said.

Clegg, Cameron’s coalition partner, said the prime minister’s proposal was motivated by “intense internal discussions” in the Conservative Party and warned that the lack of clarity for business as a result of the referendum will stifle growth.

‘Completely Vague’

“I simply don’t understand the point of spending years and years and years tying yourself up in knots, so-called renegotiating the terms of Britain’s membership in ways that at the moment at least are completely vague,” he said on his weekly phone-in show on London’s LBC radio yesterday. “I think that discourages investment and inhibits growth and jobs which has to remain our absolute priority.”

The opposition Labour Party, which rejects a referendum on the terms set out by Cameron, also warned of the effect on investment.

“The prime minister can’t tell the public how he will vote, he can’t tell investors whether the U.K. will be part of the world’s largest single market in four years time and he can’t be clear on what it is people would be choosing between staying in or leaving,” Labour’s foreign-affairs spokesman, Douglas Alexander, said in an e-mailed statement. “Uncertainty is the enemy of investment and the prime minister’s approach has created a lot more uncertainty.”

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Thomas Penny in London at tpenny@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net


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