FocusReferendum

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BritainEU Membership:

and

to be or not to be?by Joe Nellis, Professor of Global Economyand Catarina Figueira, Reader in Economics

The recent global financial crisis has had profound implications for many countries, not least those in the EU. The crisis has stirred-up economic, political and social

tensions across Europe, particularly in relation to sovereign debt risk, mobility of labour, political alignments, etc.

Consequently, many people in the UK are demanding that changes to the EU treaties must be made to deal with such tensions. Others go even further and view the EU as an unnecessary burden on the UK. But is this really the case?

The Prime Minister, David Cameron, has promised that British citizens will have the right to decide on the UK’s EU membership on the basis of a referendum, to be held on 23 June 2016. This has generated heated debate across the political spectrum and media. This article provides a platform for a more informed debate about the costs and benefits of EU membership and to help voters address the question: should we stay or should we go?

The Referendum Question

There has been unease even about the precise wording of the referendum question. Words can be manipulated and can all too easily be used to influence voters. Look what happened, for example, with the referendum held in 2015 when the Greek people were asked whether or not they were willing to accept the austerity reforms imposed on them by the EU – to which the majority firmly voted ‘No’. It has been speculated that if the question had been about whether or not Greece should stay in the EU, the majority would probably have voted affirmatively.

In the case of the UK-EU referendum, the Electoral Commission has recommended that the question is: “Should the UK remain a member of the European Union or leave the European Union?”. This wording provides a stark contrast between staying or leaving.

How would you vote?FIXIT – stay in and “fix” the EU and negotiate reforms;

BREXIT – leave the EU altogether and go it alone!

The EU: its members and currency status

Having previously applied twice for membership to the then so-called European Economic Community (EEC), the UK finally joined in 1973, under a Conservative government. Denmark and Ireland joined at the same time. It was only two years later that under a Labour government, a referendum was held on whether or not the UK should leave the EEC (more than 67% of the electorate voted ‘Yes’ to stay in).

After successive phases of enlargement of the EU, the Union currently has 28 members, covering a population of more than half a billion people. Currently, 19 members share the same currency – the euro. Two members – Denmark and Bulgaria - have pegged their currencies to the euro. The remaining seven EU members continue to use their own floating currencies - sterling is one of them.

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What would life look like outside the EU?

There is no clarity as yet about Britain’s position in the international arena if it should leave the EU. It is speculated that Britain is likely to adopt one the following four stances:

The EU: its members and currency status

Having previously applied twice for membership to the then so-called European Economic Community (EEC), the UK finally joined 1973, under a Conservative government. Denmark and Ireland joined at the same time. It was only two years later that under a Labour government, a referendum was held on whether or not the UK should leave the EEC (more than 67% of the electorate voted ‘Yes’ to stay in).

After successive phases of enlargement of the EU, the Union currently has 28 members, covering a population of more than half a billion people. Currently, 19 members share the same currency – the euro. Two members – Denmark and Bulgaria - have pegged their currencies to the euro. The remaining seven EU members continue to use their own floating currencies - sterling is one of them.

So what are the key questions confronting voters in the future referendum?

Better off: In or Out?

At the outset, it is important to appreciate that there are many conflicting views concerning this historically important question. No member country has yet left the EU and hence there is no indisputable empirical evidence upon which to base arguments. Voters will have to form their personal views regarding the implications of leaving the EU in relation to a number of critical dimensions.

So, what are the positive and negative implications for the UK of staying in or leaving the EU with respect to:

• The long-term impact on economic growth and prosperity?

• Employment prospects?

• International trade and investment?

• Tax policies and tax burdens?

• The free flow of goods, services, people and capital within the Single European Market?

• The future of Britain’s legal systems, democratic institutions and law-making processes?

If the UK votes to leave the EU, it remains to be seen whether this can happen in an “amicable” way and what the nature of any new relationship with the remaining EU members will be. And of course the outcome of the referendum may well have far-reaching implications for the future unity of the countries that make up the UK – will there still be a United Kingdom if voters opt out of the EU?

What have the Europeans ever done for us?

The EU is by far the UK’s largest trading partner, accounting for 45% all exports and 53% of imports of goods and services. Over £4 billion worth of exports are sold by Britain to the other EU countries each week. Based on official statistics, the USA and the rest of the world each account for roughly 27% of the value of exports and imports. It is also estimated that between 3 and 3.5 million jobs in the UK are related to our trade with the EU – of course many of these jobs may not be affected if we leave, since trade will continue in some form.

The EU is a major source of inward UK investment, accounting for half the stock of foreign direct investment. An exit from the EU will undoubtedly have implications for these investment flows, although it is impossible to ascertain whether or not there will be a net increase or decrease in values.

European Union countries’ currency status

Euro area

Currency pegged to euro

Floating currency

Ireland

Britain

PortugalSpain

France

Germany

Italy

Lithuania

Latvia

Estonia

FinlandSweden

Poland

Czech Rep.

Aust.

Greece

Romania

Bulgaria

Denmark

Hung.

Slovenia Croatia

SlovakiaLux.

Belg.

Neth.

Cyprus

The Norwegian model

Britain as a member of the European Economic Area (EEA), with access to the Single European Market, subject to the single market legislation, but free from many but not all EU rules (Norway, for example, is free of rules governing agriculture, fisheries, fiscal and monetary policies, etc)

The Swiss model

Britain as an independent country and member of the European Free Trade Area (EFTA) with access to the Single Market but not bound by its legislation and free to negotiate new trade treaties on a sector-by-sector basis with the EU

The Turkish model

Britain as a tariff-free partner with the EU in goods, with a common external tariff (a Customs Union) but not part of the Single Market in services; not part of EU global trade relationships and without the need to apply all EU laws

A Unilateral Approach

Britain “goes it alone” as an independent country, trading with the rest of the world on the basis of its membership of the World Trade Organisation and any other bilateral arrangements negotiated with others

Britain and EU Membership: to be or not to be?

So what are the key questions confronting voters in the future referendum?

Better off: In or Out?

At the outset, it is important to appreciate that there are many conflicting views concerning this historically important question. No member country has yet left the EU and hence there is no indisputable empirical evidence upon which to base arguments. Voters will have to form their personal views regarding the implications of leaving the EU in relation to a number of critical dimensions.

So, what are the positive and negative implications for the UK of staying in or leaving the EU with respect to:

• The long-term impact on economic growth and prosperity?• Employment prospects?• International trade and investment?• Tax policies and tax burdens?• The free flow of goods, services, people and capital within

the Single European Market?• The future of Britain’s legal systems, democratic institutions

and law-making processes?

If the UK votes to leave the EU, it remains to be seen whether this can happen in an “amicable” way and what the nature of any new relationship with the remaining EU members will be. And of course the outcome of the referendum may well have far-reaching implications for the future unity of the countries that make up the UK – will there still be a United Kingdom if voters opt out of the EU?

What have the Europeans ever done for us?

The EU is by far the UK’s largest trading partner, accounting for 45% all exports and 53% of imports of goods and services. Over £4 billion worth of exports are sold by Britain to the other EU countries each week. Based on official statistics, the USA and the rest of the world each account for roughly 27% of the value of exports and imports. It is also estimated that between 3 and 3.5 million jobs in the UK are related to our trade with the EU – of course many of these jobs may not be affected if we leave, since trade will continue in some form.

The EU is a major source of inward UK investment, accounting for half the stock of foreign direct investment. An exit from the EU will undoubtedly have implications for these investment flows, although it is impossible to ascertain whether or not there will be a net increase or decrease in values.

What would life look like outside the EU?

There is no clarity as yet about Britain’s position in the international arena if it should leave the EU. It is speculated that Britain is likely to adopt one the following four stances:

The Norwegian model

Britain as a member of the European Economic Area (EEA), with access to the Single European Market, subject to the single market legislation, but free from many but not all EU rules (Norway, for example, is free of rules governing agriculture, fisheries, fiscal and monetary policies, etc.).

The Swiss model

Britain as an independent country and member of the European Free Trade Area (EFTA) with access to the Single Market but not bound by its legislation and free to negotiate new trade treaties on a sector-by-sector basis with the EU.

The Turkish model

Britain as a tariff-free partner with the EU in goods, with a common external tariff (a Customs Union) but not part of the Single Market in services; not part of EU global trade relationships and without the need to apply all EU laws.

A Unilateral Approach

Britain “goes it alone” as an independent country, trading with the rest of the world on the basis of its membership of the World Trade Organisation and any other bilateral arrangements negotiated with others.

Arguments for staying in the EU

The supporters of continued EU membership highlight the following points:

• There is a danger that some multinationals could reconsider their investment strategies into Britain in the case of Brexit

• If the UK votes to leave the EU and adopt one of the models noted above, it may still have to accept many EU rules concerning international trade and some financial costs (as in the case of Norway) – but without having any say in EU policies

• Departure from the EU will increase Britain’s exposure to global competition, particularly from many of the new emerging low-cost economies

• British businesses would have to bear the burden of adjustment to many new laws after exit

• Britain could face a skills shortage if there are restrictions on the free movement of labour within the EU.

What do business leaders who support Fixit think?

“Waste will go up. Non-value added will go up. If it takes one extra form to be filled in, or one day’s delay, that is something our customers will not pay for… We will be less competitive… If after an exit from the EU, economic conditions in Britain were less favourable for business than in other parts of Europe, or beyond — would Airbus reconsider future investment in the UK? Yes absolutely.”

Paul Khan, Head of Airbus UK

“If anything has to change, we [would] need to reconsider our strategy and our investments for the future.”

Carlos Ghosn, Chief Executive of Nissan

“Britain is a very good place to do business… It is good for the British economy to be a member. It is very important.”

Kaoru Yano, Chairman of NEC

Arguments for leaving the EU

Those who support the exit option tend to stress particular benefits:

• Freedom to negotiate new trade deals with the EU and other countries in the world, including emerging markets, such as China, India, etc

• Freedom from many of the EU’s rules and regulations, which are regarded by many observers as unnecessarily complex and expensive

• Reduction in contributions to the EU budget• Reduction in food prices and freedom from costs associated with the

Common Agricultural Policy• Greater control over fiscal policy, in particular VAT• Freedom from EU rules governing labour markets, competition and

environmental policies.

What do business leaders who support Brexit think?

“There has been far too much scaremongering about things like jobs. I don’t think it’s in anyone’s interest to stop trade. I don’t think we or Brussels will put up trade barriers”

Graeme MacDonald, Chief Executive of JCB

“We are now the fifth biggest economy in the world. Our economy is booming because of the British people and what they are doing despite of the EU… If we were not in the EU I think we could do an awful lot more.”

Alan Halsall, Entrepreneur

“Whatever jobs are linked to trade with Europe are linked with trade to Europe, not with the EU. It is perfectly feasible, in fact, perfectly likely that the UK will be able to enter into a very good trade agreement with the EU.”

Carl Chambers, Chairman of CNG Ltd

The apparent failure of political pollsters to predict the result of the 2015 general election caused an upset, more apparent than real. Normally, according to the

rules of statistics, polls may be out when predicting vote shares for the two main parties by a margin of around 3 per cent for each party share prediction, but, in 2015, the eleven final pre-election polls were out by, on average, 3.2 per cent. So, not a massive error, but sufficiently out to predict the wrong result.

The question is, why were the polls out by so much when they have got it spot on in all elections since 1992? The most plausible explanation to date, based on Ipsos MORI’s data, at least, is that fewer Labour supporters came out to vote than had declared their intention.

So what of the coming EU referendum called for 23 June? How will the way the ‘Remain’ or ’Leave’ campaigns are managed influence voting? And who will turn out to vote?

A YouGov poll on 2-3 March showed that 37 per cent say they would like to leave the EU while 40 per cent say they would vote to remain, with 23% saying they don’t know or wouldn’t vote. Support for leaving the EU was higher than the support for staying throughout most of the period from 2011 to mid-2013. But there are a significant number of undecided voters, so both Leave and Remain campaigns have everything to play for.

A key question for both campaigns is how likely is it that campaigning tactics will influence the final result? And can pollsters quantify this effect?

Interestingly, most political scientists assume that campaigns make little, if any, difference to the final result. But if this were true, no-one would bother campaigning, and the marketing industry

Predicting the voteWill voters use their heads or their hearts in the coming EU referendum?by Paul Baines, Professor of Political Marketing

in general would collapse because the same lack of influence would also be true for commercial brands. There is increasing experimental evidence that, in advertising, emotional appeals are more effective than rational appeals. Remember how negative the campaigns got towards the end of the Scottish Referendum? We can expect that sort of negativity again.

In predicting the likely outcome of the EU Referendum vote, pollsters need to consider three things:

• How likely are people to turn up and vote?• Who will they be voting for?• How knowledgeable do they feel about the

issues on which the campaigns stand?

The turnout for the EU Parliamentary election in 2014 was 42.5 per cent, down progressively almost every election from around 62 per cent since 1979, but in such an historic referendum, I would expect the turnout to be considerably higher. Just look at the 84.6 per cent of people who turned out to the Scottish Referendum in 2015. The accuracy of opinion polls taken before the Referendum date has to be viewed with caution. People tend to give an answer off the top of their head but when in the Referendum voting booth, many think more carefully. Voting intentions are really not fully fixed until the last minute. In general elections, for example, 7-8 per cent of floating voters make up their minds in the last 24 hours.

Based on the evidence of past referendums, where there were apparent poll majorities just before the vote, a small percentage of voters amend their vote for change to a vote against, reverting to the status quo. We call this swing an ’elite retreat’. In the ten polls conducted between 9 and 17 September, the average lead for the ‘No’ vote in the Scottish Referendum campaign was 4.1 per cent when the actual ‘No’ lead on 17 September was 10.6 per cent,giving an ‘elite retreat’ vote change of up to 6.5%. I say up to, because some of this difference could have been measurement

error. So, in the Scottish independence referendum, a sufficient number of people fell into line with the

UK government’s position at the last minute for Scotland to vote to remain part of the United

Kingdom.

In the EU Referendum, debate is becoming polarised between the ’Remain’ campaigners who claim the UK’s future prosperity and continued stability and security depend on the country being part of a larger entity, and those calling for Brexit who want to reclaim our sovereignty and regain control of our borders.

There is considerable cross-party consensus for remaining part of the EU.

Business and industry in the form of the CBI and the Institute of Directors are also

Europhile with a few notable exceptions (e.g. the former British Chambers of Commerce Director-

General, John Longworth). But 132 Tories and a clutch of Labour MPs are in favour of Brexit

and there is support from many small businesses for an end to EU red tape.

The key perceptions of the British public towards the EU are polarised and largely negative. This is partly because the UK press is heavily Eurosceptic with the largest selling newspapers, the Sun, the Daily Mail and the Mirror, being anti. We can expect emotional appeals to Leave from this quarter. Any pro-European campaign will find it hard to cut through that negativity. The only way really is to speak directly to people using the sort of digital marketing campaign used to great effect by the Conservatives in the 2015 general election campaign.

That message should be partly rational, appealing on the facts of the case for, and partly emotional, by appealing to the ironically patriotic case for staying in (and retaining Britain’sgreatness). This latter appeal has the benefit of countering any patriotic appeal by the Leave campaigns. My advice for the Remain campaign would be to keep making the rationalargument that the EU is our biggest trading partner and by leaving we risk losing a large slice of our GDP. It would be difficult and time-consuming to have to renegotiate separate trade agreements with each EU state, which is precisely what we would have to do. The Leave campaign should also focus on the rational case for leaving, specifically that a large proportion of government time is spent simply on processing and applying EU law.

The emotional appeal would be that Europe holds Britain back and that the British are a proud island people who will never be wholeheartedly European. The Leave campaign will also need to articulate a vision for an independent UK, not just outline a bunch of (negative) reasons to leave, if it is to be successful.

Ultimately, this referendum will boil down to whether we let emotional or rational arguments win the day. So will it be heads or hearts that decide the outcome? Pollsters need to keep a watchful eye.

The accuracy ofopinion polls taken

before the Referendumdate has to be viewed

with caution.

Will supply chainsmiss the boat?by Richard Wilding OBE, Professor of Supply Chain Strategy

If the UK were to leave the European Union, what would happen to UK-Europe supply chains? Right now,

across the UK—and across Europe, too— businesses are asking that very question.

And one thing is certain: those supply chains will not be unaffected. There will be changes.

What will those changes be? Even now, with the referendum’s outcome still uncertain, their broad thrust can be predicted. That’s because the UK-Europe supply chains that are presently in place

largely conform to the imperatives of supply chain network design principles, and known best practices in terms of supply chain strategy.

And if the underlying logic of a supply chain network changes, then the network itself will change so as to reflect the new reality. Likewise, a supply chain strategy predicated upon the UK being within the European Union can hardly be unaffected if the UK is suddenly not a part of the European Union.

So to that extent, at least, the politicians have got it wrong. Should UK voters decide

to leave the European Union, it won’t be leap in the dark.

Any supply chain strategy exercise begins with a consideration of customer-supplier trading relationships. And here, the logic of many existing UK-Europe supply chains is predicated upon the UK being part of the European Union’s free trade area.

Put another way, the single market has worked to harmonise standards, and eliminate tariffs on cross-border trade. Going forward, should the UK leave the European Union, those assumptions will no longer hold. UK businesses may find

suppliers outside the European Union to be a viable and attractive proposition— and likewise, their existing European Union customers may prefer to engage with suppliers who are still a part of the European Union. And supply chain networks will evolve so as to reflect those new preferences.

These changes won’t come in overnight, of course. Consider the UK’s automotive industry, which accounts for 8% of economic output as measured by gross value added. Or the UK’s aerospace industry, which makes up 5% of the manufacturing sector’s sales revenues,contributing £6.8 billion in gross value added to the UK economy.

In each case, sourcing decisions are based around model lifecycles, and changes will take years to filter through. Will components be manufactured in Birmingham—or Barcelona, or Bremen? Likewise, the world’s vehicle manufacturers have some interesting choices ahead regarding plant location and where specific models will be manufactured. But the

dangers are obvious—and with the UK’s automotive industry employing 140,000 people, and exporting over 80% of the vehicles it manufactures, the stakes are high.

That said, for other supply chains, geography will act as a natural counterweight. Europe has always been an important trading partner of the UK, even at the height of the British Empire. So British supermarkets will continue to import French cheese, German yogurt, Spanish red wine, Belgian chocolate, Greek olive oil, and much else besides.

But even if these supply chains are unchanged, the supply chain processes managing the flow of goods will have to change. As they are already changing and adapting, of course, due to pressures on borders and infrastructure caused by the migrant crisis.

Put another way, a vote to leave the European Union is a vote for changing border controls, customs clearances, perhaps more extensive passport

checks, and—taken together—border crossings that may be more uncertain and unpredictable than now.

All of which will impact businesses— both here and in Europe—that rely on quick and predictable border crossings to feed just-in-time manufacturing processes, or low-inventory distribution systems. Businesses such as Jaguar Land Rover, for instance, which has an extensive European supply chain, making around 1,100 collections a week from almost 500 suppliers in 17 countries, delivering them to UK assembly plants via a system of crossdocks.

Almost inevitably in such businesses, inventory holdings will have to be modified, and lead times lengthen, thereby potentially raising costs and sapping competitiveness. And for those working in the logistics and supply chain industry, there’s another potential issue to contend with: at one large logistics provider I recently spoke with, 45% of its staff comes from Eastern Europe. Will these people stay, or return to their home nations?

So what to do? Come 23 June, businesses and boardrooms don’t have a vote, of course. But, as ever, they will be in the front line of those called upon to deal with the consequences of a vote to leave the European Union.

And with the eventual outcome seemingly finely-balanced, it may be time to give some thought to post-Brexit supply chains.

Warren East CBE (EMBA 1990), Chief Executive, Rolls Royce

Warren East, Chief Executive of Rolls Royce, said he “absolutely believes” it is in the interests of the UK, Rolls Royce, and its suppliers for the company to remain in the EU. “We are looking at the implications should the vote go one way and should we come to Brexit, but we are in favour of staying in the EU.”

Source: The Guardian (Friday 12th February 2016)

The Cranfield School of Management alumni network includes some prominent business leaders, in high-profile roles, within a range of diverse industries. Some have shared their opinions with us directly and others have appeared in the media, talking on the subject of the EU Referendum…

John McFarlane OBE (MBA 1975), Chairman, Barclays plcBarclays’ chairman John McFarlane says: “The UK will be weaker in a number of respects in the event of

a withdrawal from the EU. In the short run Sterling will be put under enormous pressure, with loss of value (of course over time would improve the trade balance). The UK’s global geopolitical influence will decline,

as today it is seen as strategically influential in Europe and for many businesses the preferred access point to the much larger European economy. The financial services industry, and particularly the city of London, will become less attractive for European headquarters of foreign companies and there will be

pressure to move European financial activity from London to within the EU. All in all, best to avoid.”

Keith Howells (MBA 1986), Chairman, Mott MacDonald Ltd

Mott MacDonald’s chairman, Keith Howells said: “We would face quite a significant skills shortage if we opt out [of the EU]. We employ quite a number of EU nationals. A lot of young people have come here from Greece, Spain and Italy, got masters degrees and put themselves on the local market. What’s the impact going to be on them? We’re all in the dark.”

Source: The Guardian (Thursday 12th May 2016)

Sarah Willingham (MBA 2003), Serial entrepreneur, investor and personal finance expertCranfield Alumna Sarah Willingham signed a statement with fellow Dragons’ Den stars, rejecting the ‘reckless risk’ of Brexit. “Leaving the EU constitutes a serious risk - to the British economy as a whole and to millions of businesses, including start-ups, small firms and larger corporations. We only invest when an opportunity seems right and risks are understood and manageable, so we are used to saying “I’m out” most of the time. But on the issue of the UK’s membership of the EU, our answer is clear: we’re in”.

Source: The Telegraph (Tuesday 31st May 2016)

Crispin Blunt (MBA 1991), Member of Parliament

Cranfield alumnus and Conservative MP, Crispin Blunt says “remain offers a grimmer and small-minded defence of our “deal”. We would be working to stop our partners developing the shared sovereignty they

need to deliver. Therefore I will be voting to leave. I believe it is in the long-term interest of both Britain and the EU to do so. I also want us to have a role as a country that is positive and a national strategy that is

consistent with our history, culture and population.”

Source: The Evening Standard (Monday 9th May 2016)

Angus Thirlwell (BGP 2000), CEO & Co Founder, Hotel ChocolatAngus Thirlwell, CEO and co-founder of Hotel Chocolat, whose retail organisation is in the process of expanding internationally, says it is not for business leaders to force their opinion on the UK population. “Whatever the British public think is the right thing to do will become the right thing,” he told Essential Retail. “I wouldn’t put my name to any list for or against. I run a brand and business – it’s for individuals to make up their own minds.”

Source: Essential Retail (Friday 26th February 2016)

Lord Karan Bilimoria CBE DL (BGP 1998), Chairman of the Cobra Beer Partnership

Lord Bilimoria told IBTimes UK that the UK’s trade deals with countries such as his native India could be hurt by a Brexit. “On balance, it’s better for us to stay in the EU,” he said. “From a trade point of view,

from an export point of view, it just is.” Bilimoria revealed he is leaning towards a remain vote, but said the EU membership is far from perfect.

Source: International Business Times (Saturday March 19th 2016)

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