We are less than a week away from what could prove to be the most important vote in a generation – and one that will impact the lives of multiple generations. In my opinion, the consequences of this EU Referendum will directly and indirectly impact in three inextricably interwoven waves: (1) on the UK (2) on the EU (3) on the rest of the world. Perhaps I am seeing dangers lurking in the shadows where actually there prove to be none but it is currently my view that an exit of the UK from the EU will have much greater collateral impact than we can currently forecast or understand. If the UK exit encourages other nations to follow a similar path and independence goes viral we will have many years of global unrest and uncertainty ahead of us and we all know that markets hate that above all else. However, change is clearly needed in some form as Europe is certainly not stable at present, with extreme groups and parties rising in popularity due to a general dissatisfaction and refusal to accept the status quo.
Nonetheless, I have to admit that my head and my heart have been in opposition from the outset. … my heart says leave as at least then we will be the victims or victors of our own home-grown decisions, however, my head currently says stay. I believe the EU (and more especially the Eurozone) is in for a rough ride over at least the next decade, in any event. The EU has simmering economic and political instability and the Eurozone is a flawed experiment waiting to fall apart at every level. The next few years could prove a painful economic and political period for Europe and, as such, I would rather be sat at the negotiating table, as an important and influential host, than as an unwanted or uninvited guest.
Life as a member of the EU is far from perfect, just like many Scots feel about life within the UK. But the Scots made the right decision in seeing a unified UK as stronger than a proud standalone Scotland. What the Scots insisted on was a devolution of certain powers and they made it clear that another referendum on independence would come if the promises made by Westminster were not honoured. In fact, it was made clear by Scotland that if anything materially changed for the worse for the Scottish people and/or they clearly wanted another opportunity to vote about their future in the UK then that would be offered. This is the message we must take to the EU – we will vote to stay but we will need the promises honoured, and if anything unacceptable occurs to make matters for the UK worse or even if we change our minds about the value of our relationship with the EU then don’t be surprised if another vote follows. Perhaps therefore a close vote with the outcome being a Bremain will be the best result. Close enough to make the support for EU membership seem fragile and hence give the UK sufficient voice to threaten.
I am not going to talk about the individual and most emotive issues as you will have heard the arguments ad nauseam from both the camps of Brexit and Bremain. What I will do is end for now, at least until the outcome is known, by pointing out some of the issues that I believe are related but much more significant, and do keep me awake: (i) our social welfare system in the UK is no longer fit for purpose and neither is our NHS. They can’t be fixed by tinkering with short term solutions or blaming it on immigration; (ii) the pension industry is in deep trouble as fewer jobs, technological change and a growing and ageing population create a mathematical problem that is unsolvable without radical change in many areas of our society; (iii) terrorism is reflecting the growing levels of dissatisfaction across the world and is proving a career choice for the disaffected; (iv) The population of the planet is depleting and abusing more of the world’s resources than it can hope to replace and replenish. We all know this to be true! So just how many of these issues, that will have adverse material adverse global impact, will we chose to knock down the road for the future generations to solve. Perhaps the question should be – are problems such as these made easier or harder to solve by being united or independent? If the answer is united, which I believe it is, we should all work harder at staying that way rather than running home with our ball when the going gets tough.
Please find below previous comments made on this topic.
Currently, many of our investors are rightly focused on the EU Referendum, and particularly the impact of a Brexit. It is possible to argue that this is the single most important vote that any of us have had since long before Moorfield had its first birthday! In order to share our thoughts, and establish a base from which to do so, I would like to refer back to a few comments I have previously made in my Quarterly Reports to our fund investors.
The European Union (EU) and The Eurozone: As you will be aware, the EU is made up of 28 member states that together form a ‘single market’ to oversee co-operation among its members in diverse areas, including trade, the environment, transport and employment. The Eurozone is a monetary union of 19 of the 28 EU member states which have adopted the euro (€) as their common currency and sole legal tender. I have written many times on what I believe to be the original purpose and good sense in creating the EU (intended to saves us from WWIII amongst other more social and economic based matters!) but I have also described the Eurozone as a political experiment gone wrong. This is still what I believe to be the case and Greece is a text book example of why!
David Cameron formally launched his renegotiation of the UK’s terms of membership of the EU at the EU Council meeting in Brussels recently. This had been preceded by a tour of European capitals in which he set out his thinking to other heads of Government on a one-to-one basis. His pitch at the Council was then deliberately low key. The wording of the Conservative Party manifesto states that there will be a period of renegotiation and that a referendum will take place before the end of 2017. Beyond that, this document is silent on what level of concessions Mr Cameron would need to extract for him to call the renegotiation a success. The Bill which has been submitted to the House of Commons on the matter indicates neither a date nor a set of ‘red lines’ for the renegotiation exercise. The Prime Minister’s challenge is three-fold: He needs to secure enough from the renegotiation to be able to claim that the referendum is one being conducted about a new deal with the EU; he needs to win a referendum on his recommendation that Britain remains in the EU having secured a better understanding with it and by a margin that settles the question unambiguously ( as a Scottish-style ‘neverendum’ would be a political nightmare); and thirdly, he wants the referendum to occur in a manner that does not divide the Conservative Party so deeply that it becomes impossible to manage in Parliament and electorally endangered in 2020.
The Prime Minister now seems to have narrowed his renegotiation to five areas of interest, which may yet be reduced further if he feels that any one of them are impossible to obtain concessions in. These five domains are: a dilution of the official ambition of the EU to obtain ‘ever closer union’ (or at least a British opt-out in terms of this language); an enhancement of the capacity of an ordained number of national parliaments (probably ten) to ‘red card’ the edicts of the European Parliament and send them back for reconsideration; a strengthening of the rights of non-Eurozone members of the European Union over economic policy and financial regulation by extending the so-called double majority principle that decisions in this sphere require appropriate majorities of both the Eurozone members and non-Eurozone states before they become applicable in the latter category of member; a substantial change in the length of time that migrants within the EU have to wait before they are eligible to claim benefits in another member country (that period is presently three months, the PM has publicly signaled support for a four year rule, but would almost certainly settle for half of that); and, more tentatively (because it might not be obtainable), a restoration of the opt-outs which the UK obtained from the Maastricht Treaty more than two decades ago, some of which Tony Blair waived.
Although progress in this sort of territory would fall well short of what many within the Conservative Party want from renegotiation, Mr Cameron’s calculation is that it would be enough to keep the vast majority of his colleagues in government sufficiently content. He could then afford to allow them a ‘free vote’ in the referendum contest confident that almost all of them would endorse his position rather than take the more divisive step of insisting that they resign if they wanted to oppose him. Much will turn on the attitude of Angela Merkel, but if Berlin determines that it wants/needs the UK to remain in the EU then it would not be that hard for the EU to issue a commitment to deal with the first four of the five areas outlined above and with enough force that Mr Cameron could assert that he has triumphed. His critics will retort that such a victory would be almost without consequence. Changing the mission statement of the EU does not make it a changed institution. National parliaments will not have the authority to overrule the European Parliament so the ‘red card’ is more like a quick trip to a sin bin as far as MEPs are concerned. Beefing up the double majority will be of no value if the UK finds itself in the minority among even non-Eurozone countries in a sector of vital importance. A two year wait to claim benefits will not stop EU migrants coming if they are convinced they will find employment. One suspects, however, that the final public determination about how to vote in the referendum will be less about the details of the terms than a broader sense of whether departing the EU is too risky. For the Conservative Party’s post-referendum debate, by contrast, those details really will matter.
Dare I say again that I think the Eurozone has yet to even come close to convincing many of us of its long term future following its exposure through the financial crisis? For too long we have discussed the potential for a Grexit as the potential catalyst of a break-up of the Eurozone – but I wonder could a Brexit trigger the break-up of the Eurozone, due to simply showing that the people of the UK believe that you don’t have to be part of a club to successfully survive and prosper?
Are UK and European business leaders and politicians’ over-confident of the UK staying in the EU? Could migration and terrorism (such as that in Paris) be the catalyst to the general population deciding that EU rules are unacceptable (epitomised by the immigration laws) and the UK is better standing alone? If so, as set out above, could this even become the trigger for a break-up of the Eurozone and possibly a rethink of the EU membership rules?
Will the UK Prime Minister attempt smoke and mirrors to avert an EU exit for the UK and if he does so will the voters fall for it? It is now widely accepted, even without the migration and potential terrorism issues outlined above, that reform is essential if the UK is to stay a part of the EU and so David Cameron will need to tread very carefully!
The Short term: The occupier market is fickle at the best of times, being economically, politically and financially fragile, with occupiers prone to switch off demand and sit on their hands with little more encouragement than some near term uncertainty. As such, the immediate outlook for the UK, with the Brexit referendum (and related issues hard on its heels), is unlikely to be a conducive environment for occupational decision taking. Therefore, it is possible to foresee an inactive occupier market in the UK in many areas over the next few months, including those most likely to have otherwise offered the prospective of rental growth. My opinion is that, unless something unexpectedly positive emerges from the current debates and negotiations, this halt in rental momentum might then prove hard to re-ignite in many areas, even with the UK staying in the EU.
Of course, the sentiment reflected in the occupier market is not the only threat to our broader economic performance, as the same potential for behavioural volatility is also true of investment capital generally. Although it could be argued that there is a fundamental difference between the inactivity of the occupier and that of the investor (due to the constant demands for risk weighted capital returns), investment capital is global and in the face of the current uncertainty perhaps the UKs perceived future economic growth and alluring safe haven status (normally seen as our first line of defence) will not prove enough to encourage or even retain investment capital. We only have to look at the lead up to the Scottish referendum on independence to know this to be true.
Considering the Brexit based uncertainty we face, my current opinion is that in the short term there will be some economic damage no matter what the ultimate decision, and GDP growth will slow alongside that of employment, consumer confidence and general investment. Sterling will be punished in the currency markets and the positive impact of this on exports will not result in a net benefit overall. Perhaps a positive is that I can see no reason why interest rates will rise in the near term, even if inflation gets some inappropriate momentum, and it would appear the Bank of England feels the same way.
The Medium Term: However, the reason we have materially stopped investing at the present time, is not because I am concerned with the medium term outlook whilst within the EU or the longevity of performance of our current investment themes (in or out), but simply because the opportunities may get cheaper to buy and build due to the impending Brexit vote (June 2016). I could spend many hours in the writing and produce many pages for the reading if I were to spend the time exploring each of the issues that the politicians will furiously debate in the coming weeks, such as; free movement/immigration, cross-border/trade agreements, regulation/directives, legal/enforcement….etc. but I am not going to – you will be pleased to know! What I will do instead is give you a summary of my personal view with my best guess of the outcome. This view comes from reading, listening and meeting with various organisations where I have an active participation, including; The British Property Federation, The Bank of England Forum, The British Venture Capital Association and even meeting with senior members of the Conservative Party and, most recently, Nicola Sturgeon (First Minister) of the Scottish National Party
By way of ‘book-ending’, let’s start and finish my EU commentary with the Scottish independence referendum, where some important lessons have clearly been learnt whereas others are seemingly being ignored. In the lead up to the vote on Scottish independence, the UK government and other parties from Westminster in London were far too complacent about their need for a strong message as they believed it a foregone conclusion that the Scottish electorate would vote, in the majority, to stay in the union (UK). They felt it to be a personal crusade undertaken by the then First Minister, Alex Salmond, and his argument had little substance if looked at intellectually rather than emotionally. But Alex Salmond is a great orator and was underestimated. He did not win the intellectual debate, but he played directly and effectively to the electorate with the power of the emotional perspective. Late in the campaign, when voting margins became too close to call, Westminster had to mobilise in a way it had not prepared for and to say near panic ensued would not be an exaggeration. Scotland finally voted to stay in the UK because fear of life outside of the status quo marginally moved ahead of the cleverly manipulated emotional pull – but only just! It is also worth noting that all through this debate, many companies and businesses throughout Scotland had made it clear they wanted to stay in the UK, so this did not prove to be an accurate indicator of the views of the general public. Those running companies and dictating what’s in their corporate best interests are, in fact, only few in number.
The EU in/out referendum for the UK does not have the same Scottish dynamic with regards a peoples champion (or a film like Braveheart), despite David Cameron wanting to stay in and Boris Johnson wanting to leave, but it absolutely does have the same emotional perspective when it comes to ‘us versus them’. The lesson learnt from Scotland and now being employed by both sides is not to be complacent and to ensure the message is loud and clear as early in the process as possible (Scotland had 2 years whereas EU has just 4 months). The lesson seemingly ignored by the ‘in’ campaign to date (although not by the ‘out’ campaign) is the power of simplicity and emotion – the majority of the voting public will not think in terms of the more rational and frankly complicated points of debate, but instead will vote ‘in’ principally because of their fear of the unknown, or ‘out’ principally because they are tired of being dictated to by unelected bureaucrats in Brussels and Strasburg on issues that are perceived to be substantially (and sometimes entirely) to do with UK living. So if you were to read that last sentence again you would conclude that, at least in my opinion, the majority of the UK electorate would emotionally rather be outside the EU and would vote that way if given the confidence to do so. The outcome is therefore most likely to come down (again) to the fear of the unknown outside of the EU versus the power of the basic argument for safer with the status quo. Let’s not forget that we have seen that it is not an accurate indicator that the majority of companies and businesses (or so we are told) in the UK say they want to stay in the EU.
Therefore, on the basis no one can sensibly argue for something they know nothing about (albeit politicians are very adept at this), let’s put aside the speculation of what life would be like outside the EU and just focus on actually what the majority of the voting public want to hear – the simplistic arguments focused on the benefits and disadvantages of retaining or improving what we currently have in our EU relationship. Of course, this is what Cameron has tried (and so far failed) to do and he should be working hard behind the scenes to try for more opt-outs or Sovereign controls for the UK, to appeal to those emotional issues, considering the gathering strength of the ‘out’ campaign.
So the point I am making, ahead of my in/out prediction, is that there will no doubt be a lot of time misspent with political noise, posturing and focus on all the EU policies and directives and how much better it will be without them (ie exit) or alternatively how frightening it will be without a say in them (ie an stay in), but I think the swing will be an emotional one based on perceptions and sound bites relating to our Sovereign control over issues most emotive to the general public, such as; immigration controls, UK laws, welfare only for those that have contributed and the security of our borders due to the global terrorism that is increasingly present. As with Scotland, my guess is that it will be hard fought and close but it will have little to do with the detail of the policies. Ultimately, I believe that people will vote for the status quo despite their strong emotion and preference to be independent. The fear of the unknown is just too strong.
I will not spend long in setting out some of my additional thoughts and fears for you to consider. Bluntly, I believe that if the UK exits the EU it could possibly be the beginning of the end for the EU and the (already broken) Eurozone. This is very material globally, both economically and socially, and is, in my opinion, one of the principal reasons why our European neighbours are so concerned about the UK vote and why the world outside of Europe is watching so closely. Yes the UK is a large economy and a very important trading partner in the EU, but this is not just about the UK being part of the EU but also about the ongoing purpose and cohesion of the EU in its entirety. The momentum of the exit vote must therefore be very alarming for more than just David Cameron and his UK allies – and so perhaps there may be more concessions yet to be offered to the UK from across the Channel despite the cries of denial!
I promised to end as I started, with Scotland, so a quick comment on their potential for another independence referendum. When I recently met with the First Minister of the SNP, Nicola Sturgeon, I asked her a number of questions, such as: (i) why she wanted to be independent from the UK, even with devolved powers, but still be part of Europe; (ii) if she would definitely put the independence vote back to the Scottish people if the UK left the EU; (iii) if she felt the EU would break apart if the UK voted to leave; (iv) if she felt confident that the EU would have Scotland as a member on acceptable terms and how long that negotiation with 27 other countries would take; (v) how she would finance an independent Scotland with oil at $30 per barrel when the maths had not worked at $100 per barrel; (vi) did she expect to use Sterling or the euro as a currency; (vii) did she feel she had won any sort of victory for the people of Scotland or just imperilled them as many in England and Wales now felt they would like a vote to decide if Scotland should remain part of the UK. Her response to me was – she wanted the UK to remain part of the EU….! I apologised for appearing confrontational but said I felt that investment capital in or looking at Scotland needed to know answers to these questions. I didn’t get my answers. However, I was later informed that an independent Scotland was not something the SNP felt appropriate to revisit in the near term unless the UK left the EU and then they would reconsider their position.
It is interesting for me to read again what I have written in the recent past and to realise how little there is to add despite an inordinate amount of time spent listening to the opinions of the ‘in’ and ‘out’ campaigners. As predicted, the exit arguments of both sides have been based on supposition, fear-mongering and a lack of forecasting credibility. Voters want the facts to be stated as simply as possible and without the feeling that this is as much political posturing as it is about the future economic and social environment of the people who live in the UK. I am often staggered by how widely politicians miss the mood of population because they are so focused on fighting each other!
Moorfield will continue to comment on this issue as and when we feel we have something of value to say. My prediction remains that we will ‘Bremain’, but it is interesting to canvass the opinions of my business colleagues and I suggest that the majority feel they would personally like to leave the EU although professionally/corporately they will most likely vote to remain in the EU because of the years of uncertainty and disruption that will follow. However, overwhelmingly they would vote to stay in under a renegotiated treaty and they hope this is what the final outcome will prove to be.