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EU UK the Brixit 080812

EU UK the Brixit 080812

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Published by Harry Cole

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Published by: Harry Cole on Aug 09, 2012
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The ‘Brixit’
 GEOPOLITICS
GLOBAL MARKETSRESEARCH
A UK exit from the EU looks increasingly likely
 
Britain and the EU: An ‘Issueswhich keep me awake at night’special report
 
August 8, 2012
Key judgments
 
The eurozone crisis has fuelled eurosceptic sentiment in the UK againsta backdrop of a historically ambivalent relationship of which there aresignificant echoes today.
 
The British government’s response to the crisis of encouraging eurozoneintegration while looking for a looser UK relationship with the EUappears to be fanning the eurosceptic flames.
 
The government’s consequent current aim appears to be to put off apotentially decisive moment in EU/UK relations until after a 2015election.
 
Nevertheless, events in the eurozone as early as this autumn could seeeven more pressure from eurosceptic parliamentarians for a firmcommitment to a referendum on EU membership.
 
Further concessions to the eurosceptics could split the ruling coalition,already subject to significant internal strains, and precipitate an earlyelection to be followed, irrespective of the outcome, by a referendum.
 
Irrespective of timing, the outcome of a possible plebiscite looks finelybalanced, with much potentially resting on the government’s ability tonegotiate repatriation of single market-related sovereignty from Brussels.
 
However, especially with the UK already appearing to have lost someinfluence at the negotiating table, we doubt that EU partners would beprepared to make major concessions.
 
Furthermore, we see a real risk that the UK could even be unable to vetofurther transfers from London to Brussels, including over financial marketregulation and a pan-EU banking union.
 
Assessing the costs and benefits of EU membership is made morecomplicated still by the unpredictability of the EU’s evolution in responseto the crisis.
 
However, the – we believe, increasing – possibility of either a looser UKrelationship with the EU or a UK exit is bound, in our view, to raise botheconomic and political concerns, including in financial markets.
Research analystsGeopoliticsAlastair Newton - NIplc
alastair.newton@nomura.com+44 20 7102 3940
 
See Appendix A-1 for analystcertification, importantisclosures and the status ofnon-US analysts.
 
Nomura |The ‘Brixit’ August 8, 2012 
2
Introduction
Outside the ‘Westminster village’ the question of the United Kingdom’s membership ofthe European Union currently remains something of a sideshow relative to the all-consuming eurozone crisis. However, as the crisis drags on, it is increasingly fuellinglong-smouldering eurosceptic flames in the UK, which have, in turn, been fanned by thecurrent British government’s efforts to strike a pragmatic balance between encouraginggreater integration to try to stabilise the eurozone while looking to opt the UK itself out ofthat process.If what many commentators, as well as ourselves, see as the current trend towardssome sort of EU/UK rupture, if not an actual exit, persists, we think it important to keepthis issue firmly in mind at this time for two reasons in particular, ie:• As we argued in a report published earlier this month (and despite the recent efforts ofthe ECB to calm markets), we believe the next few weeks could be critical in theevolution of the eurozone crisis – see‘EU in September’, Nomura Global MarketsResearch, 1 August 2012. Consequent developments in Europe could, in our view,result in further pressure on the British government at least to commit firmly to areferendum on EU membership.• The acceptance earlier this month by the junior coalition partner in the UK, the LiberalDemocrats (LibDems), that reform of the upper house of the British parliament, theHouse of Lords, is off the agenda, at least for the duration of this parliament, has addedto strains within the ruling coalition. These are likely to be exacerbated further if, as weexpect, the LibDems now block reform of the lower house, the House of Commons,which would have reduced the number of sitting Members of Parliament (MPs) andwhich analysts believe would have involved boundary changes worth an extra 20 seatsor so to the senior coalition partner, the Conservatives, come the next election.Although this issue is, in our view, very unlikely to bring the government down,additional internal tensions in the coalition stand to make further stresses over the EU – an issue on which the two partners are deeply divided – all the harder to manage.As a result (and assuming that the EU/eurozone does indeed survive the current crisis),two main questions now deserve serious consideration, in our view, ie:• Can Britain successfully negotiate the looser relationship with ‘core Europe’ which thecurrent government seems to be seeking while remaining in the EU?• If not, is a British exit – a ‘Brixit’ – likely, if not now then after the next general electiondue in May 2015?
1
 This report therefore looks in some depth at recent relevant developments, the currentsituation and likely near-term developments, as well as looking ahead to how thingsmight look after the next election. However, what we do not consider here is the possibleconsequences – politically, economically and from a market’s perspective – of a UK exit, judging those to be better assessed on the back of a clearer picture of the context andcircumstances in which an exit could occur. Thus, as things stand, we expect this to bethe first in a series of reports on EU/UK relations over the coming months.
A history of half-heartedness?
“To say the Britain may leave the EU – or at the very least retreat to a looserarrangement with its continental partners – has moved from the realm of euroscepticdaydreaming to that of an entirely plausible side effect of the present euro drama.”Philip Stephens, Financial Times, 11 June 2012
It is, in our view, worth reflecting briefly on the UK’s history relative to Europeanintegration in that it is relevant to where the UK is today and could find itself in the near-to medium term.
1
We have coined the term ‘Brixit’ based on the current common parlance for a possible Greek exit, ie ‘Grexit’.
 
The eurozone crisis is fanningeurosceptic flames in the UK……raising the possibility of a UKexit from the EU within fiveyears and possibly more quicklyThe UK has previously looked topromote European integrationfrom the sidelinesand could exacerbate furtherexisting strains within Britain’sruling coalition
 
Nomura |The ‘Brixit’ August 8, 2012 
3
Strangely enough, experts in the history of the EU often point to the eminent Britishstatesman, Winston Churchill, as one of the early promoters of European integration. Ina speech delivered at Zurich University in September 1946, the by then former Britishprime minister, reflecting on how to remedy the travails which had long afflicted Europe,opined as follows:
“What is this sovereign remedy? It is to recreate the European Family, or as much of itas we can, and to provide it with a structure under which it can dwell in peace, in safetyand in freedom. We must build a kind of United States of Europe…. The first step in therecreation of the European Family must be a partnership between France andGermany.”
However, as Philip Stephens pointed out in the article quoted at the start of this sectionof our report, Mr Churchill coupled this with “the caveat…that the enterprise would beginat Calais”. We shall return to this point when we examine the policy of the current Britishprime minister, David Cameron, later in this report.Nevertheless, by the early 1960s, another British Conservative prime minister, HaroldMacMillan, had determined to take the UK into the EU’s predecessor, the EuropeanEconomic Community (EEC), only to find accession vetoed by the then French PresidentCharles de Gaulle.
2
Furthermore, General de Gaulle vetoed UK accession again in1967, this time following an application for membership by a Labour government led byHarold Wilson. Many historians believe that General de Gaulle was not motivatedprimarily by economic considerations; rather, he (rightly) saw the UK’s membership bidas driven in significant part by London and Washington’s shared desire to undermineFrance’s bid to usurp US leadership in Europe via the EEC.Nevertheless, with President de Gaulle succeeded by Georges Pompidou, a third Britishapplication (under another Conservative prime minister, Edward Heath) was to provesuccessful and, together with Denmark and Ireland, the UK finally joined the EEC on1 January 1973.
3
 Faced with deep internal divisions on the issue, Mr Wilson’s Labour Party fought twoelections in 1974 committed to renegotiating the UK’s accession terms and then holdinga referendum on EEC membership.
4
EEC heads of government agreed a revised deal inDublin in March 1975, of which Mr Wilson said: “I believe that our renegotiationobjectives have been substantially, though not completely, achieved”. In any case,sufficient had been achieved to persuade 67% of voters on a 65% turn-out to vote infavour of continued membership despite persistent divisions in a government which hadhad to depend on opposition support to carry most of the parliamentary preparatoryvotes for the referendum.
5
Indeed, the Conservative Party, under the leadership by nowof Margaret Thatcher, had supported UK membership of the EEC in the referendummore or less en masse.In 1984, Mrs Thatcher, by now in her in her sixth year as prime minister, successfullynegotiated a rebate to the UK’s EEC budget contributions – the main reasons for whichwere: the relatively small benefits which the UK obtains from the Common AgriculturalPolicy (at that time 80% of the total EEC budget and still 41% of the EU’s today); and theUK’s then ranking as the third poorest among the 10 member countries. The rebate,which currently amounts to around EUR 5bn per year, has become totemic amongBritain’s political classes, to be defended at almost any cost in the face of increasingresentment among other EU members – an issue which, as we consider later in thisreport, could come to a head before the end of this year.
2
The EEC was also commonly referred to at this time as the ‘Common Market’.
3
Denmark and Ireland, together with Norway, were motivated in part by their close economic ties with the UK (andhad joined the UK’s previous bids for membership). Norway’s application failed after EEC membership wasrejected in a referendum.
4
The February 1974 general election yielded a minority Labour government, which the party was able to turn intoa majority in the second election held in October.
5
So deep were the divisions in the Labour Party that Mr Wilson took the unusual step of suspending theconstitutional convention of cabinet collective responsibility on the issue.
Even after a change of heart, joining ‘Europe’ was notstraightforward

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