4. Markets favor a vote to stay in
Market participants are likely to view a vote to stay as in everyone’s best interest. Here are a few reasons why:
Maintain U.K. financial dominance in Europe - Last year, the U.K. won an EU court case against the European Central Bank (ECB). The ECB had been attempting new regulations to limit the clearing of Eurozone transactions to within the Eurozone, effectively favoring German and French banks over those of the U.K.. The victory serves as an example of the benefits to the U.K. of retaining influence within the EU. It is also a reminder of the importance of Europe as financial market for the U.K.. In Asia, the U.K. competes with the financial hubs of Hong Kong and Singapore. In the Americas, the U.S. financial services sector remains the leader.
Financial services makes up a large share of U.K. net exports
Source: Charles Schwab, World Bank data as of 2/21/2016.
Support U.K. trade and economy - If the United Kingdom were to leave the EU, it seems likely that tariffs would be raised and actions would be taken to encourage trade to move back within the EU. The U.K. would have less influence to block or negotiate these regulations. With trade making up 40% of GDP keeping favorable trade agreements in place is critical to the economy.
U.K. economy is heavily dependent upon trade
Source: Charles Schwab, World Bank data as of 2/21/2016.
European military - The U.K.’s membership gives Europe added military projection and serves as a balance between the historic rivalry between Germany and France.
5. Ignore the polls
Since last September, polls of the U.K. public have shown the race to be neck-and-neck with 10-20% of voters’ undecided. However, the result of the 2014 Scottish referendum and 2015 general U.K. election prove that close polls don’t always mean a close outcome. U.K. voters have tended to be pragmatic and favor the core economic interests of their country by a significant margin.
Comments from businesses in the U.K. have generally been in favor of Britain staying in the EU, despite the regulatory burden, because membership makes it easier to facilitate the sale of goods and services. While many smaller companies would welcome a cut in the red tape of European regulations, the British Chambers of Commerce says 55% of members back staying in a reformed EU. Notably, the leaders of both main political parties in the U.K. (Conservative and Labour) favor remaining in the EU, as does the head of the Bank of England.
No matter the outcome, the issue of a Brexit may not be put to rest entirely as EU member parliaments must also agree to the changes being proposed. Nevertheless, the British understand the key role trade has always played in their economy. The British may resent bailed-out banks and bureaucrats in Brussels, but we believe economic considerations will favor the U.K. remaining within the EU.
Jeffrey Kleintop is senior vice president and chief global investment strategist at Charles Schwab & Co.