BREXIT & Real Estate Part 1: How did we get here?
The immediate impact of the referendum result in the UK is starting to settle down. However, much uncertainty remains and this will have wide ranging impacts including many on the real estate sector. Whilst the UK market is obviously most exposed there may also be international consequences. However, to begin with; what led to the UK not only having a referendum in the first place but the country voting in favor of exit.
In many respects the UK has always been a reluctant member of the European Union. It joined the then EEC (European Economic Community) in 1973 and so divisive was that decision that only two years later in 1975 the country was given the option of leaving. Indeed 1975 and this year are only times that referendums have ever been held across the entire UK. Part of that reluctance comes from the UK’s history and its island status, often keeping it one step removed from the affairs of continental Europe. However a reluctance to engage in partnership with continental Europe following 1945 was also influenced by the UK having to come to terms with the loss of global power as the majority of former colonies gained independence and the British Empire faded.
There has always been a strong Eurosceptic tradition in the Conservative Party, although historically the left wing was just as divided. During the 1975 referendum members of the then Labour Cabinet campaigned to leave, just as Conservative Cabinet members have done this year. In 1983 Labour’s General Election Manifesto supported withdrawal. It was only in the nineties that Labour as a party swung more behind the EU. This large Eurosceptic tradition has resulted in numerous opts outs and special deals during the UK’s 43 year membership in order to keep the sceptics happy.
1. During the eighties the UK obtained a “rebate” on the UK’s contributions to the EU. The rationale at the time was that the UK was being unfairly treated as much of EU’s expenditure was, and still is, directed to agriculture. UK farms tend to be larger and more efficient and thus receive a proportionately low share of farming subsidies. The result of the rebate is that the UK is currently reimbursed around £5bn of the £18bn gross annual contribution. As a result the UK actually pays a lower percentage of Gross National Income than any other EU member state. It is the only EU state to have such a rebate.
2. The UK was given an opt-out of joining the single currency, thus allowing the UK to retain the pound as well as an independent monetary policy and not face any restraints on fiscal policy. It has also meant that the UK has been somewhat protected in recent times from the crisis in the Eurozone.
3. The UK initially opted-out of the Social Chapter which covers areas such as employment protection and working conditions.
4. The UK also has an opt-out from the Schengen area which allows for passport free travel across EU states. This provides the UK with additional border controls. Only the Republic of Ireland, due to its relationship (geographically, historically and politically) with the UK, is also outside the Schengen area. Indeed, not only are all other EU states part of the Schengen zone but so are all members of the European Free Trade Association (EFTA) which is made up of non-EU states such as Switzerland, Norway and Iceland.
5. The UK negotiated limits on the ability of the EU courts to rule on issues relating to the Charter of Fundamental Rights. Only Poland has a similar arrangement.
6. An opt-out is also present on legislation relating to “freedom, security and justice”. This gives the UK a flexible opt out, allowing it to deal with each piece of EU legislation in this area on a case by case basis. Only Ireland (flexible opt out) and Denmark (full opt out) have a similar provision.
Despite these deals Euroscepticism in the UK has never gone away. The Conservative Party tried its best to rip itself apart during the nineties, whilst in more recent years the UK Independence Party (UKIP) has made impressive electoral showings. This was especially seen at the 2014 European Parliament elections where UKIP obtained more seats than any other party, 24 out of the UK’s total of 73. Partly as a response to that election result and fearing the loss of seats in the 2015 General Election, the recently departed Conservative Prime Minister David Cameron made a commitment to holding an “in-out” referendum on EU membership. So that is how the UK got to that point but what factors led to a victory for the leave campaign? On the surface the rationale for staying in the EU was very strong. All major political parties, or at least their leadership, supported remaining. Furthermore, a majority of business leaders, economists, unions and world bodies such as the IMF and OECD were all in favor of remain. Yet in the most ill-tempered UK vote in living memory, with a Member of Parliament killed during it, 52% of the vote was in favor of Brexit. Why?
If we are honest, the Remain campaign was awful. It concentrated too much on the negatives of leaving, to the extent that the Leave campaign dubbed it “Project Fear”, allowing them to side-step some of the key arguments in favor of staying in. Overall there was little sense of what positives came out of being in the union. The Labour party’s leadership refused to join in a united Remain campaign, instead delivering a half-hearted campaign of their own. The result was a lack of co-ordination and clarity from the Remain side, allowing the Leave Campaign to set the agenda. This agenda focused on two key issues; immigration and “control”.
For those looking in from outside the UK it is important to realize that the economics of remaining or leaving the EU were never really important factors in most people’s decision. There are consistent arguments against the EU if you come from either a free-market libertarian viewpoint or from a left-wing socialist perspective. Those perspectives are incredibly different but there are rationales as to why libertarians and socialists may have voted to leave. However, libertarians and socialists do not make up 52% of the UK electorate. What the majority of the 52% voted on, was a combination of wishing to reduce immigration and “taking back control”. Much has been said and commented upon both during and since the referendum campaign about the immigration issue and the increase in hate crimes since the referendum. One aspect that the Remain campaign never effectively communicated is that 75% of all immigration to the UK since 1991 has been from outside the EU. This is outside the provision of free movement across the EU and has always been entirely in the control of the UK government. If you are being cynical here it was not in the interests of either the Conservative or Labour party to highlight that it was their policies whilst in power, not the EU, which had failed to limit immigration.
Furthermore, many of the options which are now being considered in this post-referendum world would not reduce immigration. The Norwegian model is often cited as an example of what a post Brexit UK could look like. Norway isn’t an EU member but has access to the internal single market of the EU through what is known as the European Economic Area (EEA). As part of its deal Norway has to comply with free movement of people. It also is part of the Schengen Zone, unlike the UK. In addition to free movement of people Norway also has to ensure the free movement of goods, services and capital. These are the so called “four freedoms”. To gain access to the single market as part of the EEA Norway also has to enact a large proportion of EU legislation. Whilst Norway does makes large contributions to the EU it receives no funding in return. To benefit from schemes such as the European Regional Development Fund it must contribute in the same manner as EU members. It is estimated that this year Norway will make gross payments of over €800m, for a population of just over 5 million. Its net contribution per capita is pretty much the same as the UK.
The sovereignty issue is partly based upon not wishing to have to comply with legislation coming from Europe. Whilst the EU is undoubtedly a quite bureaucratic institution this argument did also play particularly well in a country that, as mentioned earlier, has struggled at times to accept the change in its global status since 1945. There is a Welsh word, Hiraeth, which means “homesickness for a home you cannot return to, or that never was”. It is very apt here. The Leave campaign played on many Britain’s harkening back to an earlier time. This loss of global influence wasn’t just in political or military terms but also economically. The post war years were not good for British industry. There was a marked reduction in manufacturing’s share of both GDP and employment. In 1948 manufacturing (plus utilities and Oli & Gas) made up 48% of output, a proportion that had fallen to 14% by 2013. In common with most western countries manufacturing, especially in high volume low value goods, has shifted to cheaper markets over the last five decades. The remaining industrial base was saved either by increasing productivity, often therefore still having a major negative on employment, or by emphasizing high value areas such as aerospace, engineering and technology. Whilst all of the western economies have seen similar effects in the post war period no G7 country has seen manufacturing as a share of GDP fall by as much as the UK.
This is where a third factor comes into play and one that is not unique to the UK in 2015. Across the world we are seeing a rise in populist politics. Core to this is an anti-establishment viewpoint, arguing that the political and corporate establishment is out of touch. The key drivers of Populism have been the sluggish economic growth observed in many countries since the financial crisis close to a decade ago as well as heightened concerns over job insecurity. In addition, and key to the UK referendum result, it is often felt that globalization does not positively benefit the entire population. This is added to by concerns over increasing income inequality and the impact that migration may be having. These effects most often coincide and are most evident in areas of economic decline. What is of interest is that the Leave vote was often highest in the former industrial heartlands of the UK. These are populations who feel left behind by globalization. It is this that the political establishment in the UK failed to grasp, and arguably still have not fully comprehended. This wasn’t just about immigration, tagging the leave voters as racists was always far too simple. It was about a feeling of despair and hopelessness. Those living in former industrial cities that haven’t seen the benefits from globalization or more specifically the trade benefits the EU brings. It was quite noticeable how many leave voters were commenting on how the UK used to have a great manufacturing sector “before we joined Europe”. People were actually equating joining the EU in 1973 and the decline in the manufacturing and industrial base that was particularly felt during the seventies and eighties. The irony here is that the EU has been the largest provider of regional funding to help de-industrialized areas. Those areas that voted to leave are in many cases the ones who have actually received the most EU funding over the last four decades and in turn will lose out the most in the future.