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Inward Investment – affected by a EU referendum?

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David Cameron’s EU referendum proposal has put the cat amongst the pigeons, but what real impact is it likely to have on inward investment in the UK?

I’ve commented previously that the UK is the ideal gateway for business into the European Community.  I’ve enumerated the following advantages:

  1. It’s quick and cheap to set up here
  2. It’s not within the Eurozone
  3. Its internationalist outlook – a polyglot nation if ever there was one
  4. London’s status as the world’s most important financial centre
  5. The flexibility of its labour market
  6. Its business sophistication and innovation
  7. The dependability of its legal system

The UK’s pragmatist approach to the EU and its oft-expressed view that the EU’s greatest attribute is the Single Market attracts a substantial level of support from within the EU itself – one need only read Angela Merkel’s balanced comments to realise that even within the Eurozone, there is a recognition, perhaps grudging, that the UK frequently has a point.  Amongst non-Euro members of the EU, the UK’s stance that the Single Market is the EU’s primary purpose is well-regarded.

The EU currently comprises three distinct groupings – existing Eurozone countries, countries committed to joining the Eurozone, and those with no such commitment.  There are divergent positions within each of these groups.

Most obviously, within the Eurozone, there are industrialised successful economies such as Germany and Finland, there are the wannabe’s with varying degrees of problems led by France, and there are the strugglers – Greece, Spain etc.  Concerns about the future of the Eurozone may be making less headline news today than they were last month, but they haven’t gone away.   Solutions need to be found to tackle mass unemployment in the periphery and a hugely burdensome welfare structure that threatens all.  The problems are economic – the solutions are political.  That’s seventeen countries attempting to find compromises between each that their political leaders can sell to their own electorates.  No-one knows how long it might take, and no-one has a clear idea of what the outcome might look like.   So if you’re an inward investor, how certain can you be that the location you choose today will still prove to be the right one tomorrow?  You can’t.  You’ve no real idea what you’ll be getting into.

Whatever the compromises Eurozone members conclude between themselves, inevitably they will impact on the EU as a whole.  So non-Eurozone members need also to participate in the compromise process. And as the non-Eurozone members are an even more diverse group, what form might those compromises take?  What impact might they have on individual states?  Will they incline an inward investor toward Bulgaria, perhaps, as opposed to much more highly developed  – and relatively expensive – Poland?  Will either or both be within the Eurozone itself by the time the dust has settled?  There are no answers to these questions.  Uncertainty reigns.

Inward investment is by its very nature long-term.  The rationale for it must always be economic, and that requires there to be a degree of certainty about the longer term.  One could surmise that in the longer term the Eurozone will become the EU, but that’s simply not going to happen within any reasonable estimate of what might be a foreseeable timescale.  It is inconceivable that either Denmark or the UK – the two countries not committed to ever join the single currency – would choose to do so in the next 10 to 15 years just as it’s inconceivable the other EU members could eject them from the EU against their wishes.

So to come back to the original question, what real impact is the promise of a referendum on a renegotiated membership terms likely to have on inward investment in the UK?

It’s worth bearing in mind Stephanie Flanders’ recent post.  Currently Germany’s largest trading partner is the UK – not a relationship either Germany or the UK would want to lose.  Given Germany’s status within the EU and its role as paymaster for the ills of the Eurozone, it will ensure such steps are taken as are necessary to enable a future Conservative government to present a renegotiated treaty to a referendum.  A referendum to either continue with the known, but on better terms, or to step into the unknown.  It would be a seriously failed government, supported as it would be by all but the foaming at the mouth diehards, that couldn’t sell that to the UK population.

So – the conclusions I reached in my earlier posts remain the same – the UK is still the gateway to Europe.   The pigeons were there anyway, squabbling as per usual – all Cameron’s done is to place the cat needed to give them a fright.

The UK is the gateway to Europe – part two

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Some weeks back, I talked about the UK being the best place in the EU to set up business.  My principal comparable was Denmark, because these two nations are the only EU members neither in, nor committed to joining, the Euro.

It seems the great and good agree.  The World Economic Forum has recently published its Global Competitive Index for 2012-13, in which the UK was ranked 8th, with Denmark ranked 12th – a swing from last year where Denmark was 8th and the UK 12th.

Ranked above the UK are three non-EU states (Switzerland – 1st, Singapore – 2nd , USA -7th ), and four EU member states, Finland, Sweden, Netherlands and Germany.  With the exception of Sweden, yet to join but committed to do so, all members of the Eurozone.

Given significant concerns about the viability of the Euro, and the inevitable but unmeasurable fall-out on continuing EZ member countries should any Eurozone country leave, that effectively places the UK as the best place to establish  if one wants to tap into the EU market.

The UK scored particularly strongly on labour market efficiency, business sophistication and business innovation.  It also ranked first for legal rights.  It’s no surprise the UK’s principal weaknesses relate to the size of government debt and budget deficit, and the sheer scale of imports.

One statistic did surprise me  – according to the report it takes 13 days to set up in business here.  Nothing like that long if you do it through us!

The UK is the Gateway to Europe

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A little over 330 million people live in the Eurozone, a further 170 million within the EU but outside the zone. GDP per capita of Eurozone countries is marginally greater than that of EU citizens outside the zone, but the range covered by each is enormous.

Within the zone, the lowest GDP per capita of a member state (Estonia) is just 48% of the highest (Netherlands) [ignoring Luxembourg – a country with a population of just over 1/2 million, with per capita GDP over double that of the Netherlands]. Interestingly, the best estimate for per capita GDP for Greece puts it at 68% of the Netherlands – not great, but there are several worse.

Outside the zone the range is far wider – Bulgaria’s per capita GDP is only 35% of Denmark’s.

We are all too aware of the fundamental faultlines within the zone, caused by debt-fuelled expansion facilitated only by association with the economic powerhouse of Germany. The devaluation option open to most struggling nation states doesn’t exist, and without fiscal transfers from wealthy states to poor, there appears to be no end in sight to the downward spiral over-indebted Eurozone nations will suffer. Rather than economic convergence, the reverse is happening – Germany’s economy continues to grow a’pace, as it benefits from an exchange rate far below that which would apply were it still using the Deutschmark.

So why does this make the UK the ideal gateway to what remains a huge marketplace?

Within the EU, there are just two countries that aren’t committed by treaty obligations to ever joining the Euro – Denmark and the UK. Both retain sovereignty over their currencies, enabling each to react flexibly to changing market conditions. Those are huge ticks in the box for any inward investment. Both have highly educated workforces, stable political systems and robust legal systems.

Denmark scores over the UK in some respects – for example, its GDP per capita is greater, its indiginous population is multi-lingual – but it loses out in many more. It’s smaller by far, and its transport links are more constrained. More importantly, the minimum Share Capital requirement for a Danish private company is €10,000 and VAT registration is compulsory regardless of turnover levels. It has a light-touch employment regime with lower employer social security contribution rates than in the UK, but typically on higher salaries. Employee representation on the Board is obligatory for all but the smallest companies.

The UK’s great strength is its internationalism. London in particular is home to representatives of almost every nationality in the world. It is the world’s most highly developed financial centre, and is regarded by many as the safe haven in uncertain times. And setting up business in the UK is quick and cheap. With no minimum share capital requirement other than the issue of 1 share that needn’t cost as much as £1 and no compulsory VAT registration until certain turnover thresholds are breached, access to the EU market place coundn’t be simpler.