The referendum on whether the UK leaves the European Community is increasingly a Today issue.  With a vote on June 23 the reality of a UK exit is getting harder to ignore.

I’m not sure what I think about this from my North American redoubt (Ok, I do care, because we have a large London office, but I’m going to ignore that for a bit).  I remember a meeting in London of the right thinking establishment when then-Prime Minister Tony Blair made an effort to jettison sterling and join the Euro, and I found myself in a distinct minority thinking that a bad idea.  I don’t know, give up control of monetary policy, bind the country to a fiscally ill-disciplined Europe and further commit to the EC treaty ideal of an “Ever Closer Union?”  For heaven’s sake, how can it be a bad idea?  So we have to rename Waterloo Station and stop talking about that silly little contretemps at Agincourt.  That’s a reasonable price to pay, right?

Well, the UK didn’t take the deep dive into the Euro but continues to be lashed to the EC on an enormous range of matters both large and small.  Throughout their time together, the Euro-skeptical cauldron has been kept on the bubble and Tories and Labor have always had their version of the Blue Dog Coalition which never, ever was really comfortable inside the EU.  And now, out of political calculation around the last election, Prime Minister Cameron is stuck with a referendum that initially looked rather slam-dunkish, but, under the quizzical leadership of Boris Johnson (and what increasingly looks like half of Mr. Cameron’s cabinet), is looking like a race.

So with Britain’s In/Out EU referendum close enough to rouse even a millennial constituency more concerned with voting in the Eurovision song contest, the attendant uncertainty is a global topic du jour for market participants.

Mr. Cameron triggered the long-promised vote when he returned from Brussels waving a note (disturbingly channeling Neville Chamberlain) and declaring he had achieved his goal of getting a new and better deal for Britain in the EC.

The problem was that once folks started to read the fine print (and God knows, no one is better at fine print than a Brussels bureaucrat) the new deal looked pretty much like the old one: no truly consequential change in immigration policy, welfare policy or the relationship between the City and the rest of Europe.  These are, of course, the three most emotive issues in the entire exit campaign.  As a beard for the Prime Minister to champion the In Vote and retain his digs at Downing Street, it seems pretty thin gruel.  So now the In and Out campaigns are firing up and, in classic style, both camps have the truth needle firmly nailed to the “you can’t possibly think that I think you believe that” end of the truthiness scale.  Exaggeration, false analogy, ad hominem attacks, generalization, non sequiturs, confused causative arrows, you have it.  I’m shocked, shocked!  Ok, I’m going to save the outrage for something truly startling, but let me take a moment and express my thanks to our UK cousins.  Mired in the middle of the most appalling political campaign in my memory, we really do appreciate the Brexit campaigners for giving us a run for our money in the spewing of blather, bloviation and bullshit.  Thank you.

I get the arguments for and against Brexit.  Being tossed out on one’s allegorical ear and again becoming subject to border controls and restrictions on the free transferability of money, products and talent is bad.  Also, and not to be overlooked, the loss of Britain’s ability to impact, in a positive way, the deliberations within the European Community on the future of the EC is not good.  The UK’s voice is a powerful moderating influence on a continent always teetering on the edge of a populist and progressive descent into statist economic ossification.  That’s not good for anyone, even the UK as a non-member neighbor.  On the other hand, being tied permanently to the more perfect union gang in Brussels and having to continuously fight to protect its own unique Anglo-Saxon liberal (and let’s face it, vastly more successful) business model is not terribly attractive either.

At first blush, it may be a bit surprising that CFOs from around the world are decidedly sanguine on the outcome of Brexit, but they are, with some 70% of those interviewed concluding that they see no change in the way they will do business with Britain in the event of an Out-vote.  Does that mean that the business world doesn’t think there will be an Out vote? Or does it mean it doesn’t see any change flowing from the vote either way?  Hard to tell.

From where I sit, the chances look pretty even; a toss-up.  If the vote is In, then we indeed carry on.  For the finance segment of the world (and I have very little opinion on agricultural policy) that means we return to the ongoing long-term tensions that have existed for years between the anti-free market socialist predilections of the EU heartland and the more capitalist, less statist, London.  We go back to the battles over bankers’ salary, tax and labor policy and we go back to the far from resolved battle over banking regulation and the role of the ECB.  We go back to the EC mired in the endless, internecine battles between Europe north and south, this horrid immigration problem, the continued enabling of the zombie-like banking system and broadly, the often irreconcilable needs, desires and demands of 28 mostly sovereign states.  We go back to the knife fight over this and everything else, both consequential and irrelevant (or just silly—see EC 2257/94 which, in excruciating detail, stipulates the conditions for bananas sold in Europe), fought out in the Rube Goldberg-ish maze of EU governmental commissions, committees and, of course, the entirely dysfunctional EU Parliament.  Hard to declare victory over either outcome and get excited, isn’t it?

Received wisdom is that an In vote means no change, but that an Out vote means major, wrenching and perhaps catastrophic change.  I don’t think received wisdom is right in either case.  An In vote is not even a pause in the ongoing, longstanding and ultimately fruitless skirmishes between the UK and the EU over a myriad of issues arising from two fundamentally different views of the economy and polity.  The relationship will remain dynamic and unstable.  “No change,” really has no meaning when change and upheaval is already the steady state of the relationship.

Does change flow from an Out vote?  Well, not in any immediate sense.  Those who profess expertise suggest it could take years to untie (and then retie in some new way) the knots which currently tie the UK to the rest of Europe.  While all that technical tinkering goes on behind what undoubtedly will be a kabuki theatre of political posturing and tub thumping on both sides of the channel, not much will change in the interim.  Moreover, many people think that an Out vote amounts to little more than a tactical shift in the ongoing conversations about the UK’s place in Europe.  Is the Out vote just a bit of tactics to get a better deal?  Both sides say no, but then all the politicians’ lips are moving, and we all know what that means.

In any event, I don’t think either In or Out presages massive change.  Britain’s going to trade with Europe and Europe is going to trade with Britain.  Come on, they are only 17 miles apart.  The City of London will remain the second capital in a bipolar financial world with New York, and no matter how much it offends the paladins in Brussels, Paris or Berlin, neither Frankfurt nor Paris is going to supplant London as a financial capital of the world.  The UK will continue to dominate finance across Europe and that’s true whether it’s in or out.

And the UK is not about to start obeying the EC rules, even if it stays in.  Already, the FSA has refused to implement salary caps on bankers and shame on a bureaucrat who can’t find a way to interpret a rule that categorically says no as really meaning yes.  Look, they all cheat.  Every European member state both large and small has, at one time or another, broken every single rule of the EC.   As long as there remain powerful incentives for all to conduct business as if the system is working just fine, no matter how demonstrably clear it is that the system is broken, then nothing will change.  And that fix is in.

So I can’t get too excited about Brexit.  It will make for wonderful theatre this summer and give us something else to be embarrassed about besides our own political conventions, but I don’t see it changing much.  As Henry Kissinger long ago said in a moment of frustration as United States Secretary of State, he wants to come back in his next life as the Bond Market.  Capital and capital flows will define the shape of the market.  Capital will insist London remains the financial capital of Europe.  Capital might continue to eddy around one new set of rules or another, but the financial marketplaces will function, London and New York will remain the two financial capitals of the world and the friction to the efficient operation of capital markets imposed either intentionally or unintentionally by our elected leaders and their bureaucracies will neither better nor worsen in a material sense.  So there.


For more information on Brexit, visit Dechert’s Brexit resource page.