Can the UK stay the leader in EU FDI?

Labour surges in UK local government elections, but Britain’s role in the EU comes centre stage as UKIP records record vote

Can the UK stay the leader in EU FDI, asks Etoile Partner, Martin Roche

  

Britain’s Labour leader Ed Milliband has something to celebrate this weekend. His party, which was heavily defeated at the last UK General Election in 2010, had a triumphant night in this year’s round of local authority elections. Based on the latest figures, Labour would have a very health majority of 90 seats in the national Parliament if it translated its local authority success in to a General Election win in 2015.

Ed Milliband, UK opposition leader

Well, Labour won’t be carried away by last night’s events. It knows from experience that incumbent British governments often suffer big local government setbacks in mid-term. And voters have shown their dissatisfaction with the Conservative/Liberal Democrat Coalition by boosting Labour. In the past such protest votes often went to the third largest party in UK politics, the traditionally Left of Centre Liberal Democrats, but they are now in Coalition government with the Right of Centre Conservative party. The Coalition has lost its early gleam of freshness and dependability as its austerity measures bite into the wallets of hard pressed families, as growth remains invisible and as a series of big policy and public relations gaffes have undermined its reputation for steadiness under fire. Not surprisingly, Labour’s favourability ratings have been creeping up and the reward came in the form of hundreds of new councillors and Labour regaining control of big and important cities in England and Wales.

But the story of the night that is most likely to have more rapid impact than Labour’s success is the 13% of the vote won by the United Kingdom Independence Party, where it had candidates. This is a record figure for UKIP, which has nearly tripled its poll ratings in the last year. UKIP wants Britain out of the EU and says it is winning voters over who believe the Conservative party has let them down by not having a national referendum on EU membership and being soft on EU issues, particularly immigration and the extradition of violent criminals and terrorists (though these are actually nothing at all to do with the EU).

Almost all UKIP votes are won at the expense of the Conservative party. At present, UKIP has no members of parliament and given the UK system of voting at general elections, it is unlikely to win any seats at the next election. But it could split the vote in many marginal Conservative held seats, thus letting Labour in. That prospect terrifies many Conservative MPs. As they go back to their constituencies this weekend they are likely to hear from local party officials that the Conservative party has to take a much firmer anti-EU line and demand and get big changes in the country’s relations with the EU. Conservative fundamentalist believe that electoral success will come from being ever more economically and socially Right wing, despite that fact that all past evidence says that winning power in the UK is about wining the Centre ground.

For Coalition Prime Minister and Conservative party leader, David Cameron, the prospect of an internal party fight over Europe must fill him with dread. The issue of Europe nearly tore the Conservative party apart in the 1990s and was one of the main reasons why it failed to win power from 1997 until 2010 and even then it failed to win a majority. To secure power Cameron had to go into government with the strongly pro-EU Liberal Democrats and any attempt now by Cameron to surrender to the will of his Eurosceptic Right wing would almost certainly bring down the Coalition, with the country likely to blame the Conservatives for forcing a general election.

Since Britain joined the European Union forty years ago it has consistently been the best performing EU nation in terms of FDI. Britain’s FDI salesmen have put EU membership at the top of the list of reasons to choose the UK as a business location. Membership confers automatic, tariff free entry into the EU’s market for goods and services – a market over 400 million strong – the single biggest and richest market in the world. Britain’s Department for Business and Enterprise says that some three and half million jobs in the UK are directly linked to the export of goods and services to the EU. Britain far outstrips other EU nations when it comes to FDI, scoring around 40% of all FDI into the EU. So, if the UK’s Conservatives become more and more strident and alarmist about the EU’s shortcomings the mobile businesses of the world may start to think twice about the long term sense of investing in a Britain that wants to take a different direction from the majority of its EU friends and allies. It may not be only a bloody political battle in the UK, but it could also be terribly damaging to global perceptions of Britain as a good place to do business.

David Cameron will need the wisdom of Solomon and the political skills of a magician to steer his way through the next six months to a year. If growth starts to come back into the economy he can probably hold off his Right wing with a promise that he will win the next election because he will have brought the UK back from economic calamity and towards new prosperity. If there is no growth he may be forced to appease the Right and put the EU issue centre stage.

My bet is that if that happens the Conservative party will not win the next election because the British voter will wake up to the fact that the EU may not be the most wonderful thing in their lives but rather the EU than risk 3.5 million jobs, cut the country off from the world’s most affluent giant market and fall out with 26 other nations, all of which are its friends and allies. Two other factors will be of huge importance in any debate about the UK’s future in Europe. The first is the City of London, the world’s leading financial centre. There are lots of EU policy issues the City hates, but it loves doing business and doing business inside the EU is easy, plus if London becomes a capital on the fringe of the great EU market Paris, Frankfurt and Amsterdam will not be slow to try and steal some of London’s business and win the crown of being the finance centre of choice for those inside the EU. The City of London not only usually votes Conservative, but also supplies much of its funding. If it sees its global dominance threatened it may well put the brake on Conservative Eurosceptic ambitions for a Britain far less engaged with Europe.

The other factor is the Euro. If the Euro starts to recover that recovery will fuel growth across Europe and will hugely strengthen the political legitimacy of the EU and cut much of the ground away from the Eurosceptics. If the Euro crisis deepens, not only will the EU start to fracture as an effective political force, we’ll all be in such economic trouble across the world that the disintegration of a partnership of nations will hardly be noticed. So, smart people everywhere should do what they can to bring the Euro back to health.