A tear in relationships

WHEN prime minister David Cameron exercised his veto and famously walked out of the European Summit in December due to “unacceptable” planned changes to the EU Treaty, the move was quickly spun as a daring attempt to protect UK business.

And it quickly gained vocal support. Mark Dampier, investment chief at financial adviser Hargreaves Lansdown, applauded Cameron’s move, saying that “the City still earns a shedload of money for Britain, despite what many people think, and it’s important that it is protected”.

Just two weeks after the event, the Institute of Directors (IoD) released figures from a survey it carried out of more than 1,000 of its members which revealed that three-quarters of respondents (77%) agreed with the prime minister’s use of the veto and 63% of its members would like to see the UK in a looser relationship with the EU.

The survey also found that 42% of respondents want a repatriation of some powers; that a fifth (21%) would like to see the UK withdrawing from the EU while retaining free trade; and 1% want the UK to withdraw altogether.

However, the straw poll also reveals that UK businesses are concerned about the consequences of the summit, despite supporting the UK government’s position. For example, 77% think that Cameron’s use of the veto has changed the UK’s relationship with the EU – more than half of whom think negatively – compared with just 18% who think that the relationship has not been altered.

Some observers have pointed out that while the veto may not have damaged the UK economy yet, further rucks with the EU might. For example, the government was set to ruffle feathers at the EU summit in January over the so-called 0.1% “Tobin tax” on financial transactions that Germany and France want in place by the end of 2012. The UK believes the tax is unfair, as London’s status as a leading financial centre would be responsible for generating most of the proceeds – and receiving little of the revenue.

As a result, some business leaders fear that the UK’s variance with the other EU member states is detrimental, and cannot go on for the long-term. The UK’s manufacturers’ association, the EEF, believes that there could be long-term implications if the UK does not build bridges with other key EU partners, as does the British Bankers Association. Some also feel that the UK should not have used the veto so readily. Sir Martin Sorrell, boss of the multinational advertising group WPP, said that “it can’t be helpful. I’d rather be inside the tent.”

Note of caution

The UK’s largest business lobby group, the Confederation of British Industry (CBI), has also sounded a note of caution.

In a statement released on 12 December, the CBI’s director-general John Cridland said that while British business acknowledged the pressure the prime minister was under at the EU Summit, he stressed that “businesses want the recriminations to stop while the UK moves swiftly to secure our influence in the single market”, adding that “40% of UK trade is with the eurozone economies and thousands of jobs depend on it. The coalition government must redouble its efforts to ensure that the UK is not put at an economic disadvantage.”

The CBI also warned that the veto had overshadowed the most pressing issue facing UK business – the strength and stability of the single currency and the eurozone members, “which is mission critical to all British businesses”, it said, and which is still unresolved. Japan’s Toyota has already said that it is more concerned about problems in the eurozone and their potential impact on the £100m expansion plans it announced in Derbyshire in November than it is about the UK’s political spat.

For some directors, it is difficult to see how political integration with the EU – rather than just free-trade – improves the UK economy.

“We obviously need to be involved and trading with Europe, but it is questionable if we need to be part of a federal Europe,” says Sean Walker, managing director at FAI Automotive, which manufactures and distributes automotive parts. Instead, he believes that the UK could consider having the same type of relationship that Switzerland or Norway have with the EU – trading partners but not subject to Brussels.

“I don’t want to see the UK throwing more good money after bad at the EU,” says Walker. “The single currency is flawed beyond belief and the EU now looks flawed as well. Sterling is holding its own, the FTSE is performing well and it seems to indicate that the UK is doing better by being ‘hands off’ from the rest of Europe.”

No longer at the top table

Not everyone agrees. Alastair Hughes, managing director at luxury beds manufacturer Savoir Beds, says that while “these kinds of political spats rarely have a direct effect on UK business”, he believes that Cameron made a mistake exercising the veto.

“Cameron’s veto has effectively stopped the UK being at the top table to discuss how the single currency can be strengthened, and that can have a massive impact on UK business,” he says.

“Europe is our closest and biggest trading partner and a weakening euro is a disaster if UK businesses are reliant for sales in the single currency. While the volume of our sales is steady, we are seeing a 5% drop in revenue because the euro has weakened. I hope that the eurosceptics will be put back in their box and that the UK improves its relations with France and Germany quickly – being isolated and acting as an observer in high-level discussions does not help anyone,” adds Hughes.

For Edwin Morgan, policy officer at the IoD, the key reason why many members want “looser relations” with the EU is due to the amount of regulation and bureaucracy that the UK has to enact which business leaders feel weakens workforce flexibility and competitiveness.

For example, says Morgan, “when the coalition government came in it made a big show of its ‘one in, one out’ rule which is supposed to mean that no new primary or secondary UK legislation can be brought in without first removing another rule that has a similar cost effect. But EU regulation is exempt, and given that most of the regulation that affects UK business comes from Brussels, the policy is flawed.”

Charles Hindson, group finance director at e2v, which manufactures engineering components for the aerospace and defence industries, complains that some employment laws stemming from Brussels impede UK companies rather than help them.

“On paper, regulations such as the Working Time Directive may seem like a good idea, or at least not harmful,” he says. “But in practice they can have tremendous adverse effects on UK working practices and make us much less attractive as a place in which to do business. France and Germany have traditionally been much more clued up to ensuring that such directives support their business environments, but the UK seems to lack leadership when it comes to EU issues.”

Hindson adds that he would support looser economic and political ties with the EU, even though 50% of the company’s business is dependent on European trade.

“If UK companies are not growing from being a part of the EU, then questions need to be asked,” he says. “All our business growth is coming from outside the EU, such as the US. We have seen a 25% rise in our business in Asia – the fastest rate of growth we have experienced in the past year – and so it make sense to pursue more business opportunities in those markets, which seem to be more flexible and have more cash to spend, than in Europe.”

Red tape is killing growth

John Turner, director at IT professional services company Xceed, also believes that “the huge burden of red tape on businesses and compliance from Brussels is killing the entrepreneurial behaviour that the country needs to grow out of the recession.

“There is no real view from the UK government about what it wants from Europe and no real push to stop legislation that is harmful to British business,” says Turner. “The government needs to be more active in shaping the legislation and putting a stop to regulations that are unduly onerous and largely unnecessary for the UK.

“France and Germany are always very active in imposing their standpoint on EU directives so that their economies benefit from them, but the UK seems to rubber-stamp rules that only add to costs and deliver few workable benefits,” he says.

Like the majority of IoD survey respondents, Turner favours looser ties with the EU, but is also not averse to the UK leaving the union altogether.

“However harsh it may be, having looser ties or even leaving the EU will, after a relatively short period, provide the opportunity for real growth from newly formed or existing small companies,” he says.

More bullishly, Turner adds: “The UK government needs to find an easy way to stop this ‘all-consuming’ EU regulation and concentrate on providing the ‘free to grow’ environment for British businesses. Bring it on. The sooner the better.” ?