A "remain" decision in the upcoming UK vote on EU membership would not necessarily kill the debate, a fact that investors must consider, argues UBS's Bill O'Neill.

The following article is from Bill O’Neill, who heads the investment office in the UK for UBS. As revealed by this publication recently, he is stepping down from the industry after a long and distinguished career. He recently attended this news service’s investment summit (a transcript of which is to be published in due course) and one of the topics he discussed with delegates during a panel session was the UK vote on European Union membership, to be held on 23 June. We are delighted that O' Neill has chosen to air his thoughts in these pages and invite readers to respond.

A few weeks ago I spoke alongside a number of industry figures at Wealthbriefing’s 2016 Investment Summit. As we gathered ahead of our panel appearance, there was one topic on everyone’s lips. That topic was, of course, the upcoming EU referendum.

With six weeks still to go until vote day, the recent launch of Vote Leave’s official campaign has seen talk of the economic implications of a decision to leave ratcheted up even further. We have Michael Gove advocating the benefits of a continent-wide free-trade zone on the one hand, set against critics warning of the dangers presented by leaving the single market.

Regardless of the merits and shortcomings of such arguments, however, we see debate centred on the choice between in and out as underplaying a crucial point. Whatever the decision made by the voting public, the ramifications of the current situation will be long-lasting and far-reaching.

We believe the UK should prepare itself for the possibility of a “neverendum”.

Even if the UK votes to remain, the referendum could hasten a re-modelling of the EU structure within decades.

Retaining EU membership will mean doing so under different terms in a changed EU, following the concessions prime minister David Cameron won in Brussels. This will not be without its own difficulties. The EU’s aim is to integrate all countries not currently part of the single currency into the eurozone, except the UK and Denmark, given their euro opt-out clauses. This raises the prospect that the three main EU bodies - the European Parliament, the European Commission and the European Council - will gradually transform themselves into eurozone institutions like the ECB and the Eurogroup.

As time passes and all countries except the UK and Denmark ultimately join the single currency, over the long term, these sole “outs” will continue to influence eurozone policy through the European institutions without being part of the monetary union, and vice versa. Such a situation will create its own tensions, and heighten those that already exist. Naturally, the interests of the “in” camp will not always accord with those on the outside. In the long run, we see this structure beginning to crumble.

For those Europhiles breathing a sigh of relief upon a remain outcome, the celebrations could be short-lived. Particularly if the Eurosceptic campaign secures a significant proportion of the public vote, we anticipate that calls for reform of the UK’s relationship with the EU will return in the years to come.

While talk is currently around the single market as we presently experience it, the challenges confronting what will eventually become a tiny set of members outside the eurozone - by then overshadowed by a large, highly integrated bloc within a single market framework - will not simply vanish with a UK vote to remain. If the arrangement becomes untenable, we anticipate that the UK could be forced to either reconsider its EU membership, or to join the euro.

Similarities with the other referendum that has overshadowed British politics in recent years - the campaign for Scottish independence from the UK – are striking. In the short term, the familiarities could initially manifest in the markets: in the run-up to the Scottish referendum in 2014, sterling weakened by 3-4 per cent against the dollar. Depending on where sterling is trading as the EU referendum approaches, the move could be larger this time.

However, from a longer-term perspective, comparison with Scotland could be more worrying for markets, investors and politicians alike. While originally cast as a “once-in-a-generation” referendum, the increasing dominance of the Scottish National Party, which again recorded success in May’s elections, has raised the prospect that it might be a very short generation between Scottish independence referendums.

In spite of the vote for continued integration with the rest of the UK, the Scottish referendum has altered the relationship between the parties involved, one which will continue to be re-shaped in the years to come. The UK’s relationship with Europe is likely to see an even more fundamental revision, and one which investors will need to pay close attention to.

Disclaimer

All views expressed herein are the views of the named analyst(s) and were prepared in an independent manner including with respect to UBS. The views expressed by the analyst do not necessarily represent the views of UBS as an institution. Neither the analyst(s) nor UBS is promoting or campaigning for any particular outcome in the referendum to be held in the United Kingdom on 23 June 2016.