Hard choice for British business - risk of EU exit or tougher regulation

LONDON, June 18 Wed Jun 18, 2014 9:16am EDT

LONDON, June 18 (Reuters) - When Britain elects a new government in May next year, business faces a difficult choice: Conservatives who could pull the country out of the European Union, or Labour waving the threat of tougher regulation.

If the Conservatives are elected, major exporters and banks fret that Britain's EU membership could be in danger, posing major risks to their role in Britain's $2.5 trillion economy, the world's sixth largest.

Conservative Prime Minister David Cameron has pledged to hold an in/out referendum by the end of 2017 if he is re-elected and after he attempts some renegotiation of current treaties.

If Labour prevails, there will only be a referendum if a new EU treaty transfers more powers away from London.

But some energy companies, banks and landlords are eyeing opposition Labour party leader Ed Miliband with trepidation after he promised a welter of new regulations to challenge what he sees as vested interests, including a cap on energy prices.

Despite these stances, both parties are trying to court business leaders' support, but what the latter really want is certainty - and that is not on the cards at the moment.

"Lots of our members report that political risks are rising up the register in their boardroom discussions," said Andy Bagnall, Confederation of British Industry campaigns director.

"Whether it be intervention in markets or flirting with leaving the European Union, clearly the more certainty that the political parties can give, the better," Bagnall said.

As the election nears, warnings from industry about the post-2015 landscape are getting louder as lobby groups publish manifesto proposals sketching out what they want the next government to do, and what they want them to avoid.

Firms' ultimate fear is damage to the economy that threatens their prosperity - either through an EU exit that may close British businesses off from a 500 million-strong single market, or by the threat of political intervention stifling investment by making expansion too risky.

The election is still some way off, but sleeves are being rolled up for battle.

Labour, which is ahead in opinion polls for the election, is casting the Conservatives as a party of privilege, in hock to big business and the financial services firms which dominate the City of London.

In contrast, the Conservatives, who have increased their support over the past year as an economic recovery takes hold, are presenting Miliband as a latter-day Karl Marx who is anti-business and fiscally irresponsible.

The pro-EU Liberal Democrats, who could hold the balance of power if neither party can secure a majority of seats thinks they are both right: Labour cannot be trusted on the economy and Conservative EU strategy is doomed to failure.

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For many investors, the prospect of an exit from the European Union tops the list of long-term risks for Britain.

Both Cameron and Miliband say they want reform and to keep Britain in, but Cameron has promised to hold the referendum in an effort to neuter the electoral threat from the anti-EU United Kingdom Independence Party.

Many businesses fear that British voters could end up slamming the door on access to the $17.7 trillion EU economy.

Carmaker Ford has said a vote to leave the EU would force it to reconsider its UK operations while Nissan sent a similar message last year.

Banks including Goldman Sachs, Citi and JPMorgan, have warned a "Brexit" could undermine London's position as the only financial centre to rival New York.

The Conservatives say the referendum is necessary to put an end to decades of doubts about Britain's future in the EU. Although Cameron wants Britain to reform the EU and stay in, his party harbours a strong Eurosceptic contingent who feel EU authorities have too much influence over national affairs.

But, a British Chambers of Commerce survey showed that uncertainty caused by Cameron's strategy is growing as the election nears. One in five businesses said they were uncertain about the impact it would have, up from one in 10 a year ago.

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But if bosses are worried by Cameron's EU dance, they are also unsettled by the attitude Miliband revealed in a keynote speech last September when he decided to scold energy companies publicly for high prices.

City lobbyists say that in the wake of that speech more businesses are wanting to meet with senior Labour lawmakers to make their concerns heard and find out more about the direction Labour would take under Miliband if it won the election.

Labour's Ed Balls, the shadow finance minister, last week visited city lobbyists Hanover, whose clients include a number of FTSE 100 firms and large multinational companies, for a meeting with business leaders. Hanover did not confirm which companies attended.

"If Miliband is saying there's a crisis of capitalism and that we need to rethink the model and the way firms behave then good businesses are naturally already entering into that dialogue," said Hanover's Managing Director Charles Lewington.

Cast by opponents as 'Red Ed', Miliband has torn up the rule book crafted by former Prime Minister Tony Blair who successfully cast the Labour party as an ally of big business.

A long-standing lack of political interference was one of the reasons foreign investors were attracted to Britain, said Jerry Buhlmann, chief executive officer at Dentsu Aegis Network, a media and digital marketing firm created when Japan's Dentsu bought the once FTSE-listed Aegis in 2013.

"We need to be very careful before we jeopardise our reputation in regard to that independence of business and lack of interference from politics," he said. "Any politician who strongly voices anti-business sentiment has a negative effect on our image abroad."

Miliband has denied his party is anti-business, but his approach is more traditionally interventionist than Blair, who courted business and preferred to occupy what he said was the centre ground of British politics.

"Labour does need to be careful that it does not put itself in a position where it will be, or can be, seen as unfriendly to business," said Terry Scuoler, chief executive of EEF, Britain's largest manufacturing lobby. "That is a word of caution to the Labour front bench (senior politicians)".

After wiping billions of pounds off the values of utility firms last September with a plan to freeze energy prices, Labour has announced several policies aimed at protecting consumers from what Labour says are dysfunctional markets.

Miliband says he makes no apology for wanting more rules. (Additional reporting by Kate Holton, Editing by Jeremy Gaunt)