What is the issue? The UK has long had a strained relationship with the EU and has never been comfortable with the ever increasing drive for greater integration and harmonization of rules and regulations coming from Brussels. As the EU has grown, more decisions are made by a qualified majority. Previously decision required unanimity. The shift weakens the power of a UK veto. The UK Prime Minister has called for a national referendum on continued UK membership of the EU.
When will the referendum be held? The referendum has been scheduled for June 23. There is no threshold in terms of turnout or results. A simple majority will decide the issue.
The wording of the referendum is important. How will this one be worded? It appears to be straight forward. “Should the United Kingdom remain a member of the European Union, or should the UK leave the European Union.” The choice is to remain or leave.
What will the UK decide? It is not clear. Many polls show a close contest. The event markets show a more comfortable lead for those who want to remain in the EU. PredictIt, for example, shows 69% to 31% favoring staying in the EU. Boris Johnson, the charismatic Mayor of London, has cast his lot with those who want the UK to leave, and this was seen as an important development. Roughly half of the Tory members of parliament want to leave, and, at least, five cabinet ministers have come out in favor of leaving. That leaves half of the Tory MPs, Labour and the Lib-Dems favoring continued membership. Big business and the banks support continued EU membership. Ironically, the more the UK establishment campaigns for the EU, the more it takes characteristics of an anti-elite movement.
Did Prime Minister Cameron win some additional concessions from the EU? Cameron did seek some EUreforms, and this process kept the pro-EU camp in the UK largely sidelined until after the negotiations were completed. Cameron secured some agreements on a range of issues; from benefits to immigrants (and their children), safeguards for London as a financial center, and a clear opt-out from participation in an ever “closer” union. As the case in negotiations, Cameron did not get everything he wanted. Moreover, the agreement does not yet reach the level of a treaty commitment, and some of the Brexit camps have underscored the non-binding nature of the agreement.
Is there any precedent for the UK leaving the EU? Generally speaking, no country has left the EU, but there are acouple of exceptions, which, while interesting, are not really precedent. Greenland, a Danish territory, left the EU’s predecessor the European Economic Community in 1985 (52 to 48 vote). Algeria, upon getting its independence from France in 1962, also left the EEC. The UK is the first country to hold a referendum to leave the EU. In 1975, the UK had a referendum on EEC membership. Then a little more than 2/3 of Britain voted to stay in the EEC. Trade issues dominated the discussion then.
What are the consequences of a Brexit? It depends on the assumptions one makes. Those favoring the UK leaving the EU tend to play down the negative consequence. Some emphasize the positive that the EU is holding the UK economy back, that it the EU has too many rules that are costly. The UK will be able to reassert its control over it borders. Those favoring continued membership focus on the disruption of trade flows and the need to renegotiate an agreement with the EU. Norway and Switzerland, which are not in the EU and negotiated trade agreements with the EU have to adopt EU rules, including accepting EU immigrant, without having a say in the formulation of policies.
What happens on June 24 if the UK votes to leave the EU? There would be a period of at least two years that the UK will extricate itself from the EU. The risk is that it takes longer than two years as many EU rules will have to be replaced in UK law. Those favoring an exit think this process can be smooth. The other camp thinks it will be disruptive. .Consider that in the 2013-2014 period, Cameron opted out of 130 EU police and criminal justice measuresbut ended up opting back into to 35 of the measures, including the European system of fast-tracking extradition of criminals. Note that the UK is a member of the World Trade Organization, which governs trade, especially for goods. Also, the UK is a member of the European Court of Human Rights, which is separate from the EU.
Is it about money or sovereignty? The UK is one of ten members of the 28 EU members that pay more than it receives from the EU. Both Germany and France pay more than the UK. The UK paid GBP18 bln to the EU in 2015, according to the Her Majesty’s Treasury. Former Prime Minister Thatcher negotiated a rebate that amounted to about GBP5.0 bln last year. That means that real cost was GBP13 bln. But the EU also spent funds in the UK, some of which is paid directly to companies for investment and research and development. Last year was estimated atGBP4.5 bln.
What should be expected from sterling? Sterling has sold off sharply since the end of the EU summit on February 20 and the setting of the referendum date. It has fallen 3.6% against the dollar and 1.4% against the euro. There is a concern that an exit from the EU could trigger a sharp decline in sterling and a potential political crisis. Some fear that the disruption for the rest of the EU could also be significant. Sterling has been sold through $1.40. The 2009 low was set near $1.35, and that is the next obvious target. The pressure on sterling is market participants reduce exposure,and some seek protection in case of Brexit. On an actual decision to leave the EU, we suspect potential toward the $1.15-$1.20 area.