Background to EU Referendum
David Cameron, the prime minister of UK in January 2013 had assured its citizens that if the Conservative Party won the parliamentary majority at the 2015 general elections, his government would negotiate better terms for continuing to be EU Member or not. Accordingly, the Conservative party won more than expected majority in the House of Commons during May 2015 general elections. Highlighting the party’s agenda, David Cameron committed to hold the In – Out referendum on UK‘s membership of the EU by the end of 2017 after conducting negotiations with EU council regarding the UK’s newer membership terms and conditions. With the deal, the governments would be able to smoothly pull off the unwanted legislation as well as protect its major financial services industry by avoiding eurozone regulations as per a BBC report. With this, there is also an intention to safeguard the money from being used as a stimulus to revive eurozone countries. Moreover, the step is expected to decrease the amount of benefits for low paid workers from other EU nations which would lead to decrease in migration welfare payments. Cameron also wants to cut the child benefit payments where migrant workers send child benefit payments to their home countries. The EU referendum would take place in the UK and Gibraltar on 23 June 2016. This referendum is believed to be UK’s third plebiscite and second time vote on the EU membership issue.
Impact of the Referendum
Britain’ Exit as also known as the Brexit would be decided after the outcome of the poll. In case the Brexit is approved then as per the highlights from the Global Council Impact of Brexit June-2015, we note that there would be:
- FDI impact: Major European corporates have made huge investments in the UK and accordingly the commercial advantages might get impacted with Brexit. The attractiveness of UK as a gateway to Europe might reduce. Consequently, the investments from the remaining EU, which are the major source of FDI in the UK, might be challenging. Hence, UK need to make extra efforts to get investments against the EU. On the other side, UK also have a certain advantages with Brexit like light regulations and deep capital markets.
- Disruption in Exports: UK is exporting a large percentage to the EU while the demand from UK is a major parameter in macro terms, for many EU countries. In case of Brexit, the trade within Europe would be significantly affected as a result of increase in cost of trade and supply chain impact.
UK trade ties with Europe (Source: Thomson Reuters)
- Impact on EU: After Brexit, the UK would not have any control on EU regulation. As a result, the European Council would lose the strong support from UK on economic policy debates.
- Flexible industrial policy: After Brexit, UK would gain more flexibility over industrial policy, as State aid rules have constrained UK policy in several areas. The UK would formulize more active industrial policy without any restriction by the EU which might boost certain activities in aspects like takeovers and introducing more comprehensive R&D tax credits. The UK would also gain flexibility in negotiating trade deals. However, the UK would be bound by WTO rules.
- Relocation costs: Brexit might impact the financial services industry in UK in aspects like liquidity, cost of financial services in Europe and derivatives market. Subsequently, the cost of business in Europe might rise while major European banks who have base operations in London might incur high relocation costs. On the other side, European corporates might also incur hurdles to raise capital in London, as UK is currently highly integrated into the European financial system. However, London’s reputation as Europe’s financial center might be impacted if major European businesses migrate following Brexit.
Risk to currency (Source: Thomson Reuters)
- Slowdown in UK economy: Based on the PWC, unemployment might rise to 8% by 2020 in case Brexit happens. Moreover, Treasury also cautioned that GDP might be 6% lower by 2030. In addition, exiting the EU might also lead weaker pound due to which the inflation might increase. On the other hand, some of the Economists believe that in case of Brexit, the UK economy might enhance by 4% in a decade, according to the BBC reports, as their tariffs on imported goods would decrease. While some British voters are also considering a risk of paying a “Brexit tax” if they leave the European Union.
- Risk of losing competitive edge: In case of Brexit, the UK’s edge might decrease as a trade partner in comparison to the EU and other major economies. The Numbers from the region might become the biggest drawback in the WTO while settling disputes with countries like China. Moreover, the economic size of the country is also a major factor that is considered in case of trade negotiations, and accordingly the UK might lose its strong influence. If the focus shifts back to the WTO, than UK might no longer have its current supremacy.
Brexit is said to be a prolonged process. Although, recent updates from EU sources indicate that exit talks would not exceed two years and there is a low appetite to negotiate new ties before full exit. The endpoint for the UK-EU relationship is thus subject to a negotiation but this entire episode is letting business face high levels of uncertainty. Recently, consumer confidence in the UK fell to its lowest level in April 2016 in the last fifteen months indicating a challenging economic outlook. Investors are also cautious ahead of the referendum outcome. On the other hand, EU officials are confident that UK will vote to stay. As a result, all eyes are on the referendum that would be conducted in June, 2016 which would decide if Britain should exit or stay in the European Union.
Poll Indications (Source: Thomson Reuters)
As per latest speculations, there does not seem to be any extension of the two years provided by the EU’s Lisbon Treaty for negotiating a withdrawal. Further, new trade partnership may take more years for appropriate conclusion. The European Commission also intends to have a meeting on June 26 for setting its strategy in case of a “Leave” vote. Rumors are also doing the rounds that Britain would probably leave on July 1, 2018, and become a third country in EU parlance. More is yet to be witnessed going forward with the actual course of this entire Brexit story.
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