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 EU reforms,
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 a couple 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 measures but 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 at
GBP4.5 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.
FAQ: UK's Referendum on EU Membership
Reviewed by Marc Chandler
on
February 29, 2016
Rating:
Reviewed by Marc Chandler
on
February 29, 2016
Rating:
