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Perspectives

Britain’s date with EU destiny

By Ilan Jacobs, Government Affairs - Europe, Middle East and Africa

March 21, 2016

The people of the UK will take a critical decision on 23 June, when they vote on whether or not the country should remain within the European Union (EU).

The issue is a divisive one, especially for the governing Conservative Party. Disagreements over Britain’s role in Europe ultimately led to the overthrow of Prime Minister (PM) Margaret Thatcher, and almost brought down her successor, John Major. The current PM, David Cameron, gave into pressure from the Conservative Party for a referendum on EU membership, in the hope of resolving the question. He has subsequently thrown himself into campaigning for the UK to remain in the EU with the energy and professionalism that saw him secure re-election in defiance of the opinion polls in May last year.

The prospect of Britain leaving the EU, with all the economic and legal disruption that it might entail, has already spooked the financial markets. The mere announcement that the popular Mayor of London, Boris Johnson, would be campaigning for to leave, helped the pound fall to its lowest point since March 2009. Citi’s economists estimated that actual withdrawal could potentially shave 1% to 1.5% off their forecasts of Britain’s annualized growth out to 2019, cause a 15 to 20% drop in the value of sterling from its then level of $1.4522, and trigger an 18% fall in house prices*. The Bank of England has already made public its contingency plans to provide extra funding and support to financial institutions around the time of the vote in case of disruption in the financial markets.

Proponents of leaving the EU argue that either these economic effects are exaggerated or are a price worth paying for the restoration of sovereignty to the British Parliament, a longstanding demand of many within the Conservative Party, which has helped fuel its decades long discontent with the EU. This ‘euro-scepticism’ now dominates the Conservative Party, with polls showing that 50% of its MPs and 59% of its members intend to vote in favour of Britain leaving the EU. Conservative voters, meanwhile, are split 45% to 31% in favour of withdrawal. Opposition Labour Party voters are overwhelmingly in favour of remaining in, by 60% to 24%.

So, in an unappreciated twist to the EU saga, David Cameron called the referendum that his party long demanded, is campaigning for a position that the majority of his members oppose, and will be reliant on mostly Labour voters to win, keep the UK in the EU and secure his legacy.

*Sources cited: Citi Research anticipated effects on markets in the event of UK withdrawal sourced from ‘Brexit – Implications for UK Equities’, as of 10 February 2016; and via ‘Brexit Risk – Implications for Economies and Markets’, as of 5 February, 2016.

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