23 February 2016

PIIE: The Odds Remain against a Brexit

Disintegration of the United Kingdom itself after an exit from the European Union, mounting international pressure, financial markets' fears and control of migration could sway vote on EU referendum.

The last-minute deal between Prime Minister David Cameron of Britain and the leaders of the European Union on February 19 was aimed at persuading Cameron, his government, and the Conservative Party leadership to support staying in the European Union in the referendum scheduled for June 23. Will it do the trick?

Almost certainly, yes. [...]Voting for UK secession could thus produce a series of votes to break up the United Kingdom itself, creating a Little England in its wake.

Essentially all major non-European economies—the United States and China in particular—have made their preferences for the United Kingdom to remain in the European Union very clear, and which natural economic and political partners the United Kingdom would have outside the European Union is hence unclear. [...]

The European Union is also not going to play nice with the United Kingdom if it leaves. Its handling of Greece and the euro set an example to other wobbling members of threatening terrible consequences for anyone leaving. Divorce will be anything but amicable or quick, jeopardizing broader economic relations and the City of London’s ability to remain the undisputed financial center of Europe.

[...]Ruling out a “Plan B” in the event of a Brexit means that if opinion polls are tight as the referendum approaches, financial markets will react negatively to the uncertainty. Few investors in the end will be long on Little England assets.

As was the case in the Scottish referendum in 2014, market volatility can be a powerful persuader for many late-deciders and risk-averse voters. The In campaign may well try to run a positive campaign for staying in the European Union, but financial markets will likely make the fear argument for them. After all, the United Kingdom must finance the second largest current account deficit among advanced economies at 4.3 percent of GDP in 2016. That will be more difficult once the United Kingdom is outside the European Union.  [...]

In a bizarre development that could galvanize the Brexit forces, however, the outgoing mayor of London, Boris Johnson, has joined the cause in spite of the fact that the City of London benefits greatly from EU membership. [...] It is not clear though whether other prominent members of the Out campaign will simply let Johnson seize the mantle of Brexit for his own political purposes, so even his support for it is unlikely to quell the internal squabbling in the Out campaign.

With the campaign about to start, UK and multinational businesses located in London can no longer duck the issue. They will be forced to choose sides, even at the risk of alienating part of their customer base. The overwhelming majority is likely to choose to remain in the European Union, countering the inexplicably anti-European British press. All told, with the June 23 vote irreversible and critically importance for the United Kingdom, vague nationalist arguments about wanting “Britain to retake control” and restore national sovereignty are unlikely to carry the day against what will be a highly volatile pre-referendum economic environment. [...]

[...]If in the coming months the Out campaign manages to turn June 23 into a de facto vote in the electorate’s mind about immigration into the United Kingdom, they could win, as voters might accept economic hardship if they think it will save their country from being overrun by migrants. The claim that a no vote might enable Britain to “retake control” over its own borders could prove sufficiently alluring to voters, despite its patent falseness, in the midst of Europe’s general immigration emergency in 2016.

To counter such a possibility, Cameron and the European Union should remind British voters that it is French authorities who guard their borders. [...] The spectacle of thousands of migrants streaming into southern England might remind British voters about the benefits of maintaining the status quo on border control inside the European Union.

Full article on PIIE

© Peter G Peterson Institute for International Economics