Brexit: to be or not to be together?

Few weeks ago, after a protracted period of renegotiation of UK’ s status as European member, the Prime Minister David Cameron has announced that the country is set to have a referendum on June 23rd. He said “We are approaching one of the biggest decisions this country will face in our lifetimes: whether to remain in a reformed EU or to leave. The choice goes to the heart of the kind of country we want to be and the future we want for our children.”

Cameron, during his public speech on January 2013, had already disclosed the possibility of a referendum and promised an upgrade of Britain’ s economical and political conditions in the EU in case of his party re-election in 2015. The in-out referendum will reshape drastically Britain’s relationship with EU in both cases. If Britain will remain, EU is going to guarantee a special status to its membership which excludes the UK from the “ever-closer union” idea and to involve new restricted policy on access to welfare system for refugees and migrants. If “Out” votes will prevail, the transitional process to non-EU country will last two years, as established in the article 50 of the Treaty on the European Union (TEU).

Some members of Parliament have strongly supported Brexit ambition during last quarter, including Justice Secretary Michael Gove and Boris Johnson, inspired by the Canadian model of a country that has free trade deals with all world while keeping control of its borders. The prospective of a result in favor of Brexit seems to be quite likely. As shown in latest polls of YouGov, using a sample of more than 80.000 voting individuals, the level of Euroscepticism in Britain is growing stronger. The map below reveals a concentration of Eurosceptic areas in the coastal south and east of England; London district includes five of the most Europhile areas.

Many are the arguments for and against Brexit and uncertain are the consequences of leaving EU. We try to outline a summary of some advantages and disadvantages of both possible outcomes to the vote. Considering trades and commerce, 45% of British exportation is allocated in EU market; therefore if Britain will still be part of EU, government could continue to avoid exporter fares and bureaucratic procedures.

On the other side, abandoning European Union could be a new chance to strengthen trade deals with other nations. Furthermore, the regulation system could be improved taking control on employment law, safety and health. Britain is an economic power, a strong link to America, a budget participant and the most significant foreign policy actor within the EU. Without it, it would be harder for EU to pull its global weight. Right now Britain has the possibility to be represented twice during international summits, the EU representative and the foreign secretary. In case of exit, its influence on the European area will be gradually eroded, but on the other hand this could turn out to be a starting point for new international opportunities. The maintenance of relationships with the European single market is feared to be tricky, but Brexit supporters claim that both sides have a strong interest in a free-trade deal. Taking into account EU Budget, UK pays £340 a year per household in order to receive an estimated £3.000 yearly benefit of membership; even out of EU some expenses to access the single market will surely be needed. Immigration policy would drastically change post-Brexit. The “Out” campaign aims to restore British control of the frontiers by defying the free movement of people. It will be hard to do this and simultaneously keep full access to EU’s single market. Uncertainty over Britain’s new relationship with Europe will discourage foreign investments but also national, as companies are waiting to know the outcome before deciding to act strategically in that market.

Regarding the Brexit market-wise consequences, the exit chance has already lead to nervousness, due to the high degree of uncertainty stemming by the forthcoming referendum. We can outline three different scenarios for UK’s economic future outside the EU: the first one forecasts a booming Britain, where Brexit will bring prosperity to British people in the medium term cutting down on regulation and avoiding short-term turmoil. An alternative scenario is the one that presents a long, troubled transition, necessary to create new relationships with non-EU countries. This period will lead uncertainty and cuts in capital flows to Britain form foreign investors. Sterling trend during last month was characterized by currency’ s fall to the lowest level in almost seven years against the dollar. Goldman Sachs and the famous market analyst Marc Chandler forecasted that the pound could drop to 1.15$- 1.20$ and Citigroup projected a reducing trend in the GDP growth by 4% over a three year period. A third scenario regards Brexit as a disastrous outcome for Britain’ s economy: best case scenario will be a slow growth or a period of recession at worst. Michael Saunders, Citigroup’s analyst, has foreshadowed some shocks related to Brexit decision: worse export performance linked to a limited access to financial services; more market uncertainty that would bring to a weaker growth in investment and a lower consumers’ spending connected to a reduced migration inflow. All of them will encourage a lower public spending or a higher taxation policy combined to higher costs of financing the deficit.

Nobody knows if there will be a replication of what happened in 1985 with Greenland Treaty, for sure analysts’ expectations are not so encouraging.

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