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23 June 2016 By John Foley

Britons vote on June 23 on whether to stay in the European Union or go it alone. That’s the straightforward part. What follows could be a tortuous multi-year negotiation over how Britain deals with its biggest trade partner. There will be tears, disappointments, and big changes that go beyond the EU’s borders – some even if the UK votes to stay. For the benefit of armchair UK-watchers, Breakingviews explains what’s at stake.

Wait. Britain is in the EU?

That’s an understandable question. Britain has access to the European single market for goods, but in other ways it is unlike most of the other 27 countries in the union. It uses the pound, not the euro. And the UK is not part of the Schengen zone of passport-free travel. There are more subtle differences too. A deal agreed by Prime Minister David Cameron in February acknowledges Britain’s aversion to “ever closer union”. And the country gets a special discount, or rebate, on its EU budget contribution negotiated by then Prime Minister Margaret Thatcher in 1984.

Why is this vote happening?

Cameron promised the referendum back in 2013 as part of his campaign to counter the rise of the right-wing, xenophobic UK Independence Party. That helped his Conservative Party secure a majority in 2015’s general election. Cameron’s party is split on the EU question, but both he and the leader of the Labour opposition, Jeremy Corbyn, are in favour of staying in: they’re in the “Remain” camp.

Why did this suddenly flare up?

The referendum started to weigh on financial markets months ago – especially in currency derivatives. A weaker pound is one of the few outcomes of a so-called Brexit that’s possible to predict with confidence. But activity intensified a few weeks ago, when the “Leave” camp started to look like it had a fighting chance.

How do I make money from it?

Investors and traders are standing back as the vote nears, while the obvious “short sterling” trade is now crowded. The trade-weighted pound is 8 percent below its peak last August, though still up 3 percent over the past week, and the right level following a withdrawal from Europe is open to debate. One alternative trade expecting a Brexit is to bet that the spread between Italian and German government bond yields widens further. The yen, gold and the Swiss franc would also be likely beneficiaries, while global stocks would suffer. Conversely, if Britain stays and the euro zone seems less at risk of financial stress, the German-Italian yield spread could narrow.

Would the UK cut itself out of Europe immediately?

No. In fact, the referendum result is not binding on the government – though a vote to leave would be hard for politicians to ignore. If Britain does exit the EU, it will take a couple of years to happen and a lot of the consequences won’t be known until negotiations about future arrangements are finished. That could take a decade to accomplish.

Would Britain close its borders to migrants?

It would have more control, but the answer is still no. A quasi-official target of bringing immigration below 100,000 was missed last year, and would probably be missed again even with Britain outside of the EU. Almost twice that number already arrive annually from non-EU countries. Despite rhetoric to the contrary, there is little evidence that European arrivals have a negative effect on Britain. And what to do about the Europeans who are already in the UK, given the difficulty of knowing exactly who and where they are, is a question still unanswered.

What happens to London as a financial hub?

The bear case is that financial institutions fail to get the right to offer products and services to the rest of Europe. Thousands of bankers might then have to wave goodbye to the Square Mile, at least in theory. In reality, moving thousands of unwilling employees to France or Germany, say, wouldn’t be so easy. More likely is that global centres of financial gravity slowly shift elsewhere.

Is Brexit contagious?

Probably. Early symptoms have been seen in the Netherlands, in France, where far-right presidential hopeful Marine Le Pen has said that France has “a thousand more reasons” to leave the EU, and in Italy. Finland’s finance minister compared a British exit to the collapse of Lehman Brothers, implying that the euro zone and even the EU could break apart. Much would depend on how Germany, as the largest economy in the union, reacts to a British vote to leave. It could choose the carrot of reforms to encourage those who remain, or it could choose the stick of making Britain’s stand-alone future as lonely as possible to deter others.

Should the rest of the world care?

If Britain leaves the EU, there will be winners. China and India, for example, could opportunistically push for trade deals with the UK on terms favourable to themselves. But there will also be many losers. Fluctuating currencies and interrupted capital flows could dent trade, even for an economy as big as the United States. Unity in the fight against climate change could suffer. And isolationist and secessionist tendencies elsewhere could gain momentum.

So…is Britain better in or out?

Breakingviews has argued that the best outcome is to stay. The voting public may have other ideas, or believe that in the long run, they will be no worse off if the UK leaves the EU. But the pervasive inequality that sparked the whole debate has neither been caused by Europe, nor obviously ameliorated by it. So even if the people choose to remain, both sides need serious change if the union is to last.


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