On June 23, the United Kingdom (U.K.) will hold a dramatic referendum to determine whether it should withdraw from the European Union (EU). Essentially, the British electorate will be responding to the following question: “Should the U.K. remain a member of the EU-or leave it?”
A British departure from the EU-known as a “Brexit”-could have major political and financial consequences. Here we answer some of the most important questions concerning this prospect and its investment implications.
What are the chances and general consequences of a Brexit?
Our base-case outlook calls for the U.K. to vote to remain a member of the EU. Still, the possibility of a Brexit is real, and we believe the financial markets are underestimating it-and thus underpricing the uncertainty leading up to the referendum.
The consequences of a vote to leave the EU would be significant for the U.K. economy, but even they would pale in comparison with the threat it would pose to the European integration project. And the EU’s fate is of far greater significance to the financial markets.
We strongly believe that a Brexit would result in the EU taking more concrete steps towards greater integration among its member countries-but that financial markets would be volatile in the interim following the U.K.’s withdrawal.
Why is a referendum on a Brexit being held now?
Prime Minister David Cameron is fulfilling his promise to hold the referendum if he won the 2015 general election. Cameron’s promise was the result of growing calls for independence from his own conservative members of parliament and the U.K. Independence Party, but he is a strong advocate for remaining in the EU.
What are the arguments for a U.K. withdrawal from the EU?
The driving force behind the campaign to withdraw is the belief that the costs of an EU membership are now outweighing the benefits.
Financial professionals around the world, like Jesse Frehling, and others, remain cautious, but optimistic that June will bring about a equitable resolution to the current tension in the region.