A referendum on the UK’s membership in the European Union is set for June 23. Although the “stay in” camp leads current polls, a Brexit — Britain departing the EU — cannot be ruled out.
The effects of a potential Brexit on cross-border trade will largely depend on the UK’s ability to renegotiate arrangements with the EU. However, uncertainty stemming from a possible Brexit has already had a negative impact on the UK economy. Dun & Bradstreet (D&B) recommends postponing decisions regarding trading with or investing in the UK, at least until the referendum date.
Growing Anti-EU Sentiment
Over the past years, public opinion has become more and more EU-sceptic in the UK, especially as the eurozone stumbled from crisis to crisis.
The UK Independence Party, which campaigns for the UK leaving the EU, won the 2014 elections to the European Parliament in the UK. As such, David Cameron promised the electorate a referendum about Britain’s EU membership.
After months of negotiations between the EU and the UK, the British government managed to secure some rather cosmetic improvements in its membership terms. These were enough for David Cameron to campaign for the UK to stay in what he calls a “reformed EU.”
However, several senior figures from within Cameron’s Conservative Party, including charismatic London Mayor Boris Johnson, will campaign for Britain leaving the EU. Polls show that the lead of the “in” camp is not large enough to rule out the possibility of a Brexit.
The Likelihood of a Brexit
From a country risk perspective, the chance of a Brexit stands below 50%. The prime minister, all other big parties in the parliament (ranging from the Labour Party to the Scottish National Party to the Liberal Democrats), and most companies (especially big ones) are supporting Britain’s EU membership.
However, several senior Conservative politicians, plus most of the party’s base, the UK Independence Party, and large parts of the traditionally anti-EU print media are campaigning for a Brexit.
Dun & Bradstreet currently assesses the risk of a Brexit to stand at 35%, but this can go up quickly, especially if the migrant crisis in continental Europe escalates further.
Business Impact of a UK Exit
The repercussions of a Brexit for exporters/investors with exposure to the UK could range from minimal to immense, depending on the results of the negotiations between the UK and the EU after the Brexit vote.
In a best-case scenario, the UK government and the EU will quickly reach an arrangement, maintaining the UK’s access to the EU’s common market. In this scenario, the City of London remains Europe’s financial center and Scotland (which is largely pro-EU) does not make a second bid for independence. In addition, less Brussels-imposed regulation could make the British economy thrive.
However, we regard such an outcome as overly optimistic and expect a much more negative business impact of a potential Brexit.
While both sides have a deep interest in maintaining free-trade ties, the EU will likely insist on the UK adhering to EU-set regulations, like non-EU member Norway. This might also include the free movement of labor, a very contentious issue for most Brexit supporters. In the end, the British government might be forced to decide between regaining controls over its borders and access to the EU markets.
What to Do until June 23?
The frequency of events will be high in the run-up to the referendum date. Hence, we recommend monitoring the news flow closely and frequently.
We also advise to factor in a further depreciation of the pound sterling, which would accelerate if the UK were to leave the EU, as the uncertainty stemming from the possibility of a Brexit is weighing on market sentiment.
As a consequence, Dun & Bradstreet recommends postponing all investment decisions until the likelihood of a Brexit has dropped to sufficiently low level. If the referendum ends with a victory of the “leave” camp, uncertainty would increase even more as further negotiations between the UK and the EU would be required.
Having previously worked for the European Parliament in Brussels, Markus Kuger joined D&B’s office in Marlow/United Kingdom in June 2010. In his role as Senior Economist in D&B Macro Market/Country Insight Products, he is writing about his home country Germany as well as the UK, France, the Netherlands, and Poland.