- The risk of the UK leaving the EU increases financial market volatility in the short term, but remains much less severe than the case of Greece. After the announcement of the referendum date, the British pound weakened 2.3% against the US dollar, lowest in 7 years. The UK government bond yields however did not change. EIC views these movements as short-term volatility with a predetermined timeline. If the UK chooses to stay with the EU in June, the outcome will reaffirm its status as an EU member. However, in the case of an exit outcome, the Lisbon Treaty (2009) specifies that once the member state notifies the European Council of its intention to exit, it will take at least 2 years before the membership ends. This time lag allows for both sides to formulate a transition plan as well as negotiate for new deals. Note that the case of Brexit differs greatly from the Grexit risk in 2015. In the case of Greece, the main cause was the possibility of Greece defaulting on its debt, while Brexit is not related to financial problems.
- EIC maintains that the possibility of Brexit is low due to large potential negative consequences. At present, opinion polls suggest that “in” votes are leading “out” votes at 43% to 40% (17% are undecided). The votes to exit have been gathering momentum since mid-2015 partly due to the migration problem in Europe and the pressure on EU members to share refugee burden. Other factors that support the UK to leave the EU include the fiscal burden to prop up weaker economies within the EU and restrictions on some political issues. However, EIC views that the outcome of the referendum is likely for the UK to stay. The newly negotiated deal helps ease concerns over burden from migrant workers and reduce also pressure for further integration. Although an influential politician like Boris Johnson, Mayor of London, has joined the Brexit campaign, the exit could prompt another referendum in Scotland whether to split from the UK as most Scots prefer to stay with the EU. Past episodes show that most English do not want Scotland to depart from the UK. Moreover, recent volatility in the economy in response to the possibility of Brexit could sway the undecided group towards staying votes more.
- The case of Brexit will hurt both the UK and the Eurozone economies especially through the uncertainty over trade and labor movement agreements. The UK exit from the EU could hurt trade between the two sides, as their trade flow accounts for a third of all international trade from the UK. This is because the uncertainty on whether they will be able to renegotiate to maintain the "single market" condition. For the UK, trade agreements with other counties that it has signed as a member of the EU could be in jeopardize; this includes free-trade agreements with Switzerland, South Korea, and some Scandinavian countries. Furthermore, the end of free labor movement may prompt multinational corporations to relocate their headquarters away from London, the current financial hub of Europe. HSBC, a large international bank, has recently threatened to move its investment banking office to Paris in the case of Brexit. Additionally, Fitch Ratings and Moody's, international credit rating agencies, have warned of lowering the UK's rating, which would affect its financial market significantly. These aforementioned factors could put both the UK and the EU economies into recession.
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