UK Leaving EU

British Prime Minister David Cameron has committed to holding a nationwide referendum on the withdrawal of the UK from the European Union by the end of 2017. As the date draws closer, the financial media in Britain and the EU has begun to consider the implications of the UK leaving the EU. A new acronym — BREXIT — has even been coined to describe the potential looming event. Societe Generale’s Cross Asset Research published a report on Friday detailing the potential impact of BREXIT on the UK economy.

Cameron forced into corner

The first point made in the report is that the referendum on the UK leaving the EU is not locked in, and furthermore, extremely unlikely to occur if current UK PM Cameron’s Conservative party  is no longer in power. Cameron was forced into announcing a referendum by end-2017 back in January of last year in order to keep the support of the Euro-Skeptic wing of the Conservative party.

The general election scheduled for May 2015 will tell the tale — if the Conservatives stay in power, the referendum remains on track. If the Labour or the Liberal Democrats come back into power, however, the referendum on the UK leaving EU will almost certainly be scuttled.

Uncertainty likely to hurt economy

The main point of the Societe Generale report is that uncertainty about the BREXIT will likely prove to be a drag on the UK economy over the next year or two, at least in some sectors. “However, the uncertainty this is generating could do considerable damage to the UK economy at a time when, finally, it seems to be achieving a strong burst of growth. This uncertainty could have a particularly detrimental effect on business investment, an area of the economy that has notably failed to respond to the improved mood.”

SG’s analysts suggest that foreign direct investment (FDI), long a bright spot for the UK, could be particularly negatively impacted by the uncertainty about a BREXIT referendum.

Net FDI UK Leaving EU

In closing, the report reminds us of the interwoven economic fabric of 21st-century Europe and the potential consequences of tearing the fabric. “And let us not forget that the largest investor in the UK is the rest of Europe. If the UK turns its back on that market then surely European investors would find the UK less attractive as a destination for their investment.”
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