Before this week ends, British Prime Minister David Cameron will have a bit more clarity from a European Union summit regarding a revised set of terms that he hopes will persuade the U.K. electorate to stay in the European Union. A referendum on that question is being held later this year, and having this plebiscite was part of his reelection platform. He supports staying in the E.U. and would prefer to hold the vote in June.
This is arguably the most important global political event of 2016 – even taking the U.S. presidential election into account. That’s because this vote will pass judgment on a political experiment, started in 1957 with a few European countries, that grew into what has become an economic powerhouse that generates almost a quarter of the world’s GDP.
The economic benefits of the EU are significant and undisputed to both the U.K. and the other 27 member nations. A study released by the London School of Economics last year estimated that if it left the EU, the U.K. could lose between 1.1 to 3.1 percent of GDP per year – a significant number these days as so many economies try to scrape together positive annual growth.
But what may make or break this vote is not the economics, but the question of social cohesion. A key element for many Britons is the concern about freedom of migration between EU countries. And as we have seen many times, the emotional impact of immigration tends to trump more seemingly mundane economic issues.
Even the timing of the proposed vote has a certain geopolitical tilt. June is about the earliest possible time operationally to hold the referendum, which Prime Minister Cameron wants to have out of the way before the summer, when immigration is likely to increase and be more prevalent in the news.
Current polling has the vote to remain in the EU at 51 percent – barely edging out those wanting to leave at 49 percent. The polls were as high as 55 to 45 in favor of remaining as recently as a month ago.
Our View: This question will be a big deal for global financial markets during the entire first half of the year. It is likely to be a major determinant in the level of several financial indicators, such as U.K. equities or sterling strength or weakness. We’re likely to see those indicators move in tandem with the polls, as U.K. assets strengthen in correlation with British public sentiment supporting remaining in the EU.
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