London letter for week beginning May 23
- To Brexit or not to Brexit, that is the question
As the June 23 referendum looms, the excitement of both campaigns are intensifying in the U.K. together with the mounting uncertainty of the country’s economic outlook. The U.K., once the driving engine of G-7 in recent years, could wake up post-referendum to a plethora of uncertainties regarding its place in the world. For some, even the possibility of Brexit is scary, while some see it as an opportunity to make a fresh start regaining the country’s sovereignty against the cacophony of dissenting voices in Brussels.
According to the Daily Telegraph, the majority of older voters, Conservative supporters and men are now backing the campaign to stay in the EU following a collapse in support of the Brexit. The poll finds that the ‘Stay in EU’ campaign now has a 13-point lead with just one month to go until the referendum.
The latest ORB poll puts the Stay campaign at 55 percent and the Leave trailing behind at 42 percent, among people who definitely intend to vote. If this is the case, the U.K. Prime Minister could wake up on the morning of June 24, boosting his power in his party while defeating an old ally and new rival Boris Johnson. However, polls were misleading before the Scottish referendum and in the general elections last year.
On Tuesday, the U.K. Treasury issued a new report on the “possible implication of Brexit” on the country’s economy. The Treasury's "cautious" economic forecasts of the two years following a vote to leave - which assumes a bilateral trade agreement with the EU would have been negotiated - predicts Gross Domestic Product would grow 3.6 percent less than currently predicted. In such a scenario, it suggests that sterling would fall by 12 percent, unemployment would rise by 520,000, average wages would fall by 2.8 percent and house prices would be hit by 10 percent depreciation.
However the second and “severe scenario” which would happen if Britain leaves the EU’s single market and defaults to the World Trade Organization, draws a pitch black dark picture ahead of the country. According to this scenario, after two years, GDP would be 6 percent lower, up to 820,000 jobs could go, take-home pay would fall by 4 percent, house prices would fall by 18 percent and the value of the pound would 15 percent lower.
Recently, the Bank of England Governor Mark Carney has robustly defended his stance on the U.K.'s EU referendum debate and accused one of his prominent critics of trying to "undermine" the Bank's remit. According to Carney, the bank has a responsibility to the British people "who don't want risks kept from them." Once again Carney signaled to voters that there are certain risks associated with the leave vote.
On the other hand, markets are unsure what the U.K. would gain in any real sense for being outside of the EU other than long months of negotiations among members, stalled investments and even the possibility of some financial institutions leaving the City of London.
Over the next few weeks, both campaigns will be working towards gaining the votes of the undecided voters. If Boris Johnson, who is known for his love of media attention, really craves victory, he will need to come up with alternative scenarios to support the case of Brexit rather than just relying on patriotic rhetoric.