By Nikolas Xenofontos, Director of Risk Management at easyMarkets
British Prime Minister David Cameron recently described the upcoming referendum on European Union (EU) membership as “bigger than the general election.” For the first time ever, Mr. Cameron’s Vote Remain campaign appears to be losing ground in the referendum debate, with the likes of Boris Johnson and Michael Gove on the offensive with their pro-Brexit agenda.
Mr. Cameron and the pro-EU camp are “very” concerned about the upcoming referendum, which is set to take place June 23. While most analysts still contend that Britain is likely to remain part of the EU after this month’s vote, the chances of Brexit appear higher than ever.
So, what happens if the majority of Britons vote Leave on June 23? How will the divorce take place? As you could imagine, walking out of the EU wouldn’t happen overnight.
According to Article 50 of the EU Treaty, which states that “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements,” it would take at least two years for Britain to fully withdraw from the EU. Policymakers gave the process a two-year timeline to ensure the exiting country has enough time to negotiate new trade deals before the formal break occurs.
The two-year period stipulated under the EU Treaty may be extended but only through unanimous consent.
Mr. Cameron has made it abundantly clear that the clock would start ticking right away.
“The British people would rightly expect [it] to start straight away,” the British leader told Members of Parliament in February.
However, pro-Brexit justice secretary Michael Gove says “no responsible government” would move so hastily, indicating that more time would be needed to ensure Britain’s healthy break from the EU. According to analysts, the more likely scenario is that Britain’s EU membership would be put on hold indefinitely while the Conservatives first decide who should replace David Cameron as prime minister.While Mr. Cameron has stated he would not resign if Britain quits the EU, very few people believe he would last as head of the Tory majority government for much longer.
According to Mr. Gove, Britain’s full withdrawal from the EU could take the duration of parliament, given that the break-up would be a process of “evolution not revolution.”
“The British people will simply have given their instruction to the government to make arrangements for us to leave the EU,” Mr. Gove said. “It will be in Britain’s hands how we manage it and how long it takes.”
Under Mr. Gove’s plan, Britain would retain its EU membership rights while it carried out new negotiations with the rest of Europe, including formalizing new trade deals. However, analysts warn that this process could be very rocky, given the strong pro-EU majority in Britain’s House of Commons.
In the event that Article 50 is invoked, the EU and Britain would likely begin working on a new trade deal straight away. Britain would still be required to obey EU laws throughout the so-called “divorce period.” In order for the deal to be finalized, however, it must be approved by 16 or Member States, according to the EU’s Qualified Majority Voting rule.
There may be a pro-EU majority in the British House of Commons, but on the street the picture appears much different. A recent poll carried out for The Independent showed a massive swing toward Brexit, with 55% of voters intending to vote for Britain to leave the EU next week. That’s a four-point increase over the previous poll, which was conducted in April.
The Financial Times poll of polls also shows a late swing in favour of Brexit, with 46% of voters likely to vote Leave on June 23. Various other polls, including those conducted by YouGov, ICM and BMG Research also show growing momentum for the Brexit camp.
The economic and financial backlash of a Brexit vote are subject to great debate. The British government maintains that the short-term impact of a British exit from the EU would be massive, including reducing gross domestic product by up to 6% by 2018. That’s equivalent to the impact of the 2008 financial crisis.
Several other bodies have warned of grave consequences for the UK economy should the British people vote to leave the EU. The Institute for Fiscal Studies (IFS), a highly respected think-tank based in London, warned last month that Brexit could cost British finances between £20 billion and £40 billion in 2019-2020, more than offsetting the government’s planned surplus. The UK would also face reduced foreign direct investment and higher costs of trade, which could reduce GDP by up to 3.5% by 2020.
Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).
 Carl Emmerson, Paul Johnson, Ian Mitchell and Dave Phillips (May 25, 2016). “Brexit and the UK’s public finances.” Institute for Fiscal Studies.