globalEDGE Blog: U.K.'s Upcoming Referendum and What it Means for the Global Economy

U.K.'s Upcoming Referendum and What it Means for the Global Economy

A referendum is a vote in which nearly anyone of a voting age can take part in, and can cast a “Yes” or “No” vote to a question, and whichever side has over half of the votes cast wins. U.K.’s Prime Minister David Cameron announced a referendum on June 23, 2016 to vote on whether the United Kingdom should remain a part of the European Union. Britain held a referendum in 1975, and voted to stay; however, there are many who called for another vote because they argued that the European Union has changed over the past 40 years.

There are several advantages and disadvantages of the Britain leaving the European Union, but a large part of the uncertainty lies in that no country has ever done it before. An advantage of being a member of the EU is the free trade between member nations, which would make it easier and less expensive for British companies to export goods to Europe. If the U.K. leaves the European Union, it may lose its negotiation power internationally by leaving the trade bloc; however, it would be free to establish trade agreements with non-EU countries. Regarding flows of investment, leading up to the referendum vote due to uncertainty and potential consequences, investment flows in the U.K. could slow. In the long-term, there are two views. Some say that the U.K.’s status as one of the largest financial centers can be threatened if it is no longer seen as a gateway to the EU for U.S. banks, while others say that Britain’s appeal wouldn’t have been diminished. Barclay’s released a view which stated that if the U.K. were to leave the European Union, it may increase populist anti-EU movements in other member nations, and the U.K. can be seen as a safe haven from those risks and attract investors. Regarding jobs, being a member nation of the European Union allows the free movement of people and increases job opportunities for U.K. workers and for British companies to employ workers from other EU countries. Those who would like the U.K. to leave the European Union believe that this prevents the United Kingdom from controlling their own borders.

The International Monetary Fund warned that the United Kingdom’s economic growth and recovery could be jeopardized by the uncertainty surrounding the upcoming referendum regarding EU membership. Uncertainty is bad for economic growth as it prompts economic players to avoid making investing and hiring decisions. The referendum is a risk to U.K. growth, which was already under pressure due to slower global trade and economic growth, as well as the turmoil in the financial markets.

On Wednesday, the pound dropped to a seven year low to below $1.39, after analysts warned that that a British vote to leave the European Union would damage U.K.’s growth prospects. HSBC analysts stated that the pound may lose another 20% of its value against the U.S., pushing its value towards $1.10, the lowest it has been since 1985. If the U.K. was to leave, the increase in the cost of imports following the currency’s collapse would cause inflation to rise dramatically, prompting the Bank of England to raise interest rates. The financial turmoil could decrease the 2.3% GDP growth rate that the Bank of England projected down 1.5%. There are concerns that U.K.’s inflation could rise by 5% and that possible deflation could turn to stagflation. Although it is difficult to predict what the impact of a “Brexit” will be, there is no doubt that the decision from the referendum would have far reaching effects for both U.K. and the global economy.

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