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Global Trends and Politics

EU referendum in the UK: The stakes are high

David Cameron will remain British Prime Minister. Contrary to all earlier predictions, he will even be able to govern alone, though with only a slim majority. Cameron won the election by setting the stakes very high. Now he will deliver on his campaign promise to hold a referendum by 2017 on whether the UK should stay in the European Union. He hopes that, with the threat of an upcoming referendum in his hand, he will have a better chance of getting widespread EU reforms pushed through in Brussels. The amount of anti-European sentiment in the country was also demonstrated by the strong results from the UK Independence Party (UKIP), though this was not reflected in parliamentary seats due to the plurality voting system.

11.05.2015

Although few would disagree that EU reforms are necessary, exerting pressure by wielding a referendum is a very risky proposition. There will be elections in both Germany and France in 2017. To promote their electoral campaigns, populist parties in both countries will pounce on any appeasement of the UK as just another example of Brussels' weakness, and so the EU will not be willing to offer much in the way of concessions. And even if Brussels does concede reforms to London, the outcome of referendums is never certain. David Cameron experienced this himself just last year, when the referendum in Scotland almost took a wholly unexpected turn shortly before the vote.

The European project has often had a difficult time with referendums in the past, for example in 2005 when the EU constitution was rejected in France and the Netherlands, or the Swedish "No" to the Euro in 2003. The situation was different in 1975, when the UK voted to join the EEC; in those Cold War and oil crisis years, the idea of Europe pulling closer together still seemed plausible and promising to many people. It would be a heavy blow to the EU if the UK chose to leave. The UK boasts the second largest economy in the EU, has on average significantly higher growth rates than Germany, and could potentially replace Germany as the number one in the EU within the next twenty years. With a population of slightly less than 65 million, the UK already makes up around 13% of the EU population, and, contrary to the situation in many industrialised countries, the British population is still growing.

A "Brexit" would mean the loss of around 16% of the EU's economic output and 12% of its budget. The EU's global political and economic influence would be significantly weakened, and the political balance within the EU would shift. Without the UK, Germany would be considered as an even more hegemonic power in Europe. Though some might argue that a Brexit would just mean that Europe had removed its greatest impediment to further integration, the German government would still be the last to wish for such an outcome. Germany and the UK often hold quite similar positions on the future institutional make-up of the EU: both reject significantly stronger EU institutions at the expense of national governments, and feel bound to the subsidiarity principle. And with the loss of the UK as a strong supporter of free trade, European economic policy would also become significantly less liberal.

The UK has close economic ties to the EU: more than 50% of British exports go to other EU Member States, and more than 50% of its imports come from the EU. Yet the hopes repeatedly expressed by British Brexit proponents – that, even after an exit, Brussels would grant the UK practically the same favourable trade terms it currently has – could be dashed. Although the UK would be freed from all EU obligations after an exit , it would certainly not be able to continue to profit from all the advantages. Otherwise, every other anti-European movement would receive "carte blanche" to follow the UK's example.

The result would be increased calls for exit referendums in other countries as well. The demands for Scottish independence would also resurface, despite the no-vote in the referendum just eight months ago, especially since the Scottish National Party scored their historical electoral win on the independence question. Cameron will be confronted with demands for more autonomy one way or another. A central issue is the UK's economic clout in the global market, for example with regard to free trade agreements: current and future treaties would be affected by a Brexit. Though London can certainly also negotiate on its own, when sitting alone at the table against the US or China, it will hardly have the same economic or negotiating clout as the EU. Moreover, London's status as a financial powerhouse could be significantly affected by the loss of its position as a preferred gateway to the EU. Presumably no bank of any significance would be willing to forego a foothold in the European Union.

Frankfurt and Paris would particularly benefit from the fact that many financial companies would have to move at least some of their business into the EU. David Cameron has set the stakes very high with his referendum promise. Though even if Labour candidate Ed Miliband had won the election: the "genie" of an EU referendum is now out of the bottle.

Sooner or later, British citizens will vote on whether to remain Members of the European Union. And the rest of the EU should not be complacent either: the UK will not be the only country facing this choice. In the long term, there will be more referendums about the future of the EU and that of its Members, because in many countries fundamental treaty changes are only possible via referendum. This presents both a challenge and an opportunity. Almost nobody considers the EU treaties to be still adequate today: they need at least to be adjusted, if not fundamentally revised. And the earlier Europeans begin to promote the European vision through forward-looking reforms, the less its proponents need to fear any referendums. The UK is just the beginning. This article was released on 9 May 2015 in German newspaper Börsen-Zeitung.

Munich Re Experts
Michael Menhart
Chief Economist at Munich Re
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