In a speech last week, British Prime Minister David Cameron raised the possibility that the UK might push the “nuclear button” and leave the European Union. We think both the threat and consequences of such a move have been exaggerated.
The most striking aspect of Mr Cameron’s much-postponed speech on Europe last week was his promise to hold a referendum on the UK’s membership of the European Union (EU) by the end of 2017. Such a vote, he said, would follow a “new settlement” to hand powers back to national governments. His preference would be to enshrine these changes in a new EU Treaty. Failing that (and there is little appetite for a new treaty in other EU countries) he would try to negotiate this new settlement on a unilateral basis.
So has Mr Cameron set the UK on a path to EU exit? Despite the ardent wishes of many members of his own party, this was not his intention. Indeed, he said that he hopes to reach an agreement which will allow him to make the case for EU membership with all his “heart and soul”. But that makes it all the more difficult to understand Mr Cameron’s thinking. If his intention is to force the debate by threatening to leave the EU, then the other countries may well call his bluff—especially if he jeopardizes their plans to build a genuine economic and monetary union. Mr Cameron refused to say what he would do in those circumstances.
The prime minister’s speech does, however, make sense from a domestic political perspective. Not only does he head a Conservative Party which has become increasingly hostile to the EU, but he also has to deal with the potential electoral threat from the UK Independence Party (UKIP, which has long demanded a referendum on UK membership of the EU and has become increasingly popular).
The prime minister clearly hopes that his referendum pledge will neutralize this toxic issue until after the next general election in 2015. By then, of course, Mr Cameron may have been released from his promise if he has been beaten at the ballot box. Indeed, recent opinion polls show the opposition Labour Party—which does not currently support a referendum—with a comfortable lead over Mr Cameron’s Conservative Party.
Hence, there is a good chance that there won’t even be a vote on EU membership in 2017. And if there is, it’s not obvious that the British public will vote to leave. With the full weight of the “establishment” likely to support continued EU membership, many people will simply vote to maintain the status quo.
But does it matter anyway? Certainly, it’s plausible to argue that the uncertainty created by Mr Cameron’s pledge could have a damaging impact on investment spending. But we would not expect this to be large and we are not at all convinced that leaving the EU would have a lasting negative impact on the economy. Nor do we think the announcement of a possible referendum on the EU is among the more compelling reasons to sell the pound (which, paradoxically, would help the economy). In short, the economic consequences of a British exit may be less dramatic than some observers have been predicting.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Darren Williams is Senior European Economist at AllianceBernstein