Britain’s Moment of Truth

Following months of campaigning, British voters will decide whether their country will remain a member of the European Union (EU), albeit with its own currency and immunity from certain rules, or leave the EU altogether on Thursday, June 23.  The vote will be momentous for Europe, a test of whether the EU can hold together while facing myriad challenges like the Syrian refugee crisis, wealth and economic disparity between north and south, and debt problems like those posed by Greece and, increasingly, Spain and Italy.

What will be the outcome of the vote?  British Prime Minister David Cameron strongly favors staying in the EU along with much of his Conservative government, the Labour Party, the Liberal Democrats and the Scottish National Party.  Ironically, if the “Brexit” occurs, the Scottish people might vote to exit Britain and join the EU on their own.

Alternatively, less than half the Conservative members of Parliament are in favor of exiting the EU, along with members of the UK Independence Party and many lower-wage workers who view EU membership as an attack on British sovereignty.

What’s at stake?  With an “exit” vote, British companies could lose access to the consolidated European market for duty-free trade and financial services.  Some analysts believe London would be unable to function as Europe’s de facto financial center if Britain was no longer an EU member.  Additionally, U.S. companies have long seen Britain as the gateway to free trade with the EU’s 28 nations, which explains why American corporations and Wall Street firms have donated substantial sums to the “stay” campaign.  Britain risks losing American investment and manufacturing jobs that would move to mainland Europe.

The International Monetary Fund (IMF) has predicted that a Brexit would reduce British economic growth by up to 5.6 percent in the next three years, partly driven by a sharp decline in the British currency.  Meanwhile, you may have noticed global investment markets becoming noticeably choppier in the run-up to the vote.  The uncertainty created by a “Brexit” vote would create more volatility, which is why Fed Chairperson, Janet Yellen, has mentioned the referendum overseas as influencing the decision of whether or not to raise interest rates in the U.S.

Who will win?  The vote is expected to be close, but recently, the odds makers in Britain have given 73% odds on a “stay” vote.  Another voting machine, the global currency markets, have driven a two-day rise in the value of the British pound that is the seventh-largest since 1971—a clear sign that the most sophisticated global investors expect the European Union to stay intact.