Since the turn of the year the Pound Sterling (GBP) exchange rate has struggled, positing massive losses as fear and uncertainty surrounding the UK’s EU referendum weighed heavily on investor confidence. The referendum is essentially a yes/no vote on whether the UK should remain a member of the European Union. Much has been discussed about the pros and cons of either outcome, but what are the experts saying?
PM David Cameron Secures Partial Reforms, But is this Enough to Keep the UK in the EU?
When the Tories were campaigning to win the general election in 2015, the unprecedented rise in popularity for the Euro-sceptic UK Independence Party (UKIP) was of serious concern. This caused David Cameron to promise that if he were elected Prime Minister he would hold a referendum on the UK’s continued membership in the European Union. Once the Tories won the election, Prime Minister David Cameron kept to his promise by announcing that a referendum will take place, although the timing of the vote was unknown at that time.
Cameron was reluctant to hold the referendum quickly, despite pressure from Euro-sceptics, as he wanted to make sure that the UK could sweeten is relationship with the EU first – thus giving British voters the choice between a reformed EU and independence.
After months of negotiations, coinciding with significant Pound Sterling (GBP) exchange rate volatility, the PM was finally able to set a date for the referendum (June 23rd) and outline the changes he had managed to negotiate.
So what reforms did Cameron ask for and what did he actually get?
One of the most controversial reforms Cameron pushed for was the ability to put an ‘emergency break’ on migration for those member states that are struggling economically to cope with ‘exceptional’ levels of migrants.
Cameron’s initial campaign for a four-year ban on in-work benefits for EU migrants was refused thanks to massive resistance from Eastern European countries. The actual deal Cameron secured allows benefits to be gradually phased in over a period of four-years as the worker contributes more in tax. Most significantly, however, Cameron only managed to haggle for a seven-year ‘emergency break’ rather than the total of thirteen-years he originally campaigned for.
Another reform that Cameron asked for is being able to completely halt payments of child benefit to migrant workers for children living overseas in their home countries. He was unsuccessful in stopping this completely, but the deal instead will see migrant children receive the same benefits as would be offered in the child’s country of origin.
On the matter of sovereignty Cameron was a little more successful. This means that the EU’s mantra of an ‘ever closer union’ does not include the UK. National parliaments will be able to use a ‘red card’ if they want to contest EU legislation, although they can only do this if they can get support equivalent to 55% of the 28-nation bloc.
In terms of reforms in the Eurozone, Cameron managed to secure the UK’s exemption from contributing to Euro bailouts. Countries not using the Euro can highlight concerns about the impact of major Eurozone decisions for discussion in the European Council.
There will also be changes to free movement should the UK elect to remain part of the EU. EU member states agreed to deny free movement rights to nationals of a country outside of the EU who marry an EU national.
Who Supports the ‘Stay’ Camp in the EU Referendum Campaign?
Originally PM David Cameron stated that he would decide on where he stands on the EU after he negotiated reforms. He is obviously satisfied with the deal struck because he was swift to show his allegiance to those campaigning to remain a member of the EU, stating; ‘I believe we are stronger, safer and better off inside this reformed European Union.’
Cameron has the backing of many influential UK officials, most of which have ties in business or jobs based in economics. The ‘stay’ camp are arguing that this suggests that many learned economic heavyweights are convinced that leaving the EU would be a disaster for the British economy.
Although he has not directly supported the ‘stay’ campaign, Bank of England (BoE) Governor Mark Carney (who stated that the decision to hold a referendum is the reason behind the sharp depreciation in the value of Sterling since the turn of the year) is highlighting the economic fears surrounding the uncertainty of the UK’s future outside of the EU. Carney stated that he will approach monetary policy as if nothing will change. ‘We’re treating this vote exactly how we treat any other political event, which is not to make a judgment on the outcome and assume the status quo continues. I will note though that there have been moves in Sterling since it’s become … clear (about) the timing of the referendum.’
Alan Johnson, leader of the Labour In For Britain campaign, warned that over 50,000 manufacturing apprenticeships will be at risk if the UK votes to leave the EU. ‘For each one of those apprentices, gaining skills, earning a good wage and working towards a career, we can’t let them down, turn our back on the world and cut British manufacturing and industry off from their largest export market.’
Several major businesses have signed a letter stating their stance on supporting the UK remaining a member of the EU. These include BT, Marks & Spencer, Vodafone, Sir Roger Carr of BAE, Iain Conn of Centrica, Dame Carolyn McCall of EasyJet, Bob Dudley of BP and many others. The signatories wrote: ‘Business needs unrestricted access to the European market of 500 million people in order to continue to grow, invest and create jobs. Britain will be strong, safer and better off remaining a member of the EU.’
It is not only potential economic stresses that are of concern to many. Sir Hugh Orde, a former NI chief constable, fears reduced security against terrorist threats. ‘To try and pull a drawbridge up and keep Britain all by itself and alone when facing international terrorist attacks and excluding ourselves from those institutions which are designed to keep us safe would be nothing short of madness,’ Sir Hugh said.
Boris Johnson Becomes the Figurehead of the ‘Leave’ EU Referendum Campaign
One of the most prominent political figures to pledge allegiance to those campaigning to leave the European Union is Mayor of London Boris Johnson. Mr Johnson said: ‘We will remain an open, free-trading and dynamic economy under any circumstances. I really think it is illusory to think London would somehow wither away and die if it wasn’t for our membership of the European Union.’ He added: ‘It is simply inconceivable to imagine that they would want to cut us off. After all, we are massive net buyers of their goods, there is every reason for them to want to cut us a deal that would be extremely favourable.’
Swelling the ranks of those wishing to leave the EU was Conservative MP Michael Gove, another politician with heavyweight status. He challenged Prime Minister David Cameron’s assertion that the reforms he secured were legally binding. ‘The European Court of Justice interprets the European Union treaties and until this agreement is embodied in treaty change, then the European Court of Justice is not bound by this agreement.’ He added that ‘ultimately it is a matter of European law and British law that only treaties have effect, and that because these agreements that have been reached are not yet treaty changes, the European Court of Justice could take a different view’.
Another prominent MP backing a ‘Brexit’ is Priti Patel who confirmed Gove’s accusation that Cameron falsely claimed that the EU reforms were legally binding. ‘EU courts and politicians will still be in charge of our borders, our courts and our economy. The deal is not legally binding and can be ripped up by EU judges after our vote. Even if it did come into force it would change just 1% of the EU Treaties. The only way to take back control over our economy to free up our businesses to create more jobs and growth is to Vote Leave.’
In another blow against the government, the letter that was signed by many British businesses all campaigning for the UK to stay in the EU transpired to only contain a third of the companies registered on the FTSE 100.
How Will the EU Referendum Impact the Pound Sterling (GBP) Exchange Rate?
With clear arguments to support both sides and with little known as to how the vote will pan out, Pound Sterling (GBP) exchange rates will be very likely to weaken considerably. Political uncertainty is very damaging to investor confidence.
If we take the Scottish Referendum as an example, the Pound saw massive price swings in the run up to the vote as traders reacted to opinion polls. This is likely to be the same leading up to June 23rd, with larger price swings possible given the importance of said vote.
So far markets are pricing in a 33% chance that the UK will vote to leave the EU. This means that if the UK does back a ‘Brexit’ there is certainly potential for massive Sterling losses, with some fearing a drop to 1985 levels.
In the long-term, however, it remains to be seen what the true impact of a ‘Brexit’ on the UK economy will be. There is every chance that the Pound will sharply appreciate after initial depreciation if it transpires that the UK remains economically sound and foreign investment continues to flood into London.
On the flip side of the coin, the UK voting to remain a member of the EU would likely coincide with Sterling appreciation. However, if it transpires that the deals reached between Cameron and EU member states are not put in effect as the PM has promised, the resultant unrest in voters and politicians alike could weigh heavily on demand for the Pound.
The only thing that is certain is that the coming months will be hugely important for the future of the UK.