Referendums and EU exit: tools, not end-goals, which lack credibility

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Prime Minister Cameron’s promise of a referendum on EU membership in 2017 served a potential dual purpose, in my view: to leverage concessions on the UK’s terms and conditions of EU membership, including immigration, and domestically to regain the initiative with the anti-EU lobby. Ultimately, the government failed to legislate (before the May elections) an in-out EU referendum, after a breakdown in negotiations with the Liberal Democrats. While the Conservatives could table a new bill to hold a referendum if they win the May elections, it is not obvious how much Cameron has achieved.

On the upside, he has shown a willingness to let the UK voter have his say on the UK’s future, whilst ensuring that his broader political agenda is not sidetracked by referendum fever for the next three years. He has also contributed to a more open debate amongst EU members about reform, including immigration.

On the downside, he has made very few inroads with Merkel, and UK cabinet members have admitted that reforming immigration policies and benefits was fraught with difficulty. Also, the credibility of the UK’s threat of leaving the EU (and other countries potentially following suit) was questionable. For starters, opinion polls show that British voters are divided on the issue of EU membership. Furthermore, no country has ever held a referendum on withdrawal from the EU, let alone left the EU. Algeria and Greenland gave up EEC membership in 1962 and 1985, respectively, but only after acquiring territorial independence, and arguably their economic and political importance to the EU project was far smaller than the UK’s today.

Importantly, I don’t think a UK referendum, let alone an EU exit, is an end in itself. Exiting the EU would require complex and time-consuming preparations, even if the Lisbon Treaty does have such provisions, and likely entail exorbitant near-term costs. I don’t think Cameron wants that on his plate. Medium-term, the UK could reinvent itself as a low-tax, labour-mobile, R&D-rich services and export economy turned towards the fast growing continents of Asia and Africa. But in the long-run Cameron would likely no longer be in power to reap the (possible) benefits of a UK outside of the EU.

The bottom line is that Cameron has his work cut out to convince UK voters that substantive reform of the EU, particularly of immigration, is possible. At the same time, he faces an uphill battle to make the threat of an EU exit stick and convince key EU partners that EU reform is both necessary and urgent. He is running out of time to regain support which has ebbed to UKIP. Claiming victory over the £1.7bn EU rebate – if it is even a rebate – is clutching at straws and unlikely to seriously dent the UKIP anti-EU bandwagon.

 

Olivier Desbarres is a former G10 and emerging markets economist, rates & currency strategist with 15 years experience. He has written extensively on EU membership and is now an independent commentator.

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