There have been sharp falls in sterling exchange rate recently, and a significant increase in risk reversal in the option market since the announcement of the EU referendum date. Political bickering in the UK is expected to set stage for notable market moves as we approach the June EU referendum.
London - The June 23 EU referendum will reveal British people's view on their country's future position within the European Union (EU). The outcome of the plebiscite will have significant economic and political consequences not only on the UK or the rest of the Europe, but globally, too.
How justified is the 'Brexit' panic, which intensified after such like London Mayor Boris Johnson announced last week his decision to campaign for 'Vote Leave', an anti-EU group?
First of all, referendums in the UK are not legally binding due to the constitutional principle of parliamentary sovereignty. So even though people vote for an exit, the parliament does not necessarily have to abide by the referendum's outcome.
Boris the EU dodger
Second, majority of polls have so far been showing more support for the UK remaining in the common bloc. Even though this may shift more towards the 'leavers' after the arrival of 'legally blond' Mayor, we all know how misleading those polls can be. Just remember the last year's pre-election polls, and how they failed to correctly reflect political mood among the UK voters.
Boris Johnson is considered as one the most charismatic politicians in the UK, and some view his stance as a significantly strong asset for 'Brexit' campaigners.
But there are also highly respected political commentators, and Westminster aficionados, who see Johnson as a mere clown, and political opportunist eager to stride forward to ascent to prime ministerial chair after Prime Minister David Cameron leaves the office in 2020. Johnson also knows very well that his staunch anti-EU views will be more than welcome among the influential Conservative backbenchers in Westminster - those whose vote in 2020 may help him reach his career's climax.
Divide and conquer
Even though a possible exit from the EU could have significant short-term negative impact on the economy, a much bigger risk to European and global stability may come in form of a political disintegration of the West, and Europe's highly increased vulnerability to the threats spilling over from the East recently.
In his invitation letter to the European leaders ahead of the February EU summit, the EU Council President Donald Tusk wrote that the UK exiting from the European common bloc "would be a defeat both for the UK and the European Union, but a geopolitical victory for those who seek to divide us."
A week later, Cameron named those 'who seek to divide us': "The challenges facing the West today are genuinely threatening. Putin’s aggression in the east. Islamist extremism in the south. In my view this is no time to divide the west," he said during his speech in Westminster on Monday this week.
It's the economy, stupid
'Brexit' fears have sent sterling plunging sharply against the US dollar this week. Investment intentions have eased, and the credit rating firms have recently warned against negative outlook in case Britain decides to opt out of the EU.
This week on Tuesday, the bosses of the FTSE 100 companies expressed their support for the UK prime minister and his effort to keep the UK in a reformed EU. Some of the largest companies' chiefs refrained from showing any public support due to their concerns about losing costumers on the back of their stance to this highly sensitive issue.
Even though the Bank of England (BoE) normally refrains from giving any judgment on the outcome of the EU referendum, or any political event, Governor Mark Carney said in October last year that Britain's membership in the common bloc reinforced the dynamism of the UK economy, enhanced labor market productivity, and sped up the pace of new business creation. At the same time Carney warned the membership increased risks of shocks and detrimental spillovers. Carney's speech coincided with a comprehensive study the BoE published the same month.
The EU as an institution has its own flaws. It is abundant with detrimental bureaucracy and red tape. But the remedy for this illness is not the disintegration of the common bloc, but the reforms – those reforms that Cameron sought to push through in Brussels last week, and partly succeeded.
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