Brexit what the implications ?

A new deal

UK Prime Minister David Cameron returned from his negotiations with other EU leaders last Friday "clutching a piece of paper", which he hopes will ensure Britain's continued membership of the European Community. However UK politicians have returned, flushed with success, from key European summits in the past. Only to find that the terms of the agreements they had reached were not worth the paper they were written on.

True to his word Mr Cameron held a cabinet meeting immediately on his return and his ministers agreed to hold a referendum, on the 23 June 2016. Mr Cameron has allowed ministers to vote with their conscious and campaign as they feel appropriate, whether in or out. In effect the battle lines have now been drawn, with the outgoing Mayor of London (and according to some, a possible successor to David Cameron), Boris Johnson joining the out campaign.

So what has Mr Cameron negotiated?

What are the out campaigns objections to the deal and to continued membership of the EU?

What are the political, economic and market implications of this referendum process?

A special case?

David Cameron has continued in the footsteps of a long line of UK leaders that have sought to extract favourable terms for the UK from Brussels. Britain has to date remained outside of the European single currency and has sought to protect what it sees as its own vital self-interests. Mr Cameron has negotiated in a similar vein and the key points of the agreement he has reached are as follows.

Migrant Welfare Payments: The UK will have the ability to limit access to "in work benefits" (tax credits and housing benefits) for EU migrant workers during their first four years in the UK. The so called Emergency Brake, however this brake can only be applied for a maximum period of seven years.

Child Benefits: Child benefits paid to migrant workers whose children are overseas will be recalculated to reflect the cost of living in their home country.

The Pound and the Eurozone: Britain can retain its own currency whilst in Europe without fear of discrimination and any money that the UK spends on Eurozone bailouts would be reimbursed.

The City Of London: Safeguards will be put in place for the UK's large financial services industry to prevent it being subject to Eurozone regulations.

Sovereignty: The UK will not be forced into an ever closer union of EU states. This commitment is to be incorporated into an EU treaty change. National parliaments will be able to band together to block EU regulations, if 55% of EU member parliaments vote against that legislation.

There are also some concessions on restrictions to freedom of movement, about competiveness and strengthening the single market.Though Mr Cameron has come away with a deal, it is not the one he wanted. He has had to give ground in several key areas such as returning powers from Brussels to the UK and the practicalities of the agreement have yet to be agreed / put in place.

What do the out campaigns want?

The out campaign is to some extent fragmented with up to three separate groups canvasing for a UK exit from the EU. Though they have different agendas they share some common beliefs, which are: That the EU hampers the UK economy through a combination of excessive rule making and the billions of pounds a year in membership fees that are levied on the UK. From which out campaigners perceive little or no return. The Out campaign would also like to see Britain regain control of its borders, so as to be able to reduce the number of people coming into the UK to work.

They also object to the prospect of an ever closer federalised Europe, modelled on the United States. Within which UK sovereignty would be sacrificed. The Out campaigns believe that Britain can trade profitably from outside of the EU and that the rest of the worlds markets and trade can more than compensate, for not being part of the single European market. It's interesting to note that the in or out question cuts across party lines and the whole political spectrum, making for some interesting and unlikely bedfellows.

When is the referendum and what is the question?

The referendum will be held on June 23 2016 leaving four months for UK voters to make up their minds as to how they will vote when asked,

"Should the United Kingdom remain a member of the European Union or leave the European Union?"

This choice of words is the recommendation of the UK Electoral Commission, who proposed this wording to modify an earlier version of the question, which was thought to favour the in campaign. It's possible that we could see further amendments or redrafting of the question before the vote in late June.

Campaigning will begin in earnest this week, indeed David Cameron will make a statement on Monday afternoon (22 Feb.) The success or otherwise of the in campaign will likely become a vote on the prime ministers political future. It would be impossible to imagine Mr Cameron remaining in power should the out campaign win the day and of course Mr Cameron has already said that he would not seek a third term as the conservative party leader.

What do the Markets want?

The markets and businesses are as much divided on this issue as anyone else, with various parties coming down on either side of the arguments. But whichever side of the debate they find themselves on market participants want to see two things and they are stability and certainty. However these commodities are likely to be in very short supply in the run up to the vote.

The UK public is broadly divided down the middle, when we look at those who already have a strong feeling on the issue. The key demographic will be those that "don't know" a group which equates to some 10 percent or more of the populous.

However the variables extend well beyond the simple in out question, because if the out campaigns are successful (and let's not forget that an anti-European party, UKIP, won 13% of the vote at last year's UK general election) then there are ramifications for the continuance of the UK as a whole.

We need to talk about Scotland

The Scottish National Party or SNP, led by the charismatic Nicola Sturgeon, are committed to Scotland remaining in Europe, regardless of the outcome of the UK referendum. Raising the possibility of Scotland trying to gain its own independence once again and in turn to the breakup of the UK, as a whole.

The prospect of trying to negotiate our exit from the EU whilst at the same time trying to placate a pro Europe, pro-independence Scottish Government is not an appealing one. This goes some way to explaining the renewed weakness in the value of the pound sterling. Remember the pound weakened sharply ahead of 2014 Scottish Independence vote, when it seemed that the independence movement would carry the day.

This time round it seems likely that Sterling will be sensitive to the success of the out campaign. Because that success implies not only a change from the status quo but also the possibility of a UK breakup. The Bank of England will, in these circumstances, likely keep interest rates on hold and liquidity plentiful. Again adding to the downward pressure on the UK currency.

Chart shows Sterling Index: The pounds trade weighted basket performance

As we can see from the chart above Sterling is approaching some key supports, when measured in its trade weighted basket. The area around 82 looks important and should this be broken, then we can retest back to 79.80 a level we have not visited since December 2013.

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