BARCLAYS: Markets are potentially misjudging the EU referendum is 3 key ways

Britons get to vote by the end of 2017 over whether the UK should leave or stay part of European Union.

While the potential impact of a Brexit — Britain leaving the EU — has been well documented over the past year or so, Philippe Gudin and the rest of the research team at Barclays warned in a note this morning that “markets may misjudge the UK’s referendum on EU membership in three dimensions.”

Barclays put it simply that these are the areas where markets are potentially underestimating the impact the EU referendum can have on the rest of the 28 nation bloc:

1) The breadth of its potential impact as a broader European or global risk.

2) The likelihood of a ‘Leave’ vote, particularly the later the date of the referendum.

3) The likely timing of the referendum and the importance of risk events that will precede it.

Barclays also added that there are two also two areas that are “underappreciated” by the markets:

1) It is a European issue, and hence of global importance, not just a ‘UK’ or ‘GBP’ issue.

2) Its outcome is driven by political economy, not just economic impact.

So in other words, markets are a little bit blasé when it comes to how the EU referendum could effect the wider EU markets even in just the run up of vote and regardless of the outcome. Specifically, in foreign exchange, the EU referendum will not just impact the British pound — other EU currencies and currency baskets will be rocked too.

In January 2014, UK Prime Minister David Cameron and UK Chancellor George Osborne said the Tories were determined to deliver on the promise of a referendum but they would prefer to stay within the EU and negotiate “a better deal.”

The Conservative-led government has earmarked the EU referendum to take place before the end of 2017 but The Times’ political email briefing “Red Box”said the government wants to hold the referendum on June 23 this year.

Earlier this week Credit Suisse analysts Sonali Punhani and Neville Hill put together a weighty research note to try and answer the question of how the UK economy would be hit in the event of a Brexit.

Here’s a quote from the report (emphasis ours):

Overall, the vote to leave the EU would entail an immediate and simultaneous economic and financial shock for the UK. We are likely to see an immediate contraction in GDP, which can be seen as a front-loading of the fall in UK national income that leaving the EU would imply for the UK.

In the medium term, we expect it to be negative for both UK demand and supply implying a weaker GDP growth path. The recovery from the snap recession is likely to be more muted,making the GDP level post leaving meaningfully lower than if the UK votes to stay.

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