Worrying about a “Brexit” — or, the UK leaving the European Union — hasn’t really gone mainstream yet.
But a team of Barclays analysts thinks that people are seriously underestimating the UK’s referendum vote on EU membership.
And whatever the UK ultimately chooses could have serious consequences for the rest of Europe.
“In our view, markets are overlooking two crucial aspects of the UK referendum on EU membership that is likely to occur this year and which must take place by end 2017,” writes Barclays’ Marvin Barth.
“First, the referendum is generally seen as a ‘UK’ or ‘GBP’ issue, when it is better seen as a European issue,” he argues. “Second, it has largely been viewed as an economic issue, but should best be analysed through the lens of political economy.”
The key thing about the UK referendum as a political economy issue is that it’s tied to larger European concerns with immigration.
As Barth explains:
Immigration is set to be the main ‘wild-card’ in driving the referendum’s outcome and, with procedural constraints, the timing of its occurrence. Because immigration also is the top political issue in the rest of Europe and because a UK Brexit would set an unwelcome precedent, we believe that the implications for the European Union (EU) and the European Monetary Union (EMU) are at least as important as for the UK. In our view, this makes the referendum among the most significant global risk events of the year.
Notably, the British have increasingly considered immigration to be a super important issue.
The chart to the right shows a time series of UK attitudes on the six “most important issues” facing the country since mid-2013. “Immigration” shot up significantly as the European migrant crisis intensified last year.
“It is also notable that among the top six concerns are ‘welfare,’ ‘housing,’ and ‘Europe,’ all issues that are popularly associated with immigration, the last two of which also jumped higher over the summer,” observes Barth.
Of course the UK isn’t the only country that’s currently debating the migration crisis. Barth even cited data showing that 20 out of the 28 EU members reported that it was the “most important issue facing the EU.”
“For this reason, we believe that the UK vote to exit the EU may have more of a political and institutional fallout in the rest of Europe than in the UK, implying significant risks to EU and EMU stability,” argues Barth.
As for what exactly these “significant risks” are, Barth writes that a Brexit could inspire other European countries to think about leaving the EU whenever things got tough (emphasis ours):
A UK exit would set an unwelcome precedent for countries to leave the EU whenever domestic priorities conflict, and would do so at a time when political risks and potential for sovereign-EU confrontation already high. Simultaneously the UK would present Continental opponents of immigration with a politically potent example (and threat) of how to deal with one of the thorniest and most emotionally charged trans-national issues confronting European voters: immigration.
Although this may seem somewhat extreme, it’s worth nothing that last year geopolitical analysts warned that something similar could happen following Grexit. And that was before the migration crisis turned Europe upside-down.
he precedent of a member state leaving the union would open Pandora’s box: it could be used as a political argument by populist and extremely parties in several countries, both from the right and the left, to push for an EU exit, including for some euro area countries,” adds Barth.
“A Finnish lawmaker already is organising a referendum on EMU membership, Marine Le Pen’s far-right movement continues to strengthen ahead of France’s 2017 presidential election, and Greece exit risks … may return in the event of a tense first review,” he continues.
“Such events would certainly revive the ‘redenomination risk’ in the euro area.”
In short, get ready for that UK referendum on EU membership. It might just be the first domino to fall.