Will Britain leave the European Union?

The nearest run thing you ever saw in your life: Arthur Wellesley, first Duke of Wellington, 18 June 1815.

The Politics of Brexit

There have been only four Australian-style referendums in British history. Three of them have been during the leadership of David Cameron. The first referendum that Cameron introduced was on 5 May 2011. This was a referendum on the “alternative vote”. As part of his Coalition agreement with the Liberal Democrats, Cameron had agreed to hold a referendum of the introduction of a preferential voting system. In the UK this is referred to as the ‘alternative vote’ (AV). This referendum was defeated with only 32.1% in favour and 67.9% against. Importantly, this referendum was only defeated through the cooperation of the governing Conservative Party and the Labour Party.

The second referendum that Cameron introduced was on 15 September 2014. This was a referendum on Scottish Independence. This followed an agreement between the Scottish and United Kingdom governments enacted in the Scottish Independence Referendum Act 2013. This referendum was defeated with 44.7% in favour and 55.3% against. Importantly, this referendum was only defeated through the co-operation of the governing Conservative Party and the Labour Party.

The third referendum that Cameron has introduced is to be held on 23 June 2016. This is a referendum on whether Great Britain should leave the European Union. Britain leaving the European Union is called ‘Brexit’. The problem at the moment is that the governing Conservative Party is divided over the issue of leaving the European Union. Perhaps the most popular politician in the whole of Great Britain is Boris Johnson, the conservative Mayor of London. Boris Johnson has declared himself in favour of leaving the European Union. The leader of the British Labour Party following the 2015 election is Jeremy Corbyn. Jeremy Corbyn is known as a ‘personal Euro sceptic’.

Polls show that the issue is extremely close. Polls published on 1 April 2016 (Financial Times Poll of Polls) suggest that some 45% of the electorate favour staying in the European Union. Some 42% want to leave the European Union. Some 13% are currently undecided. As time goes by, the undecided seem to be drifting towards wanting to leave. Even if a strategy for cooperation between the Conservative Party and the Labour Party can soon be found, defeating the proposition of leaving the European Union could be ‘the nearest run thing you ever saw in your life’.

Chart 1: The Impact of Brexit on Real GDP and GDP Per Capital in 2030 Source: Bloomberg

Britain in the European Union

As the British economy emerged from the destruction of World War II, it became apparent that the fastest growth in its international trade was no longer within the old British Empire. Instead, Britain’s most rapidly growing market was Germany and other European countries rebuilding themselves from World War II.

In 1957, in the Treaty of Rome, six countries including West Germany, France, Italy, The Netherlands, Luxemburg and Belgium formed the initial group of what was to become known as the European Economic Community (EEC). This was referred to in Britain as ‘The Common Market’.

Britain was late to the party. It hesitated because of its existing trade agreements with countries in the British Commonwealth. There was another problem. France saw the EEC as a way that it could exert power over Germany in the post war world. It did not want Britain getting in its way.