Markets Nervous Ahead Of Britain Vote On EU Exit, Fear Recession

With Britain on the brink of agreeing a deal over the renegotiated terms of its European Union (EU) membership at a meeting on February 18th and 19th, clearing the way for a referendum in June, markets are already nervous about possible consequences that might trail Britain exiting the EU and analysts fear there  might be recession backlash. 
Economists expect that Brexit would have substantial consequences. Citigroup thinks the cumulative effect will be to lower GDP growth by four per cent over three years. Berenberg, the German bank, thinks that the hit to consumer and business confidence could even trigger a recession. 
Both Goldman Sachs and Marc Chandler, currency strategist at Brown Brothers Harriman, think the pound could fall to $1.15-$1.20 in the face of capital flight. This would have an impact on inflation and monetary policy. While Eurosceptics may dismiss these concerns as scaremongering, most strategists seem to think the consequences of Brexit would be negative; that probably means more volatility as the referendum date approaches, particularly if the polls continue to be close.
But since investors dislike uncertainty, the mere speculation that Britain might exit the EU has already led to market nervousness. The pound has been very weak so far this year, particularly on days when opinion polls indicate the Brexit side may be ahead. This weakness is not just down to reduced expectations of rate increases by the Bank of England; the pound has fallen against the euro, as well as the dollar, even though the European Central Bank has indicated that it will probably ease monetary policy.
A few months ago, they were pretty confident that Britain would vote to remain in the EU but they are less certain now; the bookmakers Paddy Power give odds of Brexit of around a third. Uncertainty about the outlook for the economy would only escalate after a vote to leave. That would involve a complete renegotiation of Britain’s relationship with the EU, a process that might take two years. Advocates of Brexit argue that, since the rest of the EU has a trade surplus with Britain, the authorities in Brussels would have every incentive to ensure the continued flow of goods and services. But opponents point out that the EU might be inclined to impose tough terms, in order to dissuade other countries from following the same route. Norway and Switzerland have trade agreements with the EU but have to allow free movement of labour in exchange; if the point of Brexit is to restrict immigration, it is hard to see Britain agreeing a similar deal.  
Another worry is that foreign companies might be less inclined to invest in Britain if it leaves the EU, and has more limited access to the single market. Britain has attractions as an English-speaking base within the EU but Ireland is a ready alternative, with low taxes on profits. A particular issue is the role of Britain’s financial services sector. London is the effective financial centre of Europe; other countries might not be keen for that situation to persist with Britain outside the EU. In particular, the euro zone might insist that clearing of euro-denominated transactions be moved from London; HSBC has indicated it may need to move 1,000 staff to the continent if Britain leaves. Then there is the issue of Scotland; if Scots vote to stay in the EU and the rest of Britain opts to leave, then demands for Scottish independence will gather further momentum.

EU Has No Plan B Says Moscovici 

The European Commission has no plan “B” in place if Britain votes to leave the European Union, and the executive body will stay on the sidelines of the referendum campaign, European Union Finance Commissioner Pierre Moscovici said on Sunday.
Britons will vote June 23 on whether to remain a member of the EU. Asked in an interview on France 5 television whether the EU was planning what to do if they vote to leave, Moscovici said, “No, no and no, there is no plan ‘B’. It doesn’t help us in any way to envisage disaster scenarios.”
“The day we start talking about a plan `B’ is the day we no longer believe in our plan ‘A’. I have just one plan. The United Kingdom in a united Europe,” Moscovici said.
Moscovici said the EU’s executive will not take part in the referendum campaign, saying any involvement could backfire.
“For me, it is prudent not to go campaign and try to impose a choice on a sovereign people. Referendums are dangerous, especially for Europe,” he said.
Asked about the campaign that has kicked off with London Mayor Boris Johnson joining the call for Britain to quit the EU, Moscovici said the move could hurt Johnson’s image.
“It will not be easy for Mr. Johnson to end up next to Nigel Farage and some other clowns and populists,” Moscovici said.
He said Europe was facing existential challenges, such as the Greek debt crisis and the current refugee crisis, but that the solutions should be at the European level.
“It is a lot of crises, but these are European problems, but they are also international. The idea that you could find national solutions to these problems which are international is a lie,” he said.
“If there was a vote for Great Britain to leave the EU, it will be an inversion of the historic dynamic of the past years which has seen more countries join the bloc.” Moscovici said.

UK’s Cameron Keen On EU deal After London Mayor Backs Brexit

Prime Minister David Cameron will try to sell his case for Britain staying in the European Union to parliament on Monday facing hostility from his own lawmakers and a plunging pound after London’s mayor threw his support behind the exit campaign.
Boris Johnson, one of Britain’s most popular politicians, announced on Sunday he supported leaving the bloc, dealing a blow to Cameron who vowed to campaign to stay in after striking a deal to reform Britain’s ties with the EU last week.
The mayor’s announcement, seen as increasing the chance of a British EU exit by giving the ‘leave’ campaign a much-needed figurehead, pushed sterling toward its biggest loss in almost six years against the dollar on Monday. Government bond prices also fell.
Cameron shrugged off Johnson’s statement, saying the issue of EU membership cut through usual party political lines.
“The prime minister has been clear all along there will be different views on different sides of the argument,” his spokeswoman said.
“Our message to everyone — bearing in mind that it is people up and down the country that will have a vote in this referendum rather than just one individual — is that we want Britain to have the best of both worlds.”
Johnson, who has held his post as London mayor since 2008, defended his decision to go against his sometime ally, saying those who suggested Britain could not thrive outside the EU were the same people who wanted the country to make the “catastrophic mistake” of joining the euro single currency.
“There are people who don’t think that Britain could stand on her very own two feet and all the rest of it. I have to say I think that is profoundly wrong,” Johnson told the London Assembly, the elected body which holds the mayor to account.
His decision to lobby against Cameron was welcomed by leaders of the ‘leave’ campaign, which has been dogged by splits between factions and lacked a uniting political figure to spread its message that Britain needs to regain its sovereignty.
“I’m delighted that he’s come out for leaving the European Union,” former finance minister and chairman of the Vote Leave campaign Nigel Lawson told BBC radio. “He is a superb campaigner so he’s a great asset.”
Odds of a British exit rose to a 33 percent chance from about 29 percent after his announcement, according to bookmakers.
While Cameron’s most senior cabinet colleagues have stuck with him, six others have said they will campaign for an exit, highlighting the deep divide in his Conservative Party over Europe dating back to Margaret Thatcher.
The scale of divisions should become clear later on Monday when Cameron, who hailed Friday’s agreement as handing Britain a special status in the bloc, is due to make a statement to lawmakers.
But while many Conservatives may have turned against the deal, the prime minister was due to receive a boost from business leaders who were set to sign a letter saying the country would be better off in the bloc. Several corporate sources told Reuters the letter would be published on Tuesday.
Many businesses are keen to end the uncertainty that has weighed on markets and companies scrambling to come up with a ‘plan B’ if Britain votes to leave the bloc — a move that would transform the country’s role in world trade.
Cameron’s bid to remain in the EU also has the support of much of London’s financial district as well as most of the Labour Party, major trade unions, international allies and Scottish nationalists.
Johnson, 51, a political showman whose light-hearted wit masks a fierce ambition, said on Sunday he did not want to go against the prime minister but believed the EU project was in danger of getting out of democratic control.
That led some commentators to question whether his stance is a designed to attract widespread eurosceptic support among Conservatives in a bid to succeed Cameron, who has said he will step down before the next election in 2020.
A British exit from the EU would rock the Union — already shaken by differences over migration and the future of the euro zone — by ripping away its second-largest economy, one of its top two military powers and by far its richest financial centre.
Pro-Europeans, including former Prime Ministers Tony Blair and John Major, have warned that an exit could also trigger the break-up of the United Kingdom by prompting another Scottish independence vote.
A poll published before Johnson’s move showed the “in” campaign with a lead of 15 percentage points. However, polls have fluctuated widely and surveys suggest about a fifth of voters are undecided.
A third of voters said Johnson would be important in helping them decide which way to vote, an Ipsos MORI poll showed.
“The big battalions of the argument are unquestionably ranged against people like me: We are portrayed as crazy cranks and all the rest of it,” Johnson said in announcing his position. “I don’t mind, I happen to think that I’m right.”

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