After two days of lengthy and intensive negotiations, UK Prime Minister David Cameron returned from Brussels with a new settlement, having secured “special status” for Britain within the European Union. This achievement should improve somewhat the chances that the British people will vote in favor of remaining in the EU in a national referendum now scheduled for June 23rd. But the vote for or against “Brexit” still looks likely to be close, as euroskeptic views are widespread in Britain. Six of Cameron’s cabinet ministers, along with the popular London mayor, Boris Johnson, have indicated they will come out for leaving the EU. Cameron suspended “collective cabinet responsibility over Europe,” which means each minister is free to publically support his or her personal views on the issue. Referring to those ministers supporting Brexit, Cameron remarked that “All they are offering is risk at a time of uncertainty” and that “Leaving Europe would be a threat to our economy and national security.”
Last week’s negotiations were difficult, as Cameron’s demands were met with strong opposition from various EU governments. In the end compromises were reached, with Britain’s EU partners clearly motivated by a strong desire to have Britain remain in the EU. The UK already has a considerable degree of “special status” in that it is not part of the eurozone and as such maintains its own national currency, the pound sterling; its own independent central bank, the Bank of England; and its own monetary policy. Also it did not join the Schengen border-free travel area and has been able to opt out of a number of other agreements. No wonder that other EU members resisted what they saw as Britain’s seeking a more “a la carte Europe.” In the end Britain achieved more than many thought was possible.
An important political result of the “new settlement” is that Britain is exempted from the “ever closer union” language found in EU treaties. This language means that Britain is “not committed to future political integration.” Future treaties will include language to this effect.
What may prove to be the most important part of the agreement are a set of principles, including nondiscrimination, and legal guidelines that seek to define areas of responsibility between the Bank of England and the EU’s new financial regulators. France’s President François Hollande and Cameron negotiated on the complex issues involved through most of Thursday night. While many legal uncertainties remain, the results should be welcomed by the City of London. The UK’s financial sector has the most to lose should Brexit occur.
Another part of the agreement was a partial victory for Cameron, an “emergency brake” that will permit Britain to restrict in-work benefits for EU migrants for four years under a program that will run for seven years. He wanted a four-year ban, but a brake as an emergency measure proved to be more politically acceptable to the other EU members. Under this system a country will have to apply to the EU to limit the access of EU workers arriving over the next seven years to non-contributory in-work benefits for a total period of up to four years.
Now the action moves to Britain as the debate on the June referendum intensifies. The continuing uncertainty regarding the outcome is likely to remain a headwind for financial markets and the currency. City of London investment banks are forecasting that, should Britain vote to leave the EU, the pound sterling could tumble from 10% to 20%. Others suggest that Brexit, if it happened, could lead to a breaking apart of the EU, a development that would have significant risks for national security as well as for financial and economic stability. While recognizing that the risks are high, we continue to consider a positive vote for Britain remaining in the EU as the most likely outcome.
Bill Witherell, Chief Global Economist.