The UK faces half a decade of limbo-land. David Cameron’s promise of an in/out referendum on Britain’s membership of the European Union by the end-2017— provided he wins the next election – means an extremely long period of uncertainty for business. That will be bad for investment. It also heightens the risk of an eventual “Brexit” – a British exit from Europe – which would be even worse for the economy.
An in/out referendum is neither desirable nor necessary. Of course, if the UK was planning to hand further powers to Brussels, it would be a good idea to get the people’s consent. But no leading British politician of either left or right is contemplating such a transfer of sovereignty. Cameron has been driven to promise such a referendum because of the pressure from eurosceptics within his Conservative party as well as fears that UKIP, a fringe political entity which wants Britain to leave the EU, could take votes away from the Tories in the 2015 election.
If Cameron had been promising a quick referendum, the uncertainty for business would be manageable. But he has decided that he first wants to see if he can negotiate a “new settlement” based on a competitive, flexible and fair single market. That’s why the referendum could be nearly five years away.
Cameron may come to regret this long period of limbo-land. Businesses from Britain and overseas will be reluctant to invest so long as there is uncertainty over the UK’s membership of the EU which accounts for half its trade. Less investment could, in turn, make it harder for the economy to pull out of what could be a triple-dip recession. There’s even a tail risk that financial markets might now look at Britain’s still-high deficit more critically and push up gilt yields.
The long-term risk of a “Brexit” has also gone up. Cameron says he would campaign with heart and soul to stay in the EU if he can renegotiate Britain’s relationship in the way that he wants. But he may not succeed in such a negotiation. And, even if he does, the British people may still vote to pull out of the EU – especially since the referendum would be held in the middle of the next parliament, a time when incumbent governments are typically unpopular.