The document discusses the debate around "Brexit", or Britain's potential exit from the European Union. It notes that British Prime Minister David Cameron promised a referendum on EU membership by 2017. Figuring out how Britons will vote is difficult, as there are arguments on both sides. Leaving could allow Britain more independence but also disrupt trade and economic ties. The outcome of the referendum is uncertain and will impact Britain, the EU, and the global economy.

1. 35The Global Analyst | MARCH 2016 |
INTERNATIONAL
‘BREXIT’
Will It or Won’t It: The Big Question
Before Britain!
Figuring out these days (early March 2016) what Britons will
actually vote on June 23rd is a sort of “Catch-22” game, although
the author of this article certainly hopes for and favors success
of the “Remaining with EU, it’s an advantage for UK” campaign.
- Dr. IVO PEZZUTO
Global Markets Analyst, Management Consultant, Economics and
Management Professor
Author of the Book “Predictable and Avoidable” ISTUD Business School and
Catholic University of the Sacred Heart. Milan, Italy

2. The Global Analyst | MARCH 201636 |
W
hen Britain’s
prime minister,
David Cameron,
promised in Janu-
ary 2013 to rene-
gotiate Britain’s membership in the
European Union (EU) and to hold a
referendum by 2017 on the country’s
membership in the union, in order to
be re-elected, he probably couldn’t
envision the current turbulent and
highly uncertain global economic
and geopolitical climate or the dan-
gerous implications of a potential
“Brexit” (a fancy term meaning Brit-
ain’s exit from the EU) scenario on
the UK, Eurozone, and the global
economy.
In fact, prime minister Cameron,
who is the leader of the Tories (con-
servative party) and a strong advo-
cate of the benefits of continued EU
membership, back in 2013 proposed
to renegotiate the deal with the Eu-
ropean Union in order to defend the
interests of Britain, reduce the per-
ceived growing power of Brussels
over member states, and to reduce
the pressure of the growing Euro-
skeptic fringes in the conservative
party reclaiming sovereignty, as
well as, in other parties such as the
UK Independence Party (UKIP).
Britain has been for a long time in
a state of angst with the European
Union due to the perceived view by
Euro-skeptics that the country has
ultimately surrendered to the EU
power, inefficiency, technocracy,
and overregulation (i.e., agriculture,
fisheries, trade, and subsidies). More
recently the Euro-skeptics also criti-
cized the EU for what they perceive
to be a failure in the management
of the immigration crisis (i.e., refu-
gee crisis) which has led to politi-
cal tensions among a number of EU
countries over the suspension of the
Schengen agreement (which allows
free movement of labor in the EU).
Brexiters want to restore British con-
trol of the frontiers by stopping free
movement of people.
With EU, it’s Advantage UK
In spite of the uneasy relationship
between Britain and the European
Union, British trade with other EU
countries has risen rapidly over the
past decades, and today it accounts
for approximately 45% to 50% of its
total international trade, whereas EU
exports to Britain account only for a
small portion of their international
trade activities (approximately 6%
to 7%), according to the IMF (IMF,
2014). Given the status of the EU as
the world’s biggest trade zone, there
are concerns among analysts, econo-
mists, and political leaders about the
potential negative impact on Britain’s
trade, the EU and the global markets
of a “Brexit” scenario. Some analysts
predict that in case Britain leaves the
EU, British exports to the EU coun-
tries might become more expensive
due to higher tariffs and trade barri-
ers, red tape, or potential restrictions
for exports.
Furthermore, according to “Britain
Stronger in Europe”, Britain current-
ly pays the EU £340 a year per house-
hold while receiving an estimated
£3000 yearly benefits of membership,
that is approximately £10 billion a
year of reduced contributions to
EU budget (Economist, 2016). Fur-
thermore, with the exit from the EU,
Britain will lose full access to a single
market that serves 500 million people
in 28 countries and it will probably
face also some kind of trade retali-
ations.International firms, as well
as, some large ones based in Britain
might decide to locate their offices
somewhere in the EU to benefit of
the access to the single market in case
Britain decides to leave the 28-mem-
ber bloc.
Based on the OECD research, Britain
seems to be one of the least regulated
countries of the EU, having received
many concessions over the years
from Brussels on labor and prod-
uct-market regulations, and on the
regulation of its dominant financial
industry (OECD, 2013). Of course,
since Britain is a leading world’s
economy and London is a leading
global financial district, even the UE
might have a significant political and
economic drawback if Britain de-
cides to leave the union.
Those who are in favor of a “Brexit”
solution argue that it would be ben-
eficial for Britain to negotiate a new
relationship with the EU, without
being bound by rigid EU laws on
David Cameron’s campaign to renegotiate the terms of Britain’s membership of
the European Union has not got off to a good start.
‘BREXIT’

3. 37The Global Analyst | MARCH 2016 |
employment, health, immigration,
welfare, and safety.They also do not
want to be locked in, what they per-
ceive to be, a trade block that is not
growing and whose future scenario
is highly uncertain (i.e., the Euro-
zone just dips again into a very low
headline inflation environment due
to a number of concurrent national
and global factors such as China’s
slowdown, oil oversupply and the
subsequent fall in oil and commod-
ity prices across the globe, speed of
technological innovations, automa-
tion, robotics, increased productiv-
ity, changing demographics, stock
markets sell-offs, reduced capital
expenditures, tighter fiscal policies,
incomplete structural reforms, etc).
British Euro-skeptics also hope that
their country may gain additional
competitive advantages as a global
economic leader, securing new trade
deals with other important leading,
dynamic, and high-growth potential
economies such as North American
countries, India, China, and other
Asian markets.
After all, London is already a global
financial district and a foreign ex-
change capital, and it is well-known
that the city is trying to develop
closer ties with China and to become
a major hub for offshore renminbi
trading, thus making Hong Kong
and London the two big centers for
offshore renminbi. Britain also seems
to be a strong endorser of China’s
Market Economy status recognition
at the end of 2016 whereas a number
of EU countries are concerned about
the potential “dumping” effects (i.e.,
steel industry, etc.) that this recogni-
tion might cause to a number of their
industries if this status is granted as
soon as the end of 2016.
Furthermore, Britain’s trade deals
with the EU market and with other
countries are currently facilitated by
the EU trading and institutional rela-
tionships, thus it is still unclear what
kind of bilateral trade agreements
Britain will have with other coun-
tries in the event of “Brexit” scenar-
io, or how long will it take to set up
new agreements. Bigger companies
which are more exposed to interna-
tional trade seem to be more con-
cerned about the impact of a “Brexit”
scenario. All these factors, of course,
add uncertainty in the financial mar-
kets and do not provide long-term
visibility and security to firms and
investors, thus causing reduction
in capital expenditures, “flight-to-
quality” in the markets towards safe
assets, and increased volatility in the
currency markets.
The ideal solution, for the advocates
of the “leave” campaign (i.e., “Brex-
it”), would be a sort of illusionary
“best of both worlds” solution in
which the EU negotiates a special
deal for Britain that allows the coun-
try to retain free trade with the EU
but avoids all the disadvantages of
being a member state of the union.
This means that ideally they expect
to become a sort of Switzerland or
Singapore, with a greater indepen-
dence and flexibility, full regulatory
sovereignty, strengthened compara-
tive advantages versus the other EU
countries, thus avoiding unfavorable
alternative solutions such as joining
the European Economic Area; es-
tablishing a customs union with the
EU; or simply relying on the normal
World Trade Organization (WTO)
rules for international trade. Brex-
iters are probably also hoping to de-
velop a stronger special relationship
with the USA through the TTIP (the
Transatlantic Trade and Investment
Partnership) in order to play a lead-
ing role in Europe within the new
international partnership but also to
boost unique trade opportunities for
Britain.
The EU is the world largest eco-
nomic zone (single market) and with
the support of the British political
clout and its powerful and influ-
ential financial district, it might re-
main a leading global player in the
future if all member states are able
to strengthen their integration and
their synergic economic and social
resources and capabilities. But it is
probably the political, social, and
economic goal of achieving increased
integration among the EU member
states that frightens Brexiters the
most.
In a fast-paced, globalized, and
highly competitive business environ-
ment, a well-integrated Britain in the
European Union would guarantee
enhanced stability, prosperity, and
security to itself and to the rest of the
union. It does not make much sense,
for example, to envision a highly in-
tegrated and world-class European
banking union and European capital
markets without the strategic mem-
bership of Britain.
A “Brexit” scenario might probably
lead to more fragmented financial
markets in Europe rather than more
integrated capital markets and bank-
ing union, thus negatively influenc-
ing the perception of financial stabil-
ity in the single market banking and
financial services industry. Brexiters
are also probably envisioning the
benefits of an even stronger leading
role for Britain in Europe and in the
global financial markets (such as de-
rivatives clearing services, foreign
exchange markets, derivatives mar-
kets, fixed income markets) through
the new international alliances (like
the Transatlantic Trade and Invest-
ment Partnership) and partnerships
‘BREXIT’

4. The Global Analyst | MARCH 201638 |
with European leading countries
(such as Germany - Deutsche Börse),
and with non-EU ones, but without
the restrictions of the EU regulations.
Thus, it is quite likely that a portion
of Brexiters are probably also mem-
bers of the middle class, small busi-
ness community, and educated and
qualified professionals working in
the City, who do not tolerate the ex-
cessive interference of the EU regula-
tion in the UK financial industry, and
in particular, on sensitive topics for
the City such as the one concerning
the cap on banking bonuses (The EU
set the rules in a bid to curb excessive
risk-taking after the financial crisis).
Many consequences
For a number of analysts and observ-
ers, Britain’s decision to leave the
EU might have internal and external
negative consequences. The internal
ones would be related to a higher
level of uncertainty around the new
international trade agreements or
what someone calls “the leap in the
unknown” (that is, the uncertainty
over Britain’s new relationship with
the EU which might discourage in-
vestments, and in particular foreign
direct investments, or the issuance
of bonds).There are also fears of a
potential economic slowdown due
to the exit of Britain from the EU
which might spur bad loans, impact
banks’ revenues, force financial firms
to raise additional capital, cut divi-
dends, penalize credit ratings,and
lead to higher bond yields. But “Brex-
it” might also lead to potential loss
of jobs in a number of industries, at
least for a while; higher currency vol-
atility and inflation; a potential shock
in the stock market, and geopolitical
risks (i.e., Scotland’s decision to stay
in the EU as well as Northern Ireland
and Wales).
What is more difficult and probably
more complex to assess at this point
is what would be the longer-term
economic consequences of a poten-
tial “Brexit” scenario.For example,
the potential serious consequences of
Britain and the EU countries slipping
back into recession or worse. Recent
‘BREXIT’
data already shows signs of deterio-
ration in the confidence of firms in
Britain. Markit’s Purchasing Manag-
ers Index showed that factories had
their worst month in almost three
years in February 2016, while the ser-
vices PMI dropped to 52.7 from 55.6.
A major external impact of a “Brexit”
decision, in a worst case scenario,
would be instead the political risk as-
sociated with a potential nationalist
and Euro-skeptics “spillover effect”
to other EU states which might lead
to a spike of anti-EU movements and
parties aiming to hold in their coun-
tries similar referendum on EU or on
their Eurozone membership. Politi-
cal turmoil is also on the rise in Eu-
rope and there are big pressures on
governments to move away from fis-
cal reforms.
Two worlds, one nation!
In Britain, like in other nations, there
seem to coexist two parallel worlds,
the one of the wealthy, highly edu-
cated, cosmopolitan, technologically
savvy, and internationally connected
white-collar workforces of the City,
who are pro-Europe and who appre-
ciate the value of global competitive-
ness and global value chains, and the
other one represented by less educat-
ed and skilled people who are afraid
that their jobs, security, welfare, and
incomes might be wiped out by dis-
ruptive technology, low-cost immi-
grants, unfair welfare benefits to for-
eigner workers, global competition,
unfriendly EU regulation (for the
British), and global economic shocks
(i.e., global slowdown and potential
global recession or stagnation).
Some may think of these people as
populist, uneducated, no global,
anti-EU and enemies of modernity
and innovation. Yet, one should also
remember that these people are the
ones who probably paid the highest
price of the 2008 global financial cri-
sis and its aftermath in terms of social
and economic costs due to the “Great
Recession”, the credit crunch, the
financial industry bail-out, and ‘de
facto’ bank nationalization by the UK
Treasury. From this perspective and
being aware of their structural social
weaknesses (i.e., poor education, low
competitiveness, and intrinsic fra-
gility), one might easily understand
why this vulnerable segment of the
British society might be more scared
than others about the risk of other
potential systemic crises, deep and
long global recessions, credit crunch,
secular stagnation, or unfit regula-
tions. After all the memories of the
2008 financial crisis, the Eurozone
debt crisis, and the threat of “Grexit”
are still alive and well in their minds.
If one also add to this analysis the
fact that since the global financial
crisis of 2008, UK and Germany,and
a few other economies, have become
a sort of goldmine for anyone in Eu-
rope seeking a good job or a career in
a more dynamic and vibrant econo-
my, due to the fact that most of the
other countries have been in deep re-

5. 39The Global Analyst | MARCH 2016 |
‘BREXIT’
cession for a number of years or sub-
ject to draconian austerity therapies,
then it is easier to have a better pic-
ture of what might be leading Britain
to its current painful dilemma about
staying or leaving the UE member-
ship.
What is changing Britons’ views
British are typically characterized
by their unique mix of pragmatic,
insular, and cosmopolitan identity
which makes them very interesting
and open-minded. Thus, the im-
pression of the author of this article
about the root causes of the “Brexit”
phenomenon is that British people
have not suddenly and collectively
turned into closed-minded and anti-
EU radicals or populists. Rather, it
is more likely that after a number
of years of growing uncertainty in a
turbulent and highly interconnected
global business and regulatory envi-
ronment and downward global pres-
sures on economic growth and infla-
tion, the more vulnerable segments
of the British society have amplified
their feeling of angst, distrust, and
frustration towards anyone (In the
UE and in UK) who do not primarily
secure their national interests.
The EU and British leaders should
probably pay closer attention to these
signs of discontent and frustration
since they might escalate in social
unrest in the long-term if unsatisfac-
tory conditions continue to persist in
the UK or other EU countries. The
policy makers should also pursue
radical and effective solutions to the
immigration crisis in order to avert
the fear of a potential flood of refu-
gees. They should stabilize economic
growth, the risk of new potential
banking crises, and boost consumer
confidence, capital investments and
consumption in the Eurozone and
EU economy in order to allay their
populations’ uncertainties and fears.
Furthermore, they should also co-
operate with other global partners
towards the resolution of the current
oil and commodity markets’ over-
supply and the geopolitical tensions
(OPEC and non-OPEC countries,
Syria, Russia, the “bumpy-landing”
of China and some Emerging mar-
kets, etc) to reduce consumers and
firms’ fears about deflationary spi-
rals, liquidity traps, welfare sustain-
ability, and income and job security
issues. The critical factor for the suc-
cess of the EU (win, win strategy),
however, is not to accomplish these
goals at the expenses of other EU
countries, creating competitive dis-
advantages within the union but
harmonizing as much as possible EU
rules and regulations among mem-
bers states for the benefit of all (no
asymmetric policies and benefits).
The deal that Prime minister David
Cameron seems to have secured in
the negotiation with the EU, in order
to keep Britain in the Union, consists
of a restriction to the payment of cer-
tain welfare benefits to EU migrants
for a number of years (i.e. “The
Council would authorize that Mem-
ber State to limit the access of newly
arriving EU workers to non-contrib-
utory in-work benefits for a total
period of up to four years from the
commencement of employment. The
limitation should be graduated, from
an initial complete exclusion but
gradually increasing access to such
benefits to take account of the grow-
ing connection of the worker with the
labour market of the host Member
State. The authorization would have
a limited duration and apply to EU
workers newly arriving during a pe-
riod of sever years”). He also appar-
ently received a commitment by the
EU towards a reduction of the “bur-
den” of excessive regulation and red
tape and won guarantees that coun-
tries outside the Eurozone, such as
Britain, will not be required to fund
euro bailouts and will be reimbursed
for central EU funds used to prop up
the euro. Finally, Cameron obtained
from the EU some restrictions on mi-
grant workers’ child benefits.
A few final words
Well, to conclude, the author of the
article hopes that on June 23rd, 2016,
Britons will decide to remain in the
EU and will help develop a com-
petitive, integrated, and globally rel-
evant economic, political, and fiscal
union. On June 24th, 2016 we hope to
see a big rebound of the Sterling after
a period of high volatility instead of
potential capital flight from Britain
abroad. Currently the sterling is un-
der pressure amid concerns over the
forthcoming vote on membership
of the EU, the UK’s current account
deficit, and the high public debt as
a percentage of GDP (in excess of
80%); which have led traders actively
hedging their positions with options.
The large current-account deficit,
which must be financed by capital
inflows, in case of “Brexit” might
lead to capital flight and reduced
capital inflows with tough potential
consequences for the currency, the
country’s credit rating, and potential
shocks for the UK and the EU econo-
mies. It is also quite likely that in the
coming months the Bank of England
will not raise rates as also currently
indicated by swaps-based indexes.
Thus, for the sustainability, peace,
and prosperity of Britain, the EU
and the global economy we all hope
that “Brexit” will not happen and
that Britain will remain a key player
of the European Union and in the
world economy as well.
TGA