Policy uncertainty fuels market volatility, and the United Kingdom is no exception. It will take four months to resolve the status of Britain within the European Union—for the time being, future institutional arrangements are difficult to predict. So why is the referendum taking place? A lenient interpretation is that the crisis in the euro area, and the steep increase in immigration, made the public question the United Kingdom’s links with the continent more than in the past. A more skeptical interpretation is that a symbolic renegotiation was motivated by internal political competition in Britain.
- 2013: A German Marshall Fund of the United States survey finds 64 percent of Britons see immigration as a problem for their country (compared with 32 percent of Germans and 47 percent of Americans).
- January 2013: UK prime minister David Cameron pledges to hold a referendum on Britain’s membership in the European Union by 2017: “We will give the British people a referendum with a very simple in or out choice.”
- September 2014: “A new European Commission task force on ‘strategic issues related to the UK referendum’ begins work….“
- Early 2015: The Conservative Party pre-election manifesto asserts that the European Union “interferes too much in our daily lives, and the scale of migration triggered by new members joining in recent years has had a real impact on local communities.”
- December 2015: Cameron says he wants a deal in February.
- Early 2016: The rhetoric heats up. One British professor writes that “being in the EU is like being ruled by a foreign power.”
- January 2016: Cameron promises that individual government ministers will be allowed to take a different position than the government, once the negotiations with the European Union are concluded.
- February 1, 2016: Mario Draghi, president of the European Central Bank, warns the European Parliament that political uncertainty continues to have negative economic effects: “[T]here is still political uncertainty surrounding the European project. This is true in the broader context of our Union. A solution that would anchor the United Kingdom firmly within the EU while allowing the euro area to integrate further would boost confidence.”
- February 2, 2016: A new settlement for the United Kingdom within the European Union is taking shape; various accommodations are outlined in European Council president Donald Tusk’s letter to members of the European Council.
- February 18–19, 2016: A last-minute deal with the United Kingdom is reached at the European Council summit. The summit was viewed as a deadline for a deal in order for the referendum to take place in 2016.
- June 23, 2016: The referendum is scheduled to take place.
Brexit would be costly not only for the United Kingdom; the process would also divert attention from Europe’s pressing problems (it could take years and probably would rekindle the Scottish question), and might tempt other governments to pursue their own referenda. Gianmarco Ottaviano and coauthors from the Centre for Economic Performance calculate that, even accounting for what the United Kingdom would save in fiscal contributions to the European Union, the costs from Brexit would amount to 1 to 3 percent of GDP. The lower bound assumes—optimistically—that no tariffs are increased after exit.