Grexit is one thing, but Brexit would have entirely different consequences

Britain's EU referendum on June 23 will be the culmination of a story that stretches back to 1992, when the country left the European exchange rate mechanism (ERM) after the pound come under intense pressure from international currency speculators like George Soros. The decision to leave the ERM was seen by many as a victory, since the country had joined the mechanism two years earlier at an exchange rate against the German mark that proved to be too high. UK inflation was also too high in the early 1990s, the country was in recession, and interest rates were around 15 percent.

Since its defection from the ERM, the UK has been a semi-attached member of the EU. The country has retained sterling and enjoys, in many ways, a semi-autonomous status within the union. Because of the prolonged national debate, many Brits feel the EU is too bureaucratic and the UK could fare better on its own.

There has been intense strife within the ruling Conservative Party over the years, between those who want to remain in the EU and those who want to leave. In the end, Prime Minister David Cameron decided to deal with the issue once and for all, by holding a referendum.

With just over a month to go until the vote, opinion polls are fairly even, although those who want to remain in the EU have led most surveys.

"This reflects an intense campaign here in UK, with those who want to remain in the union claiming an exit would lead to all sorts of economic problems. It may be that voters are intimidated by this and will vote to remain, with leaving viewed as a step into the unknown," says Neil MacKinnon, in a podcast arranged by Catella Fonder.

Opinions have not changed much in recent months, but there is a tendency for the ongoing refugee crisis in the EU to colour the debate in Britain.

"This is definitely a key issue. For voters in the UK, the referendum could turn into a vote on immigration, with the two issues being conflated," says Neil MacKinnon.

He says that markets are looking anxiously for signs of the side wanting to quit the EU, the Brexiteers, growing and taking the lead. If this happens, markets are likely to become more volatile, in addition to the high volatility already seen in the sterling exchange rate. The pound has recovered recently, although this probably has more to do with the weakening of the dollar from the Fed's interest-rate policy being generally perceived as dovish.

So what happens if the Brexit side is declared the winner on the morning of July 24? In the short term, according to MacKinnon, things will be chaotic, with pressure on the pound. However, there is no certainty the direction of the pound will be one-way down, at least not in the slightly longer term.

"Shorting sterling has been a popular strategy among currency traders, but we have seen it can be loss-making. Personally, I envisage no collapse in sterling following Brexit. There could be pressure on the UK stock market but, again, will this persist? Probably not," says MacKinnon, who warns against expecting an apocalyptic scenario. There is no certainty the UK will be worse off if it leaves the EU – the argument for this is based on the UK falling outside trade with the rest of Europe, but there is really not much to suggest that.

The OECD has warned a British exit would lead to higher unemployment and lower investment. When US President Barack Obama recently visited the country, he threatened that a no to the EU would put the UK "at the back of the queue" for future trade agreement negotiations.

The pound has weakened this year, and sterling is now at the same levels as at the end of 2014. But a major slide is not on the cards following an EU exit, according to MacKinnon.

"The pound has come down from the highs we saw last year, and is probably already factoring in much of a Brexit scenario. I would caution against expecting the pound to collapse on Brexit," he says.

Since the 2008 financial crisis, the UK has seen very good economic development. The country has had one of the highest growth rates in the G7. The IMF recently published forecasts for UK growth of just over 2 percent – a decent number, although there are early signs that uncertainty surrounding the referendum is causing growth to slow.

Plans to hire or invest in the UK are beginning to be put on hold. Probably unnecessarily, according to MacKinnon, who reminds us that the country is the world's sixth-largest economy and it is unlikely other countries would choose not to trade with it.

"Remember that the balance of trade between the UK and the EU is in Britain's favour. If the EU decided to block trade, EU companies selling to the UK would lose out on trade worth 9-10 billion pounds a month. I believe such a scenario is highly unlikely," he says.

Much of the global growth over the past decade has been generated in emerging markets. It is therefore reasonable to argue that Beijing, rather than Brussels, is what matters in future. If the UK leaves the EU it will need new trade agreements, but it is unclear whether the country will follow the examples of Norway, Canada or Switzerland. Brexiteers question why the UK should be part of a group of countries that, based on most criteria, has not experienced economic success in a long time.

"The EU has been associated with low economic growth, high unemployment, especially among young people, and a deflationary debt trap. There have been banking crises, debt crises and the Greek crisis. In France we have seen advances for anti-euro politics and anti-austerity politics, and the same in Spain and Portugal," says MacKinnon, adding that the whole issue is perhaps being addressed from the wrong direction.

"What we need to ask ourselves is whether the EU in its current form has any long-term credibility. What is the likelihood of a breakup of the EU? The EU has not been an economic success story. Something has to change, policies must be changed," he adds.

MacKinnon does not have much time for the argument that a withdrawal from the EU would lead to sharply higher interest rates in the UK. Especially considering these same people are simultaneously warning of economic collapse for the country if it rejects the EU.

"If the economy disintegrates because we are outside the EU, so that trade and investment collapse, why on earth would you raise interest rates? We must remember that, aside from the Brexit scenario, interest rates are now extremely low and this is very unlikely to change in the near future," says Neil MacKinnon.

The danger from a possible British EU exit is probably not directly economic, and does not primarily impact the UK. Rather, there is a risk of a psychological effect influencing those countries that remain in the union.

"What this could mean, and probably will mean, is that other countries can say 'we want a referendum too'. We have seen a recent referendum in the Netherlands on EU trade with Ukraine, but it was regarded in the Netherlands more as a vote on the EU – and the electorate voted no," says MacKinnon.

Brexit could lead to a shift in the European political landscape, with more questions being raised about the future of monetary union and the EU. The union has many economic and political problems to deal with, and Brexit could, according to MacKinnon, trigger a breakup of the EU as we know it today.

In the equity markets this would impact companies with a large proportion of exports, particularly if those exports go to the UK. Swedish companies with the greatest exposure to the UK include kitchen manufacturer Nobia and clothing giant Hennes & Mauritz, which had about 7 percent of their revenues from the country last year.

"There will inevitably be a negative reaction for this type of company because of the uncertainty, but I doubt it will last long. Investors will realise that the British economy may fare better because of less regulation," says MacKinnon.

He does not anticipate any significant effect on the bond markets.

"What we have seen is abnormal, with government bonds worth 7,000 billion dollars having a negative yield. This situation is not likely to change in the short term because of questions about the economic outlook for the G20 countries. Brexit not likely to change that."