Lost growth will cost Britain billions of pounds if it holds a referendum on European Union membership, as increased economic uncertainty leads to a reduction in investment, research from Dutch bank ING suggested on Monday (9 February).
Prime Minister David Cameron has said he wants to renegotiate Britain’s relationship with Brussels and will hold a referendum by 2017 on leaving the EU if he wins a national election on 7 May.
The opposition Labour party, which is neck and neck with Cameron’s Conservatives in the polls, does not plan to hold a referendum unless a new EU treaty transfers more powers to Brussels.
Fewer than a quarter of Britons have a positive view of the EU, the second-lowest after Greece, and the UK Independence Party, which wants to withdraw Britain from the bloc, won the most seats at 2014’s European Parliament elections.
ING did not estimate how leaving the EU would affect Britain’s long-run growth prospects, but said uncertainty in the two years running up to a referendum would cut growth by around half a percentage point a year.
“As we saw with last year’s Scottish independence vote, foreign investors may take fright with UK asset prices and sterling likely to come under downward pressure,” said ING economist James Knightley.
“The economy will likely lose momentum and the BoE may raise interest rates more cautiously,” he added.
With Britain’s economy worth £1.7 trillion pounds ($2.6 trillion) last year, two years of lost growth would cost almost £20 billion. ING said some of the lost growth would be made up if Britons voted to stay in the EU and investment projects were restarted.
Around 20% of British business investment comes from foreign companies, double the proportion in an average advanced economy. Many companies use Britain as a base for the rest of the EU.
ING said sterling was likely to weaken in the run-up to a referendum, with €1 worth 72p against a forecast of 68p if there was no referendum.
If Britain voted to leave the EU, sterling was likely to sink to 90p to the euro, a level last seen in 2011. Against the dollar, sterling could fall below $1.40.
“If the UK votes to leave, we may see plunging UK asset prices with business confidence weakening too,” Knightley said.