With financial markets rallying and opinion polls and betting markets signaling a late shift to the Remain camp, the U.K. referendum on European Union membership seemed almost as if it was over before the voting began today. But even if voters decide to remain in the EU, the relief is likely to be short. The referendum will leave scars on the British and European political scene, and none of the issues that have made the four-month campaign so bitter and emotional are any closer to resolution.
Opinion polls have shown a clear shift to the Remain camp over the past week, ever since an extreme nationalist brutally murdered Jo Cox, a Labour member of Parliament who campaigned for the U.K. to remain an EU member and championed the cause of Syrian refugees. The gambling site Betfair put the odds of a Remain vote at 78 percent as people went to the polls, among the highest levels of the campaign. Early reports of a high turnout, which is believed to favor the Remain camp, added to the feeling that Prime Minister David Cameron will win his EU gamble.
The pound, the clearest indicator of market sentiment, rose to its highest level of the year against the dollar, breaking above $1.48 early Thursday. It has risen by 5 percent in the past ten days, suggesting that a good part of the relief rally will have occurred even before the first results start streaming in after midnight Thursday, London time. By contrast, if the Leave camp surprises and carries the day, putting Britain on the road to an EU exit, or Brexit, the market reaction could be especially severe. None other than George Soros, known as the man who broke the pound for his spectacularly profitable bet that the U.K. would devalue against the Deutsche mark in the early 1990s, has predicted the currency could drop by 15 to 20 percent in case of a Brexit vote.
The referendum poses “an asymmetrical shock of uncertainty,” says Pascal Blanqué, CIO of the big French asset manager Amundi. “My portfolios have more to lose from Brexit than to gain from Bremain.”
Policymakers and investors will certainly be happy to dodge such a bullet. Brexit has seized the market’s attention in recent months because the risks are so great. Negotiating a withdrawal from the EU would take a minimum of two years, and the uncertainty about British access to the EU single market would put the brakes on investment and tip the economy into recession, according to most economists. The political ramifications could be just as negative, with a Brexit vote raising the prospect of a potential breakup of the U.K. given Scotland’s European enthusiasm, fueling nationalist, anti-immigrant sentiment across Europe and stoking the forces of fragmentation in the 28-nation bloc.
But averting a political crisis doesn’t resolve the underlying tensions. The campaign has already exacerbated the deep divisions within the U.K.’s ruling Conservative Party over the country’s role in the EU. More than a third of Conservative members of Parliament are believed to support Brexit. The debate has been anything but elevated. Among the Brexit’s leading campaigners, former London mayor Boris Johnson compared the EU to Adolf Hitler, and Education Secretary Michael Gove said economists who warned of the risks of Brexit were like Nazi stooges.
The Remain camp has avoided incendiary language but for the most part failed to say anything positive about the U.K.’s relationship with Europe. Cameron and his chancellor of the Exchequer, George Osborne, have relied on a campaign of fear, warning that a Brexit vote would trigger recession and a run on the pound, and force the government to raise taxes.
Cameron will most likely have to reshuffle his cabinet after the referendum, but the bad blood is likely to persist in British politics — especially if the vote is close. And immigration, one of the most controversial issues of the campaign and across the EU, shows no sign of abating. The government’s Office of National Statistics today reported that net migration to the country rose by 20,000 to 333,000 in 2015, the highest annual total in at least a decade.
“This doesn’t just go away,” says Tony Broccardo, CIO of Barclays UK Retirement Fund. “Some of the deep-rooted thoughts and divisions will have to be dealt with whatever the outcome. These are not things that can be put to bed easily in a referendum.”
Europe’s woes won’t go away with a Remain verdict, either. On Sunday, voters in Spain return to the ballot box for the second time in six months to see if they can resolve the country’s political stalement. Polls don’t offer much hope, suggesting another inconclusive result with Prime Minister Mariano Rajoy’s conservative Popular Party likely to emerge with the largest number of seats in parliament but not enough to rule, and the anti-austerity Podemos party on track to overtake the Socialists as the second-largest party.
A Remain vote may quiet calls for EU referendums in other countries, but it is unlikely to dent the popularity of nationalist, anti-immigrant parties like the Front National, whose leader, Marine Le Pen, looks likely to make the second round in France’s presidential election next year, and the Dutch Freedom Party of Geert Wilders. Those politicians have put the European establishment, particularly Germany’s Angela Merkel, on the defensive over efforts to resettle immigrants from Syria and the Middle East.
The European economy remains vulnerable despite a modest acceleration of the recovery. The euro area is expected to grow by 1.6 percent this year, but the negative interest rates that are keeping recovery alive are punishing banks, insurers and pension funds. Greece remains in recession despite the latest bailout agreement in May, and Germany continues to block debt relief that could put the country on a sustainable path.
Fully eight years after the great financial crisis, the nexus between low growth, economic insecurity and populist, destabilizing politics is as strong as ever. European nationalism has a strong echo in the presidential candidacy of Donald Trump, who publicly supported the Leave camp in the U.K. referendum campaign. As one Trump aide put it this week, “America is here because of its own little Brexit.”
The idea that Britons would support Brexit and Republicans would make Trump their candidate would have seemed “improbable or unthinkable” until recently, contends Mohamed El-Erian, chief economic adviser at Allianz. People are turning to anti-establishment politicians because of the inability of Western countries to grow in an inclusive manner, he argues. Solutions aren’t exactly lacking. El-Erian’s wish list includes a burst of infrastructure investment, structural and tax reform, moves toward fiscal union in the euro area and closer policy coordination globally. What is missing is the political will or consensus to take action.
Things are likely to get worse before they get better on both sides of the Atlantic, El-Erian warns. As he puts it, “low growth means messy politics, and messy politics contaminates good policymaking.” Western economies sorely need to find an exit from that conundrum.