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EU Battle Heats Up: '50% Chance UK Out in 5 Years'

Kiran Moodley, special to CNBC.com
Monday, 20 May 2013 | 8:01 AM ET
British Prime Minister David Cameron
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British Prime Minister David Cameron

As U.K. Prime Minister David Cameron heads to Brussels this week to discuss EU tax policies, he knows there are far more taxing questions at home regarding whether his party wants to remain within the Union.

The Prime Minister is still dealing with the fallout from the United Kingdom Independence Party's (UKIP) impressive display at local elections in early May and backbench calls for a referendum on Britain's EU membership to become guaranteed by legislation.

With the referendum issue still causing the Prime Minister a headache, Nomura's Alastair Newton, believes that a U.K. exit from the EU is becoming more likely by the day.

Newton says, "I remain of the view that there is a 50 percent probability that the U.K. will be out of the EU in five to six years – and that probability currently looks more likely to rise than fall, in my view."

The embattled Conservative Party leader was not helped this weekend by reports from The Daily Telegraph. According to the daily paper, a senior figure within the party with "strong social connections to the Prime Minister" said that Conservative MPs were being forced to rebel against their leader by local party members who were "all mad swivel-eyed loons."

(Read More: UK Government Split Over EU Membership)

In response, UKIP's leader Nigel Farage took out an advertisement in the paper on Monday to lure disaffected Conservative activists to his party, writing, "Only an administration run by a bunch of college kids, none of whom have ever had a proper job in their lives, could so arrogantly write off their own supporters."

116 Conservative MPs voted for a motion last week that criticized the government's Queen's Speech for not including a bill that would ensure a referendum on Britain's EU membership. Cameron has said he will hold one in 2017 if the party wins an out-right majority in the 2015 election.

This week, nearly 200 of Cameron's MPs are set to reject his plan to legalize same-sex marriage in Britain by proposing a new series of amendments.The Prime Minister is now calling on the opposition party, Labour, to support the government to ensure the bill is passed.

However, while Cameron faces a party crisis, the Prime Minister still has supporters who defend the EU and criticize rebellious MPs.

(Read More: Cameron: 'Stratospheric Unemployment' Fueling EU Debate)

A group of prominent British business leaders wrote a letter to The Independent newspaper arguing that Eurosceptic MPs were abandoning national interest in favor of playing politics.

The letter, signed by the current president of the Confederation of British Industry (CBI) and chairmen of BT, Deloitte, Lloyds and Centrica, calls on the Prime Minister to strengthen the U.K.'s relationship with the EU, because "membership is estimated to be worth between 31 billion and 92 billion pounds per year in income gains, or between 1,200 to 3,500 pounds for every household."

While a referendum is still a long way off, the EU debate has dominated U.K. headlines for many weeks.

(Read More: UK Publishes Draft Bill on EU Referendum)

The Prime Minister heads to Brussels this week to meet with the leaders of the 27 EU members to discuss tax policies. Will the trouble back home follow him across the Channel?

"The next two summits (this week and in June) should not pose any problems for Cameron," says Carsten Brzeski, senior economist at ING in Brussels, as the conversation should not stray from tax issues. "The June summit should also not lead to significant troubles for the U.K. as it will mainly be on how the restore (euro zone) growth and how to tackle youth unemployment."

However, Brzeski stresses that the other EU leaders may be tiring of Cameron's domestic issues.

"From an EU perspective, latest developments and announcements have, in my view, clearly pushed the U.K. further to the margins. It is obvious that patience and understanding of most other EU countries has reached its limits. Of course, hardly anyone would like to see a British exit from the EU. However, the willingness to make concession just to pamper the British (political) soul has clearly diminished."

This view was backed up by Nomura's Newton: "The north Europeans would clearly prefer the U.K. to stay in the EU. And so in my view would France – as a counterweight to Germany and as a key defense partner, not least. So, there is real concern in Europe's chancelleries. But not enough that Merkel and others would be prepared to pay any price to keep the UK in."

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