A ‘Brixit’ Could Be Next Problem for Europe: Nomura

The U.K. is not renowned for its smooth relationship with its European partners and, like the end of a tempestuous love affair where both partners have tried their best to accommodate the others’ demands, the relationship could finally hit the rocks with Britain leaving the EU for good, according to a report by Nomura.

London Financial District
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The bank says although the U.K. has always had an ambivalent relationship with its European neighbors, the euro zone crisis has fueled deeper skepticism over Europe with the British government looking to re-negotiate its ties and obligations to the EU.

To be sure, a British exit from the European Union would be nothing on the lines of a Greek exit or ‘Grexit’ from the euro zone.  Britain doesn’t use the euro and has control over its monetary policy.

Still, its departure from the European Union would affect markets though Alistair Newton, senior political analyst at Nomura says it’s hard to quantify.

“We believe, increasing  possibility of either a looser U.K. relationship with the EU or a U.K. exit is bound, in our view, to raise both economic and political concerns, including in financial markets,” Newton wrote.

The relationship between Britain and Europe has soured over the last year, especially on the issue of greater European regulation for the banking sector.

Britain’s chancellor George Osborne has fought to prevent Britain’s financial sector — which makes up 14 percent of the U.K. economy — being subject to new rules over banking regulation and a financial transactions tax that could be used to fund future bailouts.

The proposal for a transaction tax has been approved by Germany, France, Spain and Greece among others.

The British government’s attempts to wrestle back control over issues related to the single-market from Brussels have not been successful so far, according to Newton, who says the lack of willingness by EU partners to make more concessions could lead to a break-up.

As the crisis leads to further , the U.K. could lose its bargaining power on treaty reform. For example, if the ECB decided that fiscal integration and banking union were necessary in order to prevent a euro zone collapse, Britain could be sidelined.

“We see a real risk that the U.K. could even be unable to veto further transfers from London to Brussels, including over financial market regulation and a pan-EU banking union,” Newton wrote.

If the euro zone crisis were to worsen, Newton says, the pressure from euroskeptic parliamentarians to take a harder line on the EU could split the current British government, a coalition between the Conservatives and Liberal Democrats or Lib Dems.

The report states that the tension between Britain and the EU extends even to non-crisis-related matters such as the 2014-20 EU budget, which presents “an obvious bone of contention” that could cause a “serious schism” between the two.

Though the report states that it’s unlikely the U.K. will hold a referendum on staying within the EU until the next term of government, there is always the risk that Britain’s euroskeptic politicians and general public could grow weary with EU rules and regulations and push through a vote.

As Nomura states: “the question still remains as to whether the U.K.’s domestic politics will wait that long.”