UK Election 2015

Why UK’s EU referendum may be sooner than you think

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The possibility of a "Brexit" – Britain exiting the European Union after more than four decades – may become reality sooner than many in the markets expect.

Since winning an unexpected majority in Thursday's general election, U.K. Prime Minister David Cameron has already re-committed to an in-out referendum by the end of 2017. However, he also acknowledged earlier in the year that it could come sooner.

UK election result: EU seeks to avert Brexit

Following his electoral success, Cameron said he is already trying to re-negotiate the U.K.'s position within the EU. If he can win concessions, it may help keep his own party and the rest of the electorate on side.

"This election result gives David Cameron considerable political capital, and for the sake of financial stability it is to be hoped that he uses this to take a tough but ultimately constructive view on the U.K.'s role in the EU," Michael O'Sullivan, chief investment officer for the U.K. at Credit Suisse, wrote in a research note.

Brexit? We're better in the EU: CEO
Brexit? We're better in the EU: CEO

Currently, polls indicate that the electorate favors remaining in the EU, with a poll by Survation for the Mail on Sunday over the weekend suggesting that 45 percent would vote to stay, and 38 percent would vote to leave.

Yet Thursday's election result – which came as a shock to most pollsters -- shows how unreliable polls can be.

Here, we look at why the referendum may come sooner rather than later.

Middle Eastern refugees

There is already controversy brewing in the U.K.'s right-wing press about whether or not the country will be "forced" to take in some of the refugees and asylum seekers who have tried to cross the Mediterranean in recent weeks.

The European Agenda on Migration, which is expected to be announced on Wednesday, is set to include a proposal that the people – many of them from war-torn states like Libya and Syria – are distributed amongst EU states according to their population and economic health.

A boat transporting migrants arrives in the port of Messina after a rescue operation at see on April 18, 2015 in Sicily.
Deadly Mediterranean migrant wave will be tough to thwart

The desperation of these refugees has been highlighted by a number of tragic accidents in the Mediterranean, with close to 2,000 people either dead or missing in its waters over the year to date, according to the International Organization for Migration.

Immigration was one of the key issues in the recent U.K. election campaign, and the newly re-elected Prime Minister, who is reliant on his backbench MPs, will not want to look soft on either the EU or asylum seekers.

Tory rebellions

Cameron will well remember the travails of John Major, the last Conservative prime minister who also had a slim majority, as he tried to keep all of his MPs on side. There is a very real possibility that, in the event of a referendum, some of Cameron's own party will be campaigning alongside the UK Independence Party (UKIP) for the country to leave the European Union. As such, the Prime Minister may find it easier to bring forward a vote during the party's honeymoon period.

UKIP support

Yes, they have only got one MP – but 3.5 million people (in a country of around 62.5 million) voted for the anti-EU party. If there is a low turnout for the EU referendum, and you add the number of people who voted UKIP to those who voted for other parties but aren't keen on the EU, there might be a real risk of exit. It may be better for the Conservative Party to strike with a referendum while UKIP is demoralized and disorganized.

Scotland the Brave

The biggest victor (apart from Cameron) in Thursday's election was the Scottish National Party (SNP), who destroyed the Labour Party in Scotland. And its leader, Nicola Sturgeon, has already made it clear that an EU referendum could trigger a new Scottish independence referendum – making it doubly risky for sterling and other U.K. investments. Cameron may want to remove this double risk from the equation sooner rather than later.