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Agree or adios: UK sets out EU demands

Cameron warns of 'Brexit'

Discussions between the U.K. and Europe over its future in the Union are heating up, with U.K.'s prime minister sending a list of demands for reforms to the European Union's leaders Tuesday.

The U.K. is expected to hold a referendum on whether to stay in the EU or leave (a so-called "Brexit") in mid-2016 -- earlier than the original deadline for reform of 2017. Ahead of the vote, the country's prime minister is trying to extract promises for reforms in Europe and to renegotiate the U.K.'s membership of the 28-member Union.

On Tuesday, a letter from U.K. Prime Minister David Cameron to the President of the European Council, Donald Tusk, was published in which he lists demands for EU reforms and a renegotiated U.K. membership.

Speaking at Chatham House Tuesday morning, Cameron covered the central demands the U.K. made of the EU. These included ensuring the protection of the single market for the U.K. and other non-euro countries, plans to boost competitiveness, allowing Britain to be exempt from the EU's objective of "ever-closer union" and, lastly, restricting EU migrants' access to in-work benefits in the U.K.

David Cameron
Chris Ratcliffe | Bloomberg | Getty Images

He told the audience at Chatham House that "if the EU were to evolve into a single currency club…then it would no longer be a club for us."

"We have to make sure there is a point to being in the EU, but not in the euro," he added, stating emphatically that there would not be a "second referendum."

Brexit debate steps up a gear as Cameron sets out stall

Cameron has been under increasing pressure from euroskeptic members of his ruling Conservative party and increasingly popular single-issue parties like the U.K. Independence Party (UKIP) to either renegotiate the U.K.'s membership of the EU or pull out of the Union.

Cameron himself has conceded that the treaty change needed to implement these reforms (which requires the ratification of all 27 other members) was a big task but was not an impossible one. Economists are cynical about Cameron's timeframe for reforms, however, saying that it is unfeasible that he could see his demands met by Europe ahead of a potential referendum in six months' time.

"The major issue faced by Cameron is timing," Simon Smith, chief economist at FxPro, said in a note Tuesday.

"Because if his demands require treaty changes that need to be ratified before the vote then the end of 2017 is unrealistic since it can take many years for all member states to accept such structural alterations. One thing is certain and that is today the starting gun will fire leading to many months of debate over whether "Brexit" is in the best interests of the U.K., its businesses and people."

While many business groups, such as the Confederation of British Industry, have warned of the risks and "huge uncertainty" that would follow a vote to leave the EU, there is a robust "Brexit" campaign which appears to have strengthened of late, decrying EU bureaucracy that impedes business and unilateral decision-making.

With this in mind, not all business leaders are pessimistic about a "Brexit" either. Richard Longdon, chief executive of Aveva Group, told CNBC Tuesday that Europe offered no benefits to U.K. businesses.

"We do business all over the world and to be honest, it's no easier doing business in Europe than it is doing business in Australia or anywhere else. But the negatives to being in Europe, to me, outweigh the positives," he told CNBC.

While the U.K. economy has made a robust recovery from the financial crisis in Europe, the uncertainty surrounding a "Brexit" could affect financial markets. A vote to staying in the Union can no longer be taken for granted either. According to the latest YouGov poll, for the first time since November 2014, more British people want to leave the EU rather than remain a number.

The Bank of England is now expected to wait until after a referendum before raising interest rates and on Tuesday, Adam Posen, a former member of the BoE's monetary policy committee said the "Brexit" risk "had to be taken seriously."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld