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To Brexit or Bremain, that is the question—analysis

British Prime Minister David Cameron arrives an EU summit meeting on the so-called Brexit at the European Union headquarters in Brussels, on February 19, 2016
Stephane de Sakutin | AFP | Getty Images
British Prime Minister David Cameron arrives an EU summit meeting on the so-called Brexit at the European Union headquarters in Brussels, on February 19, 2016

After falling to a seven-year low Wednesday, the British pound is set to end the week down more than 3 percent from when U.K. Prime Minister David Cameron set June 23 for the so-called Brexit referendum. Given the currency was already down more than 5 percent year to date, and down more than 10 percent over the past 12 months, this week's reaction was quite significant to the simple confirmation of a date for an already well-telegraphed vote on whether Britain should stay in the European Union.

The debate in Britain over EU membership centers on three main areas.

  • First, the economy, and whether positives like free trade would exist outside of EU membership, and whether negatives like excess regulation would make a meaningful difference if removed.
  • Second, migration of workers, and whether this helps offset Britain's poor demographics, or acts as an excess strain on the welfare system.
  • And third, sovereignty; is Britain ruled by the members of Parliament in Westminster elected last May by British voters, or by unelected bureaucrats in Brussels?

The big move in sterling over the past week came not at the start of last weekend when Cameron returned from Brussels with his renegotiation deal, but rather on Sunday and Monday. There are two main reasons for this.

  • First, Boris Johnson became the most high-profile member of Cameron's own Conservative Party to say he would be backing an exit. The Financial Times reported this week that the number of Tory MPs backing Brexit is approaching 150, meaning that the parliamentary party of 331 MPs is split almost in half. This, alongside some Labour MPs too, adds a broad, mainstream appeal to the exit camp that has found it hard to present a united front so far. It's little known in the U.S. that in the U.K. there have been three rival exit groups vying to be the official organization in the Electoral Commission's eyes to front the exit campaign. They disagree on the priorities and on who should lead the charge. It has at times created a slightly farcical nature to the idea of a British exit from the EU, and thus not galvanized the support of as yet undecided voters.
  • The other thing that occurred at the same time is that Johnson framed the debate very much as a sovereignty issue. Those who oppose the migration of Continental Europeans into Britain are likely to vote for a Brexit regardless. Similarly those who voted for Nigel Farage and the UK Independence Party in last year's general election have probably already decided how they will vote on June 23. By pulling on the sovereignty chord, Johnson and company have a much better chance of convincing swing voters — the portion of which is large, adding unpredictability to this vote — to side with him and back an exit.

Of the concessions that Cameron secured from Brussels in his renegotiation deal, politically the most significant was a permanent opt out from the "ever closer union" ambitions of the EU. This was meant to placate voters unsure over the sovereignty issue within the debate. However, Michael Gove — the justice secretary, and the second most high-profile Conservative Party member to back an exit after Johnson — argued last week that it's not a significant legal concession. He also said it does not reduce the number of laws from the European Commission, or rulings from the European Court of Justice, that inhibit U.K. lawmakers from freedom to act as they see fit. "It is hard to overstate the degree to which the EU is a constraint on ministers' ability to do the things they were elected to do", he wrote in The Sunday Telegraph.

Similar sentiment was echoed by Johnson. In doing this, they are appealing to a sentiment present in all Brits whatever their political persuasion, which was espoused so beautifully by "Prime Minister" Hugh Grant when talking back to "U.S. President" Billy Bob Thornton in the film "Love Actually," saying in the movie: "We may be a small country, but we are a great one." And it's that message, with the support of mainstream politicians, that has convinced investors this week that a Brexit is very possible, and thus moved the pound south.

That said — Prime Minister Cameron's deal with Brussels has further secured Britain's special status in EU. The two key areas being, on the economy, where Britain benefits from free trade yet maintains its own currency; and on migration, where Britain benefits from workers joining its economy from Europe, but is not compelled to let millions of refugees enter in the same way that Germany, France and many others are. These points are significant, and the PM and his team have proven very adept at translating such factors into votes in the past. The threat to Britain's economy will be at the forefront of the stay-in-the-EU campaign.

One point that while not top of the agenda for either camp in the U.K., but hugely relevant for global markets, is what a Brexit would do to an already weak EU. The bearishness this week has focused on the pound, with the euro still mainly influenced by the European Central Bank rather than a U.K. referendum, but euro volatility can be expected as we approach June too.

The most crucial factor that's likely to decide this vote is uncertainty. The PM has a deal that shows what Britain's relationship with the EU should look like if the nation were to stay. Nobody has any idea what things would look like if Britain were to leave. The status quo is the easy choice for voters in June, and thus the onus is on the exit camp to make what will need to be a hugely convincing argument to voters to embrace the unknown. And in light of that, an ever-weaker pound may in fact play into Cameron's hands — will people really vote for something that is so clearly hurting the Great British Pound?

— Wilfred Frost is co-anchor of CNBC's "Worldwide Exchange," which recently began broadcasting Monday to Friday from 5 a.m. to 6 a.m. ET from CNBC global headquarters in Englewood Cliffs, New Jersey. Frost also covers banking and finance for the network.

— For more insight from CNBC contributors, follow @CNBCOpinion on Twitter.