The Brexit conundrum: To be or not to be

Moneycontrol BureauNearly a month from now Britain votes on its membership of the European Union — a decision that could have repercussions for both the United Kingdom and the 28-member economic and political alliance. Let's begin with the basics.

What is Brexit?

The possibility of the United Kingdom’s exit from the 28-member European Union (EU) is termed as Brexit. It is combination of 'Britain' and 'exit'. A Brexit would impact the position of both the UK and the EU in the world.

What will its significant impact be?

Trade pacts between countries will most likely be recast. While the UK would likely be free to strike new trade deals based on domestic priorities it would have less leverage. It will also be a lower priority than the EU for other countries. The UK would also face the huge challenge of renegotiating existing EU deals that would no longer apply.

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On the other hand, the EU would likewise be a less attractive partner at a time when it is only a second priority for the US and Japan and a lower priority for many emerging countries.

Currency VolatilityThe PoundThe pound has been volatile since February 22 when British Prime Minister David Cameron announced that the referendum will be held on June 23. The pound fell 2.3 percent -- a seven-year low -- to 1.39 a dollar. Analysts predict that the pound jitters will continue as the referendum nears and even a few months after the vote.The pound will fall to USD 1.35 or below by the end of the second quarter of 2016, according to Bloomberg analysts. The US DollarBoris Schlossberg, Managing Director of FX strategy for BK Asset Management recently told CNBC that he expects investors to flock to the US dollar as the pound will weaken substantially. GoldIn a note in April HSBC analysts said that using gold as a hedging measure could be effective against the financial uncertainty surrounding Brexit. It is for this reason the yellow metal may surge if Britons vote in favour of exiting the EU. "We continue to see potential for gold to reach USD 1,300 an ounce this year," according to the note.Swiss FrancHSBC has also suggested that a way to safeguard against a Brexit would be to invest in Swiss Franc (CHF). "If Brexit is rejected then the CHF is unlikely to weaken much as little political risk seems to be priced into the currency. If, by contrast, the UK votes to leave the EU, then the CHF would enjoy a sizeable safe-haven bid amid the scramble out of GBP and EUR," according to a Business Insider report, quoting a HSBC FX Strategy team report.Voices of Concern

India

According to a recent report by SBI’s Economic Research Department, Brexit may actually strengthen India's position as a truncated EU may be looking to recast its pacts with other countries. The report says that the referendum does put a question mark on the future of Indo-EU Free Trade Agreement.

High-profile Indian-origin politicians in the UK, like UK employment minister Priti Patel and Infosys chief Narayan Murthy’s son-in-law Rishi Sunak have spoken out in favour of Brexit to create a "fairer immigration system" that does not discriminate against non-EU migrants.

The Federation of Indian Chambers of Commerce and Industry (FICCI ) has warned against "considerable uncertainty" for Indian businesses operating in the UK and Europe if Brexit materialises.

Britain

Leaving the European Union would tip Britain into a "year-long recession", British Finance Minister George Osborne has said. An analysis released by the Her Majesty's Treasury argued that leaving would cause "an immediate and profound economic shock" to Britain and damage economic growth.

US

Outgoing US President Barack Obama had in April warned that Brexit would put the UK on the backfoot in any trade deal. He also made a plea to Britons to stay in the EU. Presidential front-runner and Republican nominee Donald Trump, however, has stated that Britain would be “better off” without the EU.

Emerging Markets

Developing countries are already reeling from the impact of a commodity slump and the uncertainty over the referendum is likely to make it worse. “The stability of the British economy is really important for the stability of the global economy, and also that... uncertainty in global capital markets has very negative effects, even on the poorest countries,” Jim Yong Kim, President, World Bank, told BBC Radio 4’s World at One programme recently.Compiled by Chaitanya Gudipaty