Brexit Campaign May Have More Success If It's Not Led by UKIP: Analysis

Photographer: Chris Ratcliffe/Bloomberg

A cross-party coalition campaigning for the U.K. to leave the European Union, including Labour euroskeptics, Conservative back-benchers and supporters of the U.K. Independence Party, would make Britain's departure a more credible possibility, Bloomberg strategist Richard Jones writes.

Although there is a risk that “too many cooks spoil the broth,” there is also the possibility that the broader the support across the U.K. political spectrum, the greater the likelihood of Britain voting for exit. A poll of almost 4,000 people for think-tank British Future found that 70% of voters remain undecided on EU referendum, which means that the result is still in doubt and a referendum campaign will sway voters.

The idea of a Labour figure leading the “out” campaign has been mooted, with Labour donor John Mills proposing Kate Hoey, former Labour cabinet minster under Tony Blair, for the position. While UKIP leader Nigel Farage may prove too divisive to head up the "out" campaign, a Labour figure leading the Brexit drive would give it cross-party support.

In addition to a possibly united front of Labour and UKIP euroskeptics, a group of more than 50 back-bench Tory MPs, calling itself “Conservatives for Britain,” have said they will vote to exit the EU if Prime Minister David Cameron does not renegotiate the U.K.’s EU membership terms to their liking.

Larger businesses are concerned by the possibility of Brexit. The Confederation of British Industry cut its U.K. growth forecasts on Monday, citing the EU referendum as a potential risk to businesses.

In response to the Tory euroskeptic splinter group, Foreign secretary Philip Hammond, sponsor of the EU referendum bill in the House of Commons, has said that the desire of some Conservative MPs for Westminster to be sovereign over EU law is “not achievable”.

One of the issues surrounding any referendum is that the plebiscite risks becoming less about the question being asked and more of a way for voters to express displeasure with the incumbent government.

Jeremy Stretch from Canadian Imperial Bank of Commerce, in a research note dated June 5, highlights the “risks of additional front-loaded fiscal tightening” in the U.K., especially as Osborne announced 3 billion pounds of spending cuts the day before.

Front-loaded austerity may hurt the government's popularity, and if German Chancellor Angela Merkel gets her way and the referendum is held in 2016 rather than 2017, so as not to clash with elections in Germany, the U.K. may be voting when spending cuts are in full force.

This also risks isolating Scottish nationalists, which may accelerate the process of a second Scottish sovereignty referendum.

Impact on the pound will almost certainly be negative. Uncertainty before the vote will sideline the Bank of England, keeping them on a lower-for-longer rate path, and may also undermine the nascent U.K. economic recovery.

NOTE: HC Bill 2, the European Union Referendum Bill, is scheduled to receive 2nd reading on June 9 and proceed to committee stage thereafter

NOTE: Richard Jones is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own.