This year might be the year that British Prime Minister David Cameron learns the folly of his having given hostages to fortune. This might very well be the year that the United Kingdom suffers the consequences of his having committed the country some three years ago to hold an up-down referendum before the end of 2017 on continued membership in the European Union. This is not least the case since that referendum now looks likely to be held in the second half of this year, in what are all too likely to be inauspicious circumstances for both the U.K. and global economies.
Cameron hopes to negotiate modifications to the U.K.'s terms of membership in the European Union next month, which might make continued membership in that union more palatable to the British electorate. In particular, he hopes that Europe will agree to limit the access of European migrants to the U.K.'s welfare system, to reduce the U.K.'s contribution to the European budget, and to reduce the regulatory overreach of the European Commission. He is now intimating that should all go well with those negotiations, he will call for a "Brexit" referendum well before the end of this year.
A fundamental problem with having made a long-dated referendum commitment is that Cameron cannot possibly know what the mood of the country will be by the time the referendum eventually takes place. This was clearly underlined by the U.K.'s experience with the recent Scottish independence referendum, where the mood of the Scottish electorate changed sharply in the weeks immediately preceding that referendum. That surge made the referendum, which initially looked like it would yield an overwhelming "no" vote, a very closely fought contest.
Judging by the Scottish experience, Cameron should be concerned that already as much as 40 percent of the U.K. electorate is in favor of leaving the European Union. He should also be concerned that a significant part of the British press and several senior members of Cameron's own Conservative Party can be expected to campaign actively for Brexit. It would not help Cameron's efforts to keep the U.K. in the EU were the current global financial market turmil to persist or were there to be any future high-profile immigrant-related incidents in the U.K.
A decision to leave the EU would have devastating long-run consequences for both the United Kingdom and the European Union. For even if the United Kingdom were to negotiate favorable trade terms from the European Union in the protracted divorce negotiations that would inevitably follow a "no" vote, such a vote is bound to raise renewed calls for Scottish and Welsh independence, since both Scotland and Wales would prefer to be in the European Union than out. That would raise basic questions about the long-run viability of the United Kingdom in its present form, which is bound to be highly unsettling to the markets.
A British exit from the European Union would also likely sow a mood of uncertainty as to the long-run viability of the 28-member European Union itself. No longer would it appear that European Union membership was irreversible.
Even should Cameron, in the end, secure a "yes" vote for staying in the European Union, his referendum call will not be without its economic costs. This is especially the case since Cameron would be calling the referendum at the very time that the United Kingdom is currently experiencing its largest external current account deficit in the post-war period. That makes the United Kingdom highly dependent on a continued large capital inflow from abroad to keep its currency stable. By so doing, it sets up the conditions for a sterling crisis in the run-up to the referendum should capital decide to stay away from the United Kingdom for fear of a possible "no" vote in that referendum.
Hopefully, both the British Treasury and the Bank of England are working on a Plan B to steer the British economy in the difficult months that likely lie ahead. Whatever the outcome of the Brexit referendum might be, this year is likely to be a very challenging one for the U.K. economy.
Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.