Brexit will have far-reaching consequences for the world

In a horrific incident just a week before the crucial referendum on United Kingdom’s European Union (EU) membership, Jo Cox, a member of Parliament from the opposition Labour Party was on June 16 killed after being shot and stabbed in her constituency in northern England.

The police are investigating reports that the assailant yelled "Britain First" during the attack, leading to speculation that this might be associated with a far-right political party of the same name, whose candidate for London mayoral elections last month turned his back in disgust on Sadiq Khan at the count, in sectarian rage at the city’s decision to make a Muslim mayor.

As the country comes to terms with this tragedy, it is clear that the fault lines in the UK are as sharp as ever and tensions are rising with each passing day.

The United Kingdom is passing through a tumultuous phase. Prime Minister David Cameron promised to hold a referendum if he won the 2015 general election, in response to growing calls from his own Conservative MPs and the UK Independence Party (UKIP), who argued that Britain had not had a say since 1975, when it voted to stay in the EU in a referendum. 

As a consequence, a referendum will be held next week to decide whether Britain should leave or remain in the EU which is an economic and political partnership involving 28 European countries. It came out of post-Second World War efforts to foster economic co-operation, with the idea that countries which trade together are more likely to avoid going to war with each other.

It has since grown to become a "single market" allowing goods and people to move around, basically as if the member states were one country. It has its own currency, the euro, which is used by 19 of the member countries, its own parliament and it now sets rules in a wide range of areas, from the profound to the mundane.

The UK has maintained its own unique position in the EU with its own currency and visa regulations. But the debate about the UK’s relationship with the EU has continued unabated. Earlier this year, Cameron sought an agreement with other EU leaders to change the terms of Britain's membership.

He argues the deal, which will take effect immediately if the UK votes to remain in the EU, gives Britain "special" status within the 28-nation club, and will help sort out some aspects of the EU which do not sit well with the British populace, such as high levels of immigration and giving up the ability to run our own affairs. His critics, on the other hand, have derided Cameron’s deal, arguing that it will make little difference and falls well short of what he had promised when he announced his plan for a referendum. 

If Britain votes to leave the European Union, it could mark the beginning of uncertainty both about the UK economy and the rest of Europe. Till now there was relative certainty that the Remain in EU camp had an edge, but more recently, Brexit camp has taken a lead in polls. This has rattled the markets and British politics.

Even as global growth has slightly improved and in the UK there has been a significant increase in industrial production and construction output, the biggest risk to the UK economy remains the outcome of the referendum on next week. The Bank of England has warned that uncertainty about the EU referendum is the "largest immediate risk" facing global financial markets.

The UK treasury has claimed a "Leave" vote would tip the UK into a year-long recession. British chancellor, George Osborne sparked anger among his Leave-backing Tory colleagues when he said an emergency Budget would be needed if the UK voted out.

He listed examples of the measures that could be required including hikes to income tax and cuts to the NHS, saying leaving the EU would be an "irreversible" step causing "financial instability" and leaving the UK "with no economic plan." Big business - with a few exceptions - tends to be in favour of Britain staying in the EU because it makes it easier for them to move money, people and products around the world.

But the Vote Leave campaign has accused the Bank of England and the Treasury of "peddling phoney forecasts" to scare people into voting to stay in the EU. More significantly, the migration issue has acquired centre stage at a time when middle England is feeling restless about the rapidly changing demographics.

The Leave camp has argued that leaving the EU is necessary for people to support Britain's "multi-racial, multi ethnic society". According to this view, the government could not limit the number of arrivals from inside the EU and to continue to have support for migration the UK needs to be able to control the numbers.

A vote for Brexit will have far-reaching consequences. No wonder the Indian government is closely assessing the possible fallouts of such an outcome. Reserve Bank of India governor Raghuram Rajan too has warned that Brexit cannot be ruled out as a source of volatility, but he added that India has defences in the form of good policy, long-term liabilities and reasonable amount of (forex) reserves.

Modi joined a string of world leaders who have counselled the UK not to withdraw from the EU, including US President Barack Obama, French President François Hollande and Chinese President Xi Jinping. Indian Prime Minister has called the UK the "entry point for us to the European Union" and that "India always stands in support of a strong and united Europe." 

Indian companies have been increasing their investments in the UK and using it as a jumping off point to the rest of the European market. The Indian business community largely also seems to be in favour of the UK remaining in the EU.

As the Federation of Indian Chambers of Commerce and Industry suggested, a British decision to leave the EU "would create considerable uncertainty for Indian businesses" and would "possibly have an adverse impact on investment and movement of professionals to the UK." 

Though the long-term impact of a Brexit for the global economy and for India in particular are far from obvious, it is clear that in the near term, there will be heightened global volatility thereby impacting capital flows and impact through currency exchange too will be significant.

Whatever happens on June 23, the UK will no longer be the same after the referendum.