Why a British exit from the EU remains a possibility

Europe's sovereign debt crisis has for some time now roused euroskepticism in the United Kingdom.

In his much anticipated Jan. 23 European Union speech, UK prime minister David Cameron reiterated that he wants to work with the EU. From the speech:

"First, the problems in the eurozone are driving fundamental change in Europe.

"Second, there is a crisis of European competitiveness, as other nations across the world soar ahead. And third, there is a gap between the EU and its citizens which has grown dramatically in recent years. And which represents a lack of democratic accountability and consent that is — yes — felt particularly acutely in Britain.

"If we don't address these challenges, the danger is that Europe will fail and the British people will drift towards the exit."

Cameron also said the next parliament would give the British people an "in-out referendum" in 2017, if the Conservative Party wins the 2015 election.

But according to Nomura's Alastair Newton's latest note, "Issues Which Keep Me Awake At Night," he writes that a British exit from the EU, or 'Brixit,' continues to be a cause for concern. He points out two big risks to Cameron's strategy:

1. "Between now and the election, the eurozone could come up with something, eg, on bank regulation, which spurs a real crisis in the UK over Europe." In an earlier note Newton pointed out that there is the chance that certain eurozone events — a single bank supervisor, which would in effect take away the UK's ability to veto; a bank transaction tax; and measures that discriminate against non-eurozone countries — could put more pressure on Cameron from euroskeptics in the conservative party.

2. "Chancellor Angela Merkel’s fairly positive response to his speech notwithstanding, Mr Cameron could fail to negotiate a ‘new settlement’ with Europe wide and deep enough to produce an ‘in’ vote in a plebiscite."

Of course at this point there is real concern that Cameron could see a defeat at the 2015 election.

Newton writes that there is a 50-50 chance of a 'Brixit' in the next five years.

With the UK having lost its AAA rating and widely regarded to be on the edge of a triple dip recession, this week's budget is crucial to restoring the government's credibility ahead of the election and the UK's position vis-à-vis the EU. 

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