In a risk assessment issued to clients, analysts said a perfect storm of fraught coalition tensions, declining British influence in Europe, and moves for closer EU integration risked forcing an “in or out” referendum before 2015 – causing the coalition government to fall.
Penned by former British diplomat and Tony Blair adviser Alastair Newton, the report added that, without a repatriation of powers, it would be difficult to get Britons to vote to stay in Europe – forcing a British exit, or “Brixit”, from the EU.
“In short, we see a non-negligible probability that, however the question put to the electorate was worded, a referendum on EU membership without first securing significant concessions from EU partners would result in the UK leaving the European Union,” Newton said.
“We see difficulty securing an ‘in’ vote no matter how the question is framed.”
It is the first known instance of a financial institution issuing a risk assessment for the UK’s exit from the EU, but could prompt a wider debate among global investment banks about the UK’s future role in Europe.
Director of business think-tank Open Europe, Mats Persson, said: “This is significant – it’s a debate which will be very vibrant in the City of London as it relates to the idea that London is an entry point into the European market.
“In order to guarantee the benefit of the single market there needs to be some change in the UK’s basic membership – renegotiation is not a threat.”
Tory MP Douglas Carswell told City A.M.: “I think it’s wonderful to see that the City and the banks are beginning to recognise reality. Brixit – unlike Grexit – would happen from a position of strength and would be a good thing. It would allow us to return to prosperity more quickly and trade with the world.”
Arbuthnot Banking Group economic adviser Ruth Lea added a British exit was “something the markets should be flagging.
“The truth is that what’s happening now between the Eurozone and this country is that Britain is becoming isolated,” she said.
The UK’s relationship with the EU face a stumbling block in the near term with negotiations on the EU budget for 2014-20 underway.
The UK is calling for the budget to be frozen in real terms but EU members could call for the UK to forgo its budget rebate, which Eurosceptic MPs could see as a climbdown by the UK.