FXStreet (Delhi) – James Knightley, Senior Economist at ING, notes that EU President, Donald Tusk, responded equivocally to David Cameron’s letter outlining his “demands” in relation to the referendum on the UK’s ongoing membership of the EU. Key Quotes “In November, UK Prime Minister David Cameron sent a six-page letter to EU President Donal Tusk spelling out his key aims in negotiating a better deal for Britain in terms of its relationship with the EU.” “Yesterday, we got the first response from Donald Tusk in a letter update to the European council. In it he stated that “there is a strong will on the part of all sides to find solutions that respond to the British request while benefiting the European Union as a whole” and that “so far we have made good progress”. For the first three topics of Economic Governance, Competitiveness and Sovereignty, Tusk hinted that these were relatively straightforward to deal with and agreement was certainly possible.” “However, of the most contentious of the four – Immigration – he said there is “presently no consensus” on the UK’s demands, adding that we “have to overcome the substantial political differences that we still have on the issue of social benefits and free movement”. Indeed, Poland and Slovakia have already rejected David Cameron’s demands on this topic.” “Tusk did acknowledge that the longer the debate drags on the greater the risk for economic activity, recognising that “uncertainty about the future of the UK in the European Union is a destabilizing factor. That is why we must find a way to answer the British concerns as quickly as possible.” “This is our concern given that half of all the UK’s trade is with the EU plus the fact that the UK is a very open economy whereby foreign investment accounts for around 20% of all investment spending, whereas it is less than 10% for most other developed markets. Any uncertainty (even if the UK eventually votes to remain within the EU) poses a major risk to the UK economy and makes it more likely that the Bank of England will not rush into aggressive interest rate hikes. Sterling also looks vulnerable in this environment.” “Nonetheless, it also poses clear risks for the EU too. The loss of the UK – a relatively fast growing economy that is on course to be larger than Germany in the next 25 years – would negatively impact the EU’s own economic outlook and global influence. The loss of the UK’s more laissez faire influence could also upset the political balance within Europe.” “The upcoming EU leaders’ summit next week is likely to see more discussion on this topic, but Cameron has already given up getting an agreement that soon given the focus on terrorism in the wake of the Paris attacks. The next opportunity will be in February.” For more information, read our latest forex news.