Closely-followed former global macro fund manager Raoul Pal says the United Kingdom's European Union referendum — no matter how the "Brexit" vote goes — could have really bad unintended consequences for the rest of Europe.

The EU is made up of 28 member countries, and it allows for the free movement of goods, services, workers and capital. Basically, if you're a citizen of an EU member country, you can freely live and work in another member country like Spain and use its health-care sytem and other services. A key focus of those who support a "Brexit" has been concerns about the recent rise in immigration to the UK.

On Thursday, British citizens will vote on whether the UK should remain in the EU or leave. The polls suggest the vote is going to be close.

It's about Europe, not Britain

Whether the UK remains or leaves, with a small margin of victory either way, it won’t matter for Britain so much as it will for the rest of Europe, according to Pal.

“The biggest issue is going to be Europe," Pal told Yahoo Finance, adding, "Regardless of what happens to the vote, something has really changed in the markets. It looks like they're starting to discount that if a Brexit happens, then it's a really big event for Europe more than it is tor the UK because it may allow other countries to think about leaving the EU. The risk is of Europe falling apart."

Pal pointed that there's been a "bit of a panic" going on in the market, with European bank stocks already in a free-fall and European government bonds negative yielding.

If the UK leaves on its own free-will, it could give the signal to other countries that they can leave. It could have a domino effect.

"What's stopping Greece saying 'we just want out too'? If the fifth largest economy has walked away, what's to stop anyone else? What's to stop the Spanish?"

Even if that doesn't happen, just having a vote in the first place isn't a good thing for Europe.

Let’s say “remain” wins 51% to 49%, the unintended consequence is that it gives other European countries a hope that maybe if they were to have a referendum they would be able to exit, Pal explained.

The thought is that if “remain” wins the vote, the market might have a relief rally after. However, it’s not about the reaction of the day, but the reaction in the weeks and months following.

“Regardless of outcome, it’s going to make everyone realize that Europe has a problem. If the UK leaves, it will split the nation 50/50. If it remains, it will create a problem for Europe that they got the fifth largest economy to remain but only just. I really think it makes Europe a much weaker place.”

It could also be more difficult for the EU to impose rules on the UK if 50% of the country doesn't want it.

"The EU gets a bit more paralyzed in what they can do. It's a bad all around outcome."

Pal, a UK citizen who has lived in Spain, previously co-managed GLG's global macro fund, one of the largest in the world. He retired in 2004 at age 36.

He now authors a research letter, The Global Macro Investor, which is read by some of the most prolific hedge fund managers. Pal is also the co-founder of Real Vision Television, an online subscription financial-news service.

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Julia La Roche is a finance reporter at Yahoo Finance.

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