The risk of BREXIT – Britain exiting the European Union (EU) – looms large with the upcoming referendum on Britain’s membership of the EU, on June 23rd. Can Britain break European hearts while at the same time staying friends? And more importantly can Europe stay strong after the hole left by the loss of their long term partner? How the relationship ends will determine the impact of BREXIT.
A lot has been written recently on the potential fallout from BREXIT. The UK Treasury devoted 200 pages to the subject last week, in support of staying in, estimating that each British household will most likely be hit by £4,300 per year if Britain leaves the EU.
This is not an estimate in the drop in people’s individual incomes, rather a figure that is derived from their forecast of a 6% drop in Britain’s Gross Domestic Product by 2030, a measure of economic output, divided by the current 27 million British households.
“Brexit to cost UK households at least £4300 a year” makes for a more fear inducing headline than a more accurate description like “The UK economy could shrink by 6% by 2030 under BREXIT, based on a range of economic assumptions that can vary widely”.
The report was music to the ears of the Yes campaign in favour of remaining in the European Union, no better way to scare the populous, as they seek to personalise the impact of Britain leaving.
As with everything in economics, there are huge uncertainties in terms of estimating the fallout from a British vote to exit the European Union. While both the Yes and the No sides will argue their case for In and Out, respectively, the reality is that the long term fallout will depend heavily on just how the relationship ends.
“It’s been a long marriage between members of the European Union” said IMF Director Christine Lagarde recently. “It’s really my personal hope that it doesn’t break. Like all marriages, good talks can actually help and I hope that the dialogue can continue.”
On the British side of the marriage, while the Yes campaigners are prepared to try and make it work with Europe, the No campaign is effectively saying to its European partners: ‘I love you but I am not in love with you’. They do not want the commitment that staying in the European Union brings, but they also do not want to wave goodbye to all of the benefits.
The No campaign are in that delusional ‘we can still be friends’ mind-set, whereby they believe trade deals with Europe can be easily agreed. The reality is that like any break up, “staying friends” rarely happens. Europe will not make it easy for Britain if they decide to walk away.
Even if there is a rational justification for moving on and working together for a smooth exit, emotion will cloud reason among the European establishment and a painful transition is likely to unfold, as both sides recover from an interdependence that has been fostered over decades.
Still, just because it could be a messy divorce is not reason enough for Britain to stay in the European Union, a political construct that is clearly at a crossroads. Rather than lambast Britain for considering their future in Europe, other members, on a path to closer integration with their eyes closed, should take this time to step back and consider what they want from this relationship.
If the British referendum prompts intelligent and reasonable discussion among member states, and reflection on the type of European Union they wish to build, it could avoid a more painful breakup down the line.
Too many relationships, in all walks of life, are defined by ‘it’s easier to stay’. Leaving requires jumping into the unknown. That fear of the unknown, the prevailing force that can limit development, is why people don’t quit the job they dislike, why they stay in bad relationships, or why they rarely move outside their comfort zone in general. It is why I believe Britons will ultimately vote to remain in the EU, the same reason that had me convinced Scottish independence would not happen.
Nevertheless, it is a risk that Ireland cannot ignore. There are many facets to our relationship with Britain, but from an economic perspective, there would be significant implications for the Irish economy. Indigenous industries, more reliant on the British market than multinationals, would be hurt most by the uncertainty emanating from a breakup. However, rather than bemoan the risk of BREXIT, companies should be addressing it head on by seeking out new markets.
For example, Latin America remains a relatively untapped region for Irish companies, a developing region with a population of over 600 million.
Colombia, a country I recently visited, is the fourth largest economy in Latin America with a population of around 50 million people and an estimated GDP of $263 billion USD. It is one of the fastest growing economies in the region with a growing middle class, of which Europe has a free trade agreement in place since 2013, yet Irish exports to the country are less than €60 million every year. The BREXIT risk is a reminder for Irish companies to continue to widen trade links across the globe.
In terms of global financial markets, while there would inevitably be market dislocation resulting from a messy BREXIT, the oversubscribed Argentinian government bond auction last week – after 15 years of exile from the international bond markets since their massive debt default – highlights the fact that markets do move on.
Market sentiment longer term will be heavily dependent on the success of the British government to navigate a smooth exit and to forge a new path for an independent Britain.
To steal a campaign slogan from Donald Trump – perhaps a bigger risk to the world than BREXIT – can a British government, independent of the European bureaucrats, make Britain “Great” again? That is the question the undecided voters have to answer on June 23rd when they go to the polls.
I believe the fear of the unknown will dominate voters’ minds and Britain will remain. What Britons have under the current system will outweigh the uncertainty and inability to quantify the economic and social consequences that comes with a free and independent Britain.
Finally, the European Union and member states would be better served by having detailed prenuptial agreement. It is the uncertainty around the terms of the breakup which is the biggest risk. As well, events since the global financial crisis shows how Europe’s institutions like to play the fear card if you refuse to comply. Greece was bullied into staying, their people threatened with Armageddon, but are they any better off now. No relationship can survive long term where control is the power that unites.
Article featured in the Sunday Independent, May 7th 2016