Monday 18 December 2017

Can Britain and Europe remain friends in the event of a breakup?

Will British voters decide it's easier to stay in their troubled relationship with the European Union? Uncertain terms of divorce are the biggest risk

IMF managing director Christine Lagarde said she personally hoped that Britain would not vote to leave the EU Photo: Andrew Harrer/Bloomberg via Getty Images
IMF managing director Christine Lagarde said she personally hoped that Britain would not vote to leave the EU Photo: Andrew Harrer/Bloomberg via Getty Images

Vincent McCarthy

Can Britain break European hearts at the same time staying friends? 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 a Brexit.

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 In and Out sides will argue their case, 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 managing 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 '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. It is the uncertainty around the terms of the breakup which is the biggest risk.

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 $263bn. 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 €60m every year.

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 when they go to the polls on June 23 .

Vincent McCarthy is head of investment consulting in Invesco Ireland

Sunday Indo Business

Promoted Links

Business Newsletter

Read the leading stories from the world of Business.

Promoted Links

Also in Business