Where the grass is greener
In a divorce, the lawyers benefit
by Gary Smith in Hong Kong
Sun 13 Mar 2016
Some campaigners are tempted to look at the issues behind Britain's in-out EU referendum in homely down-to-earth terms. The comparisons can be useful – so long as we don't take them too far.
Leading members of the 'leave' campaign suggest, for example, that the UK would never have decided to join the EU if we knew how things would turn out. This is of only limited assistance. It is an argument for not getting married, not an argument for getting divorced. These are not the same thing.
We can only speculate on the longer-term contentment resulting from divorce. We can be a bit more scientific when assessing the short-term costs. Economic value is usually transferred from the unhappy couple to lawyers. My fear is that, if the UK were to leave the EU, there would be a similar outcome. Whatever the exact result, both sides would suffer financial loss. Lawyers would be the main winners.
Whatever your predisposition on the EU question, you can find a long-term economic analysis that suits your bias. The more I read on these longer-term scenarios, the more uncertain I become. It reminds me of the alarmingly diverse economic analyses from the opposite camps in the run-up to the Scottish referendum in September 2014. The watchwords seemed to be: exaggerate, extrapolate, and then use the power of compounding to deliver a really knock-out blow.
Looking at the shorter term, by contrast, there seems to be general acceptance, including among Brexit proponents, that departure would bring costs. Uncertainty about the country's future European and international ties would hit economic activity.
Uncertainty might prevail for some time. Existing arrangements for a nation wishing to leave maintain that exit negotiations should be completed within two years, so that departing states can benefit from the rule of needing only majority decisions rather than unanimous agreement from the remaining EU members.
But two years would probably not suffice. General elections in Germany and France next year will hold up decision-making. Failure to complete an exit agreement within two years would lead to additional complexity. Some studies have suggested it might take 10 years.
In view of substantial disagreement on the likely longer-term economic consequences, I believe the decision-making process should give greater weight to the short-term costs.
Here, another home-spun metaphor may be helpful. Will voting to leave or stay affect whether the grass in the UK garden is greener by 2030 compared with continental Europe?
Consider a decision by a UK homeowner to move between similar houses, priced more or less the same, on different sides of a street, to exchange an easterly aspect for a westerly one. In London the cost of this property swap could be 10% of the value of the new house, just to enjoy the sun in the afternoon rather than the morning. I don't know which aspect is better for growing a back-garden lawn. I do know that I don't want to pay that kind of money to find out.
Rational people don't make this kind of house switch. They usually do this only when the overall case for moving home overwhelms the consideration of transaction cost. Devotees of the 'leave' cause will have to convince the electorate that they have worked out the balance, and that it is in the UK's favour – and then begin to explain it clearly.
Gary Smith is Head of Sovereign Wealth Funds and Official Institutions at Baring Asset Management and a member of OMFIF's Advisory Board. This is No.10 in the series.
OMFIF's series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the 23 June poll. We are assuring a balance between many different points of view, in line with OMFIF’s overall neutral stance on the issue.
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