“Economically, it would be like putting a gun to your head and pulling the trigger.” That is how the head of research at emerging-markets fund house Ashmore views a potential British exit from the European Union, on which a yes/no public vote is scheduled for June 23 in the UK.
Jan Dehn told AsianInvestor that the downsides of such a move would far outweigh any potential benefits and have global ramifications way beyond what many have considered. “It would be hugely regressive and have very deep economic consequences,” he added.
For instance, Brexit would deprive the UK, and ultimately Europe, of investment from Asia, and most notably China, argued London-based Dehn.
If Britain were to leave, the EU could quickly unravel as other countries looked to follow suit, he said, thereby reducing its economies of scale and economic and political heft. Asian investors would then start to view Europe as a group of smaller nation states and be less inclined to allocate money there.
One clear danger is that Brexit would scupper the implicit bargain struck with China that allowed the renminbi into the International Monetary Fund’s special drawing rights basket with a 10.9% weighting, said Dehn.
Britain and Europe gave up a substantial part of their currencies’ share of the basket (surrendering 3.2% and 6.5% respectively) in last November's agreement to allow the yuan entry, while Japan and the US gave up much less (1.1% and 0.2%), he noted. The implication is that, in return, China will channel a significant amount of its surplus reserves into UK and European assets, notably the energy sector. Indeed, this has already begun, with China taking a stake in building the Hinkley Point nuclear power plant.
Once the RMB is a global currency – as it will be by October this year – that will free up as much as half of China’s $3.2 trillion in reserves, said Dehn.
However, such a deal makes far less sense from a Chinese perspective if Europe breaks up, he noted. “So there are serious ramifications beyond simply the economy-of-scale argument – there’s also an external funding issue.”
Dehn also highlighted significant geopolitical implications: Chinese investment in energy infrastructure would enable Europe to diversify away from Russian oil and gas towards US shale gas. A divided Europe, on the other hand, would give Russian president Vladimir Putin greater control in Eastern Europe and make him more of a regional threat.
China will have too much capital to deploy into financial markets, hence it has set up the Asian Infrastructure Investment Bank to allocate to real assets globally, added Dehn. “If you put $1.6 trillion into an investment bank and leverage it up 10 times, you get $16 trillion. That what’s at stake here, and Europe and Britain are destined to be major recipients of this.
“If Europe disintegrates because of short-term nationalistic policies, then that whole [Chinese] deal falls apart,” argued Dehn. “That is much more significant from a long-term perspective than the local economic implications.”