Cliff Taylor: Between a rock and a hard Brexit

Will economic sanity lead to an orderly Brexit deal? Or will political tensions lead to a collapse in the talks , or at least an acrimonious and minimalist agreement between Britain and the EU? These are the key questions for the economy and Irish business as Article 50 is triggered.

What did we learn on Wednesday as the letter was delivered? The tensions between the political dog-fight and the economic interests of both sides to get this done are evident. Both sides set out their political stall on Wednesday, while behind the scenes it is clear that there is increasing recognition of what a deal might look like, and how economic disruption could be minimised.

Both sides talk of their desire to negotiate a far-reaching trade deal for the future. This would be in Ireland's interest. But the tensions are there. There were hardline hints from a number of other EU governments and the European Parliament on Wednesday.

In short, there is a real risk of failure in the talks and, in an economic sense anyway, Theresa May's comment that Brexit must not damage the Republic of Ireland rings a bit hollow.

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Terms

Even how the Brexit talks will proceed is not yet agreed. At stake is first the terms on which Britain would leave and then separate talks on a new trade deal between Britain and the EU.

Three times in her speech Theresa May said she wanted this free trade agreement negotiated " alongside" Britain's exit terms. But the EU side is insisting, according to a statement from the council, that the talks "start by focusing on all key arrangement for an orderly withdrawal". Europe wants the exit bill paid, before focusing on the future.

For Irish business, this means that the key issue of future trading arrangements will, if the EU sticks to its guns, not even start to be addressed until the tricky issue of Britain’s exit bill is agreed. In the meantime sterling will swing - and will weaken if there is news of the talks hitting difficulties, another issue of our businesses to deal with.

It is also now clear that, yes, Britain will leave the single market and the customs union – which allows free trade in goods, meaning some kind of controls on the Irish Border now look inevitable. So a considerable period of uncertainty lies ahead for Irish businesses. And there is a real risk that, in two years time, Britain will leave the EU with no deal done on future trading arrangements and no agreement on allowing for a transition period for this to be negotiated, or to come into force.

If Britain crashes out of the EU without a deal on future trading arrangements, then tariffs - special import taxes - at levels set by the World Trade Organisation (WTO) would be likely to apply and customs checks and other barriers to trade would be introduced immediately. UK prime minister, Theresa May specifically referred to this possibility in her speech to the House of Commons on Wednesday.

Disruption

This would disrupt trade between Ireland - and all other EU countries - and the UK . In total 14 per cent of our exports go to the UK and we source 18 per cent of our imports from the UK market. It would pose particular problems for the Irish food sector, where 40 per cent of exports go to the UK and for Irish supermarkets, who import heavily from UK manufacturers. In practical terms, to take just a few examples, liquid milk imports from the North would be likely to be wiped out, and Irish exports of cheddar cheese and beef to the UK would be seriously threatened.

This is the worst-case scenario for the Irish economy and on ESRI calculations Irish GDP growth would be not far off 1 per cent per annum lower each year for the few years after Britain left and the unemployment rate would be 2 per cent higher. As an Ibec report published yesterday highlighted, it would also take a heavy toll on sectors such as food and on certain exposed regions.

For our economic interests, what is clear is the harder the Brexit, the worse the economic threat to Ireland. What Ireland needs is for the two sides to agree a deal which involves the continuation of free trade between Britain and the EU - or as close as possible to it – with a clear and organised path to get there via transitional arrangements.

But Britain may find it hard to agree to the EU terms for a continuation of free trade – even on an interim basis for a transition period. These would be likely to include signing up to continue freedom of movement, EU regulation and possibly continuing to recognise European courts. And, in the views of its supporters, this would not be a “ real” Brexit.

The bottom line is that, right now, amid all the political noise, a harder style Brexit is looking more likely, with significant economic costs for Ireland. Whether this will change in the months of negotiations ahead, as economic considerations come into play, is anyone’s guess.