John FitzGerald: the financial implications of Ireland leaving a union

Sunday is the 92nd anniversary of Ireland’s biggest ever financial success when a deal was signed with the UK government to reduce Ireland’s potential debt by around 80 per cent of GNP.

The agreement itself was signed after 10 days of intense negotiations in London. The outcome was such a surprise to the government that it was only late the previous evening of December 2nd, 1925, that the then taoiseach WT Cosgrave, realised that the minister for finance should have been part of the negotiations. However, it was then too late for the night boat, so Ernest Blythe [ the minister] only arrived late the following evening for the signing of the agreement.*

What triggered the intensive round of negotiations between the two governments in November 1925 was the rumour that the Boundary Commission, set up under the Treaty, was going to redraw the Border in a very unfavourable way for the South, with parts of Donegal to transfer to the North.

This was something that the Cosgrave government had never expected, and such an outcome could have led to its collapse and a possible reopening of civil war. The UK government shared this concern.

‘The Irish are just making trouble because they lost. A bit petty isn’t it really?’

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In the first day of negotiations on November 26th, 1925, the Irish sought to persuade the British government to prevent the Boundary Commission's report being published and, instead, to redraw the boundary in Ireland's favour. Not surprisingly, the Northern Ireland prime minister William Craig rejected this option, and British prime minister Stanley Baldwin supported his stance. However, the UK offered to suppress the Boundary Commission report and to leave the Border unchanged.

Public expectations

Yet the Irish needed more given public expectations. In particular, Cosgrave and his deputy, Kevin O'Higgins, expressed very serious concern about the treatment of Catholics in Northern Ireland.

However, the Irish side had not worked out in advance what was needed to protect the interests of Northern Catholics (unlike how well prepared Irish negotiators have been in recent talks). As a result, the Irish were left trying to formulate their demands over the course of the continuing negotiations.

Among the ideas canvassed was the abolition of the special constabulary, proportional representation in elections and freeing of prisoners. It was clear that there was some sympathy for Irish demands from the UK government side – Craig, the Northern prime minister, was probably under some pressure.

However, on the Sunday afternoon in Chequers, Craig announced that the Irish side was interested in a deal on the debt, the first time this had been raised. Craig’s intervention changed the subsequent course of the negotiations. On Tuesday, December 1st, the negotiations resumed in the British treasury, with Winston Churchill (chancellor of the exchequer) and Cosgrave the lead negotiators.

National debt

The initial UK position was that, as a result of article V of the Treaty, Ireland had accepted a share of the UK national debt as a price for leaving the UK. Applying a suitable formula, the sum involved was £156 million or 80 per cent of Ireland’s then GNP.

The Irish side did not debate the issue of a liability, but argued that the UK was owed offsetting money by the dominions and other first World War allies. Little progress was made that day.

The next day Churchill and Cosgrave met on their own. When they returned to the formal meeting they announced that a deal was done for Ireland to pay £5 million instead of £156 million. The UK had caved in on the debt issue. After the Irish left, Lord Birkenhead said the Irish could not afford to pay – an explanation for the UK change of mind.

While the final agreement resulted in the debt GNP ratio in 1926 being 10 per cent rather than 90 per cent, the Irish side was profoundly dissatisfied with the result. It would have much preferred a deal which protected Catholics in the North. However, it had been outmanoeuvred, partly because it had not been prepared for the negotiations. The end results were a solvent Irish economy but continuing discrimination in the North for the following 50 years.

On the table

Today the price for leaving a union, and the Irish Border, are once more central issues. But it is the UK's outstanding liabilities post-Brexit that are on the table.

This time around Ireland’s primary concern in pursuing its crucial objectives on the Border is not about economics. Rather it is to protect the peace process and the stability both of Ireland and of Northern Ireland in a post-Brexit world.

* A paper by Seán Kenny, Lund University, and myself describes how the deal was done.