Theresa May’s retreat from Brexit ‘cliff edge’ may cushion Ireland

Ireland may be cushioned from the worst of Brexit as UK prime minister Theresa May said on Monday she intends to avoid a "cliff edge" for British business when a two-year divorce talks period comes to an end.

Ms May’s comments at the Confederation of British Industry’s (CBI) annual conference in London were in sharp contrast to the tone she set at her Conservative Party’s conference in early October, seen as setting the course for a “hard Brexit” and prompted a sterling sell-off.

"We have in the past highlighted some of the main risks of a 'hard Brexit' for Ireland on the trade side, but also regarding investment," said Frederico Barriga Salazar, Fitch Rating's lead Ireland sovereign credit analyst.

“If there’s some leeway by the EU, it would spare Ireland some of the worst [effects].”

Sterling rallied to a two-month high of 85p against the euro after the UK prime minister signalled she was listening to British business and was open to seeking a transitional deal following Brexit, if, as is most likely, a new relationship has not been agreed by then.

Flip-flopping

This would avert a scenario of tariffs and quotas applying immediately after two years of formal talks between the United Kingdom and European Union end.

“There’s been a lot of flip-flopping and I think this is the latest step back from the cliff,” said Dermot O’Leary, an economist with Goodbody Stockbrokers in Dublin. “We would be most affected by a ‘hard Brexit’.”

While Ms May wants to invoke article 50 of the Lisbon Treaty by the end of March, setting Brexit negotiations in motion, "nobody really thought two years was a realistic timeframe for a new agreement", said Colin Bermingham, a eurozone economist with BNP Paribas in London.

“The UK is Ireland’s biggest export market after the US, so clearly you want as open a trade deal as possible,” said Mr Bermingham. “With the UK’s friends in the room dwindling, Ireland is probably pushing its case the most.”

Competitive edge

Justin Doyle, a senior currency trader with Investec in Dublin, said a 6 per cent rebound in sterling in less than a fortnight "is a very welcome reprieve for the Irish export sector as we head into the end of a dramatic 2016".

However, the competitive edge of Ireland’s 12.5 per cent corporate tax rate will be eroded as Ms May also told the CBI event she wants to cut the UK’s 20 per cent headline tax rate to the lowest among the world’s 20 largest economies.

Experts see the rating falling to 15 per cent, matching a US one proposed by president-elect Donald Trump, who wants to cut his country's current 35 per cent levy.

“It’s clear that May is going to push a pro-investment and pro-innovation agenda on the taxation front, which will be a competitive pressure for Ireland,” said Fergal O’Brien, Ibec’s director of policy, who was at the UK prime minister’s CBI address.