A united Ireland would be worse off than the Republic

Questions over UK debt mean Irish reunification could come at a high economic price

Reunification costs: Britain might argue that Northern Ireland has been responsible for a disproportionate share of UK debt, and would therefore push for a larger share of this liability to be transferred to a united Ireland. File image: Getty

Reunification costs: Britain might argue that Northern Ireland has been responsible for a disproportionate share of UK debt, and would therefore push for a larger share of this liability to be transferred to a united Ireland. File image: Getty

 

With the British government opting for a hard Brexit, it would appear that the only way Northern Ireland and Scotland can stay part of the EU single market is to leave the UK, which opens up the possibility of a united Ireland.

Apart from the obvious political challenges, a move toward a united Ireland also raises a number of important economic issues.

Northern Ireland is likely to suffer the greatest negative economic impact from Brexit, given its considerably closer economic relationship with the EU, and particularly Ireland, compared with any other part of the UK.

While less than 50 per cent of UK merchandise exports are destined for the EU, about 60 per cent of Northern Ireland’s exports are to the EU, and of that more than half go to Ireland.

Northern Ireland is also more dependent on EU transfers including EU Common Agricultural Policy payments.

While there are no examples of a larger country leaving the EU – Greenland with a population of less than 60,000 left the EU following a referendum in 1985 and Algeria split from France and thus the EU following an armed conflict in 1962 – German reunification in 1990 provides important insights into the issues involved in reunifying two territories.

German reunification happened quickly, and a series of important decisions that had significant economic implications were made in short succession.

This included the abolition of the East German currency, which was replaced by the Deutsch Mark at an exchange rate of one to one.

An economic and social union was also created, whereby the unified Germany would take on the liabilities of East Germany and the East German economy was supported by significant financial transfers.

The cost of German reunification has been estimated at €2 trillion.

Irish unification would involve some of the same issues encountered in Germany.

The issue of liabilities is important, and this issue will also form an important aspect of the article 50 negotiations between the UK and the EU.

Pension liability

The public sector pension liability in Ireland is estimated to amount to €98 billion.

Apportioning the UK public sector pension liability to Northern Ireland on the basis of public sector employment would more than double these liabilities for a united Ireland.

This reflects both the higher liabilities in the UK and the greater share of employment in the public sector in Northern Ireland.

If UK debt were apportioned on a per capita basis, then this would add over €64 billion to the Irish debt.

However, as the UK per capita debt is lower than that of Ireland, the per capita debt of a united Ireland would be lower than that of Ireland.

Of course, Whitehall might argue that Northern Ireland, where public expenditure far exceeds tax revenue, has been responsible for a disproportionate share of UK debt, and would therefore push for a larger share of this liability to be transferred to a united Ireland.

In this respect there are a lot of similarities with German reunification, where East Germany was economically less developed than West Germany, and thus needed significant subsidies from West Germany.

The latest data suggests that the Northern Ireland deficit is about 27 per cent of gross domestic product (GDP), or €10.8 billion, which is met by transfers from the UK treasury.

Furthermore, in a unified Ireland subsidy rates, as well as systems of public service delivery, would need to be harmonised.

For example, the system of delivering health services differs significantly. But which system would be adopted and what would the cost implications of this decision be?

Public investment

Northern Ireland’s per capita GDP is similar to that of the Border region of Ireland which is about 38 per cent lower than the national average.

Therefore, in a united Ireland, per capita GDP would be 11 per cent lower than the current national average in Ireland.

The gap between East German per capita GDP and that of the reunified Germany was similar to that which would apply to a united Ireland.

However, since reunification, that gap has declined significantly, in part due to substantial public investment that was funded through transfers from richer regions of Germany.

In the wake of German reunification, East German industry had to reorientate its production and sales from the collapsing Comecon economic community led by the Soviet Union, which proved very difficult for many firms.

While a united Ireland would not be as radical a departure, Brexit implies that barriers to trade between Northern Ireland and Britain would rise, while those between Northern Ireland and the Republic would be eliminated, and barriers between Northern Ireland and other EU countries would remain unchanged.

The latest data suggests that Northern Irish manufacturing firms sell more of their goods to Britain than they sell in Northern Ireland, the Republic and the rest of the EU combined.

This suggests that Irish unity might have a bigger negative effect on Northern Ireland, at least over the short- to medium-term, than Brexit.

A united Ireland is largely a political issue, but one with serious economic implications.

Even with the significant costs of German reunification, more than 70 per cent of Germans considered unification to be broadly a success and more than 80 per cent considered it an example for other countries.

Dr Edgar Morgenroth is an associate research professor at the Economic and Social Research Institute (ESRI)

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