Brexit poses major risks for the UK and Ireland

A vote to leave EU would have profound consequences for both countries and EU itself

The UK government has set June 23rd as the date for the “In-Out” referendum vote on Britain’s continued membership of the EU.

Opinion polls are pointing to a very close vote. The issue has now moved centre-stage in the UK.

AIB views Brexit as the main event risk for UK and Irish economies in 2016, as a vote to leave would have profound economic and political consequences for both countries and, indeed, the EU itself.

Most studies show that leaving the EU would have a negative impact on the UK economy.

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It could take up to a decade for the full economic impact to be felt in terms of foreign direct investment (FDI), trade flows, migration, etc.

There would obviously be negative knock-on effects for Ireland, given its close ties with the UK.

It is very difficult to quantify the full macro-economic effects of a Brexit on the UK and Irish economies.

We don’t know what the post-Brexit trade arrangements would be between the UK and EU.

Complicated process

Brexit would also be a prolonged and complicated process, creating much uncertainty that would impact on economic activity.

FDI into the UK would be negatively affected, especially if there is uncertainty over free trade with the EU.

The critical question centres around trade and what type of arrangements would be put in place between the UK and EU in the event of Brexit.

Some 45 per cent of UK exports go to the EU, so it is a vital market.

On the other hand, the UK takes some 10 per cent of EU exports. Thus, the UK is not as vital to the EU for trade as the EU is to the UK.

The more the UK seeks to regain control over policy and regulations post-Brexit, the more difficult it will be for it to negotiate a worthwhile trade deal with the EU.

In order to secure a preferential trade deal, the UK is likely to have to adhere to EU rules and regulations.

Continued membership of the EEA (European Economic Area) would allow the UK to maintain full access to the single market. However, non-EU EEA member countries such as Norway must accept and adopt virtually all EU rules and regulations and also make a contribution to the EU budget.

There would seem little point in the UK leaving the EU while remaining in the EEA. The UK could also seek to get Swiss-style bilateral accords for specific sectors or a Turkish type of customs union, but these are quite limited forms of trade deals.

Major drawback

It would be a major drawback for the UK if it had to fall back on WTO rules, as the EU imposes common external tariffs on non-EU countries that don’t have preferential trade deals with it.

The UK would also lose its preferential access to the 53 countries which have trade deals with the EU. Overall then, Brexit poses serious downside risks to UK trade.

Ireland has long and well-established political, trading and economic links with the UK.

Although EU membership and FDI have lessened Ireland’s dependence on the UK, it remains a key economic partner.

Some 17 per cent of Irish exports go to the UK. This may seem relatively small, but Ireland has a very large and well diversified export base. Exports are bigger than gross domestic product (GDP).

Thus, exports to the UK actually account for 18.5 per cent of Irish GDP. Indeed, when one includes imports, total external trade with the UK equates to 35 per cent of Irish GDP.

Thus, the UK economy is vitally important for Ireland. Ireland enjoys an overall trade surplus of about €2.5 billion with the UK, thanks to a large surplus on services as the goods balance is in deficit.

The main Irish exports to the UK are food, pharma, information and communications technology (ICT) and a broad range of services, while on the import side, energy, manufactured goods and services are all-important.

The UK is a particularly important market for Irish indigenous exporting firms.

Ireland is the UK’s fifth largest export market. Some 33 per cent of Ireland’s imported goods come from the UK.

It is worth noting that more goods are imported into Ireland from the UK than from the rest of the EU combined.

Trade links

It is not just trade links that are important between Ireland and the UK. There is also substantial cross-country investment between the two countries.

Those trading with the UK, at a minimum, would face increased administrative and regulatory costs following a Brexit.

An ESRI report suggests there could also be a significant decline in bilateral trade. Sectors such as agriculture, retailing, energy and financial services are likely to be most affected by Brexit.

Brexit could pose major problems for large retailers and other companies that treat Ireland and the UK as one market for goods distribution, sales, accounts and business administration.

Brexit would have serious implications for the Irish agri sector in particular, as the UK takes around 35 per cent of Ireland’s food exports.

Meanwhile, obviously, the Border with Northern Ireland would become an external EU land border, post-Brexit.

This could give rise to all sorts of issues in terms of customs posts, passport controls etc, depending on the extent to which Brexit impacted upon the free movement of goods, services and people between the UK and EU.

EU law provides for a two-year period for discussions on arrangements for exiting the EU after a country decides it wants to leave.

This period may be extended. Thus, the earliest the UK would leave the EU is likely to be mid-2018.

Great uncertainty

However, the effects would be felt well before then, as a vote to leave the EU would create great uncertainty, impacting upon economic activity and financial markets.

Even at this stage we are already seeing an impact, with sterling losing considerable ground against the euro since the start of December over growing concerns about a possible Brexit, as opinion polls point to a close result.

Ultimately, a vote in favour of Brexit is likely to see sterling fall even more sharply.

Oliver Mangan is chief economist at AIB