A sizeable body of research has been undertaken from as far back as 2014 to examine the possible implications of Brexit for the Irish economy. The evidence from this work has been very important for the Government and for the EU Commission in formulating how to respond.
There are a number of important conclusions.
Firstly, Brexit is likely to be bad for Ireland, though there will be some positives.
Secondly, putting a single number on the impact on Irish output of Brexit is extremely unwise: the outcomes are too uncertain and it is better to think in terms of a range.
Thirdly, there are many channels through which the Irish economy will be affected.
The most obvious channel through which Ireland will be affected is through trade. The ESRI’s estimate is that a hard Brexit’s impact on trade could lower Irish GDP by around 4 per cent, with a margin around that central estimate.
Currently around 13 per cent of our goods exports go to the UK. The reduction in UK GDP as a result of Brexit will impact directly on the demand for Irish exports. If the UK leaves the Customs Union there could also be tariffs imposed on some key products, which will affect this trade.
Food exports, a labour-intensive sector of our economy, will be badly hit. Irish food producers have limited market power – they sell into competitive markets. They may respond to falling UK sales both by cutting output and by paying farmers lower prices. So food sector workers and farmers are both likely to lose. These negative effects will have greater impact outside Dublin and in rural Ireland.
For exporters who have significant market power, such as the pharmaceutical sector, the effects of Brexit will be very limited. If the UK wants to buy a drug made in Ireland by a major supplier it will just have to pay the price.
A second channel through which we are already being affected is the exchange rate. While the gyrations of sterling are not new, the recent fall in sterling’s value is causing some firms serious problems. However, these problems will ease over time either as UK inflation catches up if the pound’s value remains low or else due to a bounce back by sterling. Exchange rate effects, while serious, tend to be of limited duration.
A third channel through which Brexit is already impacting on Ireland is through a redirection of foreign investment from the UK because the firms concerned need access to the EU market. We are beginning to see an influx of some financial sector firms. In the longer term relocation of investment by non-financial firms will prove more significant. There will be some limited offset as a few Irish firms need to establish themselves in the UK. An ESRI paper has estimated that over time the net inflow of foreign investment will add around 3 per cent to the level of GDP.
A fourth channel, which has not been researched in any detail to date, is the impact on imports from the UK: we import much more from the UK than we export. Even without the imposition of tariffs, customs barriers will result in a significant increase in costs. Given that UK retailers have a major presence here, much of what we buy in Irish shops comes from the UK even if it is not manufactured there. Brexit could raise the price of retail goods and reduce competition in retailing, lowering Irish living standards
A significant amount of our outward and inward trade with the rest of the world passes through the UK. The imposition of customs barriers could seriously impact on this transit trade, not least through imposing significant delays for lorries clearing customs.
In addition, there is the danger that the UK could discriminate against hauliers carrying transit traffic, just as Austria did before joining the EU.
Ireland has been part of a labour market with Britain for two centuries. It looks as if the UK will not wish to impose restrictions on Irish citizens working in the UK, just as Ireland will not restrict UK citizens.
However, Irish wage rates have tended to track UK rates. If the two labour markets were to remain fairly integrated after Brexit this could result in some negative drag on wage rates in Ireland in the medium term as the UK economy suffers from Brexit.
The impact of Brexit on Northern Ireland will be more negative than for the UK as a whole. Already some firms are considering relocating across the Border from Derry to Donegal.
There is also the medium-term risk that the rise of English nationalism may eventually put pressure on the huge transfers from London that sustain incomes in the North, even if postponed due to current dependence on the DUP. Lower UK transfers to Northern Ireland would destabilise the North, an issue of serious concern to the Republic.
While these are the main channels through which Brexit will impact the Irish economy, the complexity of the links between the Irish and the UK economies is likely to bring other consequences. Overall it seems highly probable that Brexit will negatively impact on the Irish economy. While there remains the possibility of a small positive outcome, there is also the possibility of a very negative outcome.
On balance, with a hard Brexit I would see the ultimate impact lying between a fall of 7 per cent of GDP up to possibly a 1 per cent gain. The downside risk would be significantly lower if the UK opted to remain in the Customs Union.
The timing of the impact on Ireland will differ across the channels. The negative trade effects and the impact on retailing will be heavily concentrated in the immediate aftermath of the UK leaving the Customs Union. The positive foreign direct investment (FDI) impact is already being felt, but its full effects will play out over a very long period. Overall, it will probably be 15 or 20 years before Ireland, the EU and the UK will have fully adjusted to Brexit.