No-deal Brexit capable of derailing economy and reigniting Troubles

The European Commission this week described Brexit as a "singular event" that "could constitute a major disaster". The EU's executive arm signalled it would call for the release of funds from the European Solidarity Fund, normally reserved for victims of natural disasters such as earthquakes, to cushion the financial blow for exposed countries like Ireland.

At the same time, Ministers here have been warned that the hit to Ireland from a crash-out Brexit could be far worse than previously thought. At Tuesday’s Cabinet meeting, a high-level briefing document was circulated – and later collected back from them. It left several Ministers taken aback by the severity of the warnings.

The report suggested that 10,000 jobs in the tourism and hospitality industry were likely to be lost in the first three months after Brexit and that there would be “carnage” in the fishing industry.

Both events, exacerbated by the current Westminster turmoil, reflect the fear now coursing through Brussels and Dublin about the UK's impending divorce. The Central Bank predicts we could see up to 34,000 fewer jobs by the end of next year and more than 100,000 over the medium term. That's significant given headline unemployment rate, now at 5.3 per cent, means there are 126,000 people out of work.

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The Department of Finance suggests economic growth here, which has been a multiple of the euro zone average for several years, could flatline in 2020 and be reduced by about 5 per cent over the longer term. That's the equivalent of having €15 billion wiped off the value of the Irish economy.

Minister for Finance Paschal Donohoe has also signalled that the public finances are likely to take a €6 billion hit, with the projected budget surplus for 2020 morphing into a deficit of up to 1.5 per cent.

The disruption in this area is perhaps the greatest unknown in the Brexit equation

Bad as these predictions are, many believe they fail to capture one of the key risks – namely the potential disruption to supply chains. The European economy is underpinned by complex network of cross-Border supply chains, built up over years, that will not be easily disentangled. The disruption in this area is perhaps the greatest unknown in the Brexit equation.

A recent report by the Irish Maritime Development Office indicates that nearly 40 per cent of "unitised" Irish exports to continental Europe – in other words container freight – equating to three million tonnes annually, uses the UK land bridge. What impact border controls at Dover, the UK's main cross-channel port, will have on this trade is not yet clear.

Equally, 70 per cent of our medicines come from, or through, the UK. In a no-deal Brexit scenario, the UK will no longer be part of our regulatory jurisdiction.

While the UK has pledged to favour flow over customs checks in a bid to lessen the likely logjams at ports, the French plan to impose strict EU controls on UK goods coming into that country.

A leaked UK government report recently warned that British supply trucks, many of them carrying Irish produce to Europe, will be unprepared for French customs and that this could reduce the number of vehicles passing through by up to 60 per cent within a single day of Britain crashing out of the trading bloc with a “catastrophic” impact on trade.

"You could get into a . . . situation where a small component in the supply chain of some product gets held up, then that has enormous implications for a certain sector," says Martina Lawless of the Economic and Social Research Institute .

While a lot of the focus to date has been on how Irish trade with the UK might be affected, she admits nobody has a good handle on how Irish trade with continental Europe, the trade that uses the UK land bridge, will be affected.

“That’s the one big omission from the current suite of numerical estimates on the impact of Brexit,” she says. “We have a good picture of the longer run but that’s basically when firms have adapted to the new world in which the UK is not in the EU anymore,” says Lawless. “But how we get from one to the other . . . there is still a lot of unknown in terms of how that adjustment takes place.”

Lawless suggests the headline impact numbers also mask “the sectoral and regional allocation of the hit. You’ve got much heavier exposure in the agri-food sector.”

Dublin City University economist Edgar Morgenroth, who has done extensive research in the area, says a no-deal scenario would result in tariffs being levied on exports from the Republic to the UK.

“ While the precise level of tariff that might be charged by the UK is not known, it is likely to follow the pattern of EU tariffs,” he says.

“These tariffs are highest for agri-food products, textiles as well as other basic manufactured goods. These are products where Irish exports are more likely to come from smaller indigenous firms and where the UK market is of particular significance,” he says.

“ For example about 40 per cent of agriculture, forestry and fisheries exports are to the UK. The average tariff for meats is just under 50 per cent and for cereals about 45 per cent, while that for pharmaceuticals is zero, he says.

Estimates of the impact of tariffs are that they would reduce employment in Monaghan by 2.5%

"Given that not all sectors are equally important in all counties and with sectors facing different tariffs, the total impact of tariffs will be different across the country," says Morgenroth. "While agri-food accounts for less than 1 per cent of jobs in Dún Laoghaire Rathdown, it accounts for just over 20 per cent in Monaghan.

“Thus, estimates of the impact of tariffs are that they would reduce employment in Monaghan by 2.5 per cent while the impact in Dún-Laoghaire Rathdown would be just 0.1 per cent,” he says.

And while we can presume Border controls and increased red tape will result in delays and increased costs for businesses, quantifying the impact of this, particularly for small businesses with limited resources, is next to impossible.

And what of the long-term impact of a level shift in sterling? Employers’ group Ibec has warned of multiple business closures if sterling remains above 90p against the euro or weakens further to parity with SMEs in the agri-food sector the worst hit.

According to a survey, published by Enterprise Ireland this week, one in 10 of its client companies said the Brexit-related slide in sterling has already cost them more than €100,000.

“The single biggest risk in a no-deal scenario is not having a transition period,” says Ibec’s director of policy and public affairs Fergal O’Brien. “Deal or no deal, you have to have an adjustment period,” he says.

"Even if we agree that there's not going to be a deal and we agree that we're going to World Trade Organisation (WTO) rules then we can transition to those WTO rules over a period of time instead of going there immediately," he says.

The Government says most of these details will not be clarified until after the UK leaves. This leaves a hiatus that is fraught with uncertainty.

“So it’s very hard for businesses to plan what the requirements are going be for moving products, for doing business on the island of Ireland, and for how the land border and EU checks are going to be enforced,” he says.

We are hit with countless surveys, suggesting Irish firms, particularly in the Border area, are woefully unprepared

“From a business planning perspective, right now we can’t provide much advice to our members about how they should plan,” he says.

“What further complicates this is that Government has said it does not know what the land Border arrangements will be on November 1st, suggesting that a lot of those details have still to be worked out with the UK in the event of no deal,” says O’Brien.

We are hit with countless surveys, suggesting Irish firms, particularly in the Border area, are woefully unprepared for Brexit. But it’s not obvious how they can prepare in the midst of such uncertainty, other than by cutting UK firms from their supply chains entirely or by diversifying into other markets. This simply isn’t feasible for many SMEs.

The economic forecasts also ignore the political risks associated with a hard Brexit, which, from an Irish perspective, is the reason for the backstop, the provision in the existing EU-UK withdrawal agreement aimed at avoiding a hard border in Ireland.

Canadian credit ratings agency DBRS predicted this week a resurgence of sectarian violence in Northern Ireland in the event of a "severe hard" Brexit. It said such a scenario would result in "a deep and prolonged period of disruption and serious fallout with the EU", leading to heightened political and security risks beyond the predicted economic fallout.

Analyst Alan McQuaid says the big worry on the Brexit front, particularly if there is a hard Border, is not the loss of trade and jobs, but more so the loss of life, with the likely return of violence, not just in the six counties, but in Dublin, London as well.

“And while many economists are talking about potential gains for Ireland on the foreign direct investment side, that is unlikely to materialise if employers think there could be risks to their employees from terrorist activity,”he says.

“Whatever happens with Brexit in the end is likely to be bad news for Ireland, assuming of course there isn’t a second referendum and the UK decides to stay in,” he says. “ At this stage, the only consolation is that it appears most UK politicians want to leave the EU with some kind of deal, a soft rather than hard Brexit.”

Since the financial crisis, uncertainty – consumers cutting back on spending, firms curtailing investment – has been a key theme in economics. Brexit delivers big in this department. And Ireland, more than any other EU state, is at the mercy of events not within its control.