Brexit would create turmoil and damage Irish trade

The prospect of a British departure from the EU in the June 23rd referendum has brought with it a cascade of threats and uncertainties for Ireland’s recovering economy.

As to whether there might be any benefit for Ireland, the consensus is that a Brexit would most likely be an overwhelmingly negative affair.

There are risks on several fronts as the poll draws closer. The most immediate danger is a disruption of financial markets if Britain repudiates the EU, prompting a decline in economic activity as firms adjust to an uncertain outlook for British trade in Europe’s internal market.

There is yet more risk over the precise terms on which Britain would leave the EU and seek to maintain such trade from the outside.

Further challenges arise in respect of the EU itself post-Brexit. These relate to the economic performance of a diminished EU and to the EU’s stewardship of a Brexit process which could lead to uncomfortable demands for deeper integration being made of reluctant member states.

All of this amounts to an exceedingly difficult political challenge facing Taoiseach Enda Kenny and his new administration to minimise any economic damage to Ireland.

This is to say nothing of the potential for any British departure to undermine the Good Friday peace pact, with one of the big Brexit dangers being the possibility of new Border controls.

True, there might well be some opportunity for Ireland to swoop like a vulture as foreign investors divert projects from Britain in pursuit of access to EU markets.

City of London

For example, British chancellor George Osborne has warned of a Brexit threat to “tens of thousands” of jobs in the City of London financial market.

Even though some institutions might well migrate with their operations and jobs to Dublin, proportion is necessary. Any potential investment gain must still be seen alongside other Brexit pressures which would weigh very heavily on the Irish economy.

The starting point is Ireland’s deep dependence on trade with Britain, which, since 1973, has carried on within the same European framework.

A vote for Brexit would call into question arrangements which are highly beneficial to traders on both sides of the Irish Sea. Every single week, the totality of that trade is valued at some €1.2 billion. Although Ireland’s economic expansion in recent decades means the State is rather less reliant on Britain than in the post-Independence period, this trade is still crucial to Irish fortunes.

Thus it is good for Ireland when the British economy grows, as was shown when Britain’s speedier turnaround from the 2008 crash helped lift Ireland from the mire. Strong Irish ties with the recovering US economy were also crucial, but the revival here came when the euro zone was still in the throes of a deep crisis.

The flip side is also true. When the British economy is not in good shape, the Irish economy suffers. One key risk to Ireland in a Brexit scenario is that a vote to leave triggers a big economic slowdown in Britain, or even a recession.

Already there is evidence of large-scale investment projects in the UK being put on hold in advance of the poll. Such projects would be reinstated after a Remain vote. But further delays – and consequent economic damage – would be inevitable after a Leave vote, no matter when or how Britain ultimately left the union.

Brexit downturn

For Ireland, there would be no avoiding the impact of a Brexit downturn in Britain. “Ireland, unsurprisingly, is the most dependent on the UK [as it shares a land border],” said analysts at Societé Génerale, the French bank. This is a standard assessment. “The country is one of the most exposed in the EU to the UK via merchandise and service exports,” said Fitch, the credit rating agency. Research on Brexit by Oxford Economics, a consultancy linked to the Oxford University business school, found Ireland was “consistently the most vulnerable member state” of the EU to any British departure.

There is more. As many financial market participants are proceeding on the basis that British prime minister David Cameron would carry the day for the Remain camp, a Leave vote would create turmoil in the markets. This would drive sterling’s value down against the euro, weakening the return to Irish exporters from their sales in the British market. There would be major implications for Irish food and drink companies.

Business lobby group Ibec identifies the danger of “severe” consequences in the dairy, meat, prepared food and alcohol sectors. But it does not stop there. There would be threats to the wood and wood products sectors, as well as the paper and paper product sectors.

“It’s back to the cliche, this is low probability but very high impact stuff,” says a senior trader in a big Dublin institution.

“You can track the Irish export-led recovery, moving in perfect lockstep with the fall in the euro/sterling exchange rate. What’s the first knee-jerk reaction on the UK leaving the EU? The pound weakens.

“The UK clearing banks are saying 15-25 per cent depreciation in sterling against the euro. It’s already down 8-10 per cent . . . You have to take into account the harm done to the European economy, so that probably underplays it.”

It follows from all this that investors would be likely to reappraise share values of companies with particular exposure to the British market. Such companies might also face higher borrowing costs, in light of uncertainty over their UK trade.

In any bout of market volatility, questions would also arise for Ireland’s banks. Following similar signals from the Bank of England, Central Bank governor Philip Lane hinted at the provision of emergency liquidity for banks if a vote to leave the EU was followed by financial market dislocation.

The objective in any such intervention by central bankers would be to douse the flames of short-term pressure. However, the really big long-range question centres on the scope and depth of new trading arrangements between Britain and its former EU partners. One Leave argument suggests mutual self-interest post-Brexit would ensure a seamless transition to a new order. In this account, punitive tariffs would not be imposed on British exports into the EU as reprisal tariffs would damage its exports to Britain.

Dismissed as fanciful

This is dismissed as fanciful by the Remain camp. For one thing, the Leavers want to take Britain out of the European single market altogether. This might well lift the burden of EU regulation from UK firms, but tariffs would surely follow to protect EU firms which apply such regulation.

Furthermore, European negotiators would be incentivised to insist on difficult exit terms for Britain as a dissuasive strike against anti-EU campaigners in any other member state.

The logic suggests it would set a bad precedent to grant favourable exit terms where a post-Brexit Britain shouldered none of the embedded costs associated with the internal market. Whatever happens, additional costs for Irish business are likely.

“If the UK vote to leave, then regardless of the type of new arrangement it reaches with the EU, customs and other procedures are likely to become more onerous for exporters to the UK,” says Ibec’s main risk assessment on Brexit.

“This could be particularly challenging for Ireland given our close trading linkages.”

Time and difficult politicking would be required to recast economic relations between the EU and Britain.

Right now, Ireland remains Europe’s fastest-growing economy. But that could be thrown into doubt on June 23rd.