Brexit deal positive – but dangers haven’t gone away

For the Irish economy, the Brexit deal done between the EU and UK presents two tantalising possibilities – one short term while the other concerns the longer term shape of the UK exit. The most immediate, of course, is that if this deal does finally get approval – now or later, perhaps even after a UK election – a no-deal Brexit and all its costs and uncertainties for Ireland are avoided.

Then, if this happens, both sides say they want to negotiate a long-term trade deal including zero tariffs which – if it came about – would remove a risk to Irish exporters to the UK, notably the food sector.

Of course, as ever with Brexit, there are two big “ifs”. The most obvious is the short-term uncertainty and the risk that the deal will not be approved, with as now uncertain consequences. One point to note is that even if there is a general election, this is Boris Johnson’s route out of the EU and the one which he would presumably put to the people.

If the withdrawal deal is approved, then the outcome of future trade talks will in itself be uncertain – there is no way of knowing if the aspiration of tariff-free trade will hold and Boris Johnson has leeway to take a new economic direction. If the deal is all, it is still all to play for in terms of the long-term trade arrangement.

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Were this deal to get acceptance, the UK leaves the EU and goes into what is called the transition period, a kind of standstill where current trading arrangements remain. This removal of a no-deal risk would be a huge boost to the short-term prospects of the Irish economy.

Official forecasts are that in the event of a no-deal, the economy would grow by only 0.7 per cent next year and a recession would be a possibility. If this is avoided, economic growth next year could be over 3 per cent.

In the short term, the Irish economy could get a “relief bounce” if a no-deal Brexit is finally taken off the table. Consumer and business confidence have been affected by the prospect and it has had a wider impact on spending, investment and even house prices.

It would also boost exchequer finances, as Budget 2020 was constructed on the basis of a no-deal Brexit, with all its implications for growth and tax revenue. If a no-deal Brexit is avoided, then the forecasts for the exchequer next year will swing from a deficit to a surplus.

Forecasts adjusted

Minister for Finance Paschal Donohoe has said that, while the forecasts may be adjusted, he will not present another mini-budget package to give away any of the proceeds of faster growth. The budget presented earlier this month was intended to deal with either Brexit outcome. However a swing into surplus next year will give all the parties scope to make promises as we enter a general election campaign – whenever that comes.

Of course this all depends on how the political drama plays out, with no guarantee of House of Commons support for a deal and lingering uncertainty and risk.

If a deal is done, then as things stand the transition period is due to end on December 31st, 2020. Given that the EU and UK will hardly be able to do a new trade deal in such a short period of time, this could well lead to more uncertainty moving through next year on what happens next.

There is provision in the withdrawal agreement to extend the transition by up to two years, though UK prime minister Boris Johnson has said he does not want this to happen. If pushes comes to shove, it would seem crazy not to, if the choice was to go to a period of WTO tariffs applying as a deal was hammered out.

To understand the new deal, we need to forget the old idea of the backstop – the guarantee that there would be no hard border in any circumstances. This is because what has now been negotiated is not a backstop, it is the way things are likely to be in future, albeit that a future EU/UK trade deal could change some aspects of it. If we want to stay with cricketing terminology, the backstop has become a long stop – it is what the future will look like. It avoids the need for any Irish Border checks and goes back to the old plan of regulartory and customs checks in the Irish Sea.

It is a mechanism to allow a hybrid kind of customs regime in the North, which is likely to apply unless there is a political change in the UK which reverses the decision that as part of Brexit it will leave the EU customs union. The concession by the Irish Government was to move this from an "all-weather" promise to one depending on the consent of the Stormont Assembly.

Given the way this vote would happen, it would mean neither side would hold a veto – it is thus politically saleable in the Republic. But could it leave the North’s economy facing some long-term uncertainty, as all is now in the hands of its representatives who could vote every four years? How this might sit with major foreign investors with long time-horizons is worth considering. But any compromise here was always going to be a bit messy.

The hybrid nature of the plan also opens up new opportunities for fraud and smuggling. A powerful EU/UK joint committee is to try to draw up plans to minimise this risk; this will be significant and complicated work and it will be vital from the Irish point of view that it is seen to function well.

We do not need any questions about the validity of goods leaving this island for continental EU markets.

Business and the Border

Businesses on the southern side of the Border will take note, also, that this new planned arrangement does underpin the UK leaving the EU customs union. This means those trading with the UK will face new customs requirements and bureaucracy once the transition period ends. These will impose significant costs.

A plus is the commitment in the political declaration to seek a “zero-tariffs” trade deal in the future. This would remove the risk of heavy tariffs on items such as food hitting Irish exporters in a key market and pushing up prices in the shops. However this is not binding and is all up for negotiation after Brexit happens.

It would depend on the UK meeting indications in the political declaration that it will not cut standards after Brexit in areas such as employee rights and the environment – so-called level playing-field provisions. The EU won’t want to give favourable access to a lower-cost/lower-standards competitor, were the UK to go down that road. We should note that the UK commitments on alignment here are weaker than they were under Theresa May’s proposed deal in 2017.

So it is all to play for and much will depend on the way UK politics swings and whether Johnson really does follow his earlier statements and diverge from EU rules and regulations. This will be a big issue in the UK general election, whenever it is called. UK economic forecasters have run the numbers again in recent days and confirmed that a harder version of Brexit brings significant risks and costs to the UK economy.

Economic and political negative

For Ireland, the story is as it has always been. Brexit will always be a negative – economically and politically – but, as with the UK, the softer the Brexit, the less the damage. If a no-deal is avoided, this takes one big risk off the table. However we are not quite there yet, as we watch the drama playing out.

Beyond that, if the UK does leave in an orderly manner, then the future shape of a trade deal between the two sides remains a huge economic issue for Ireland. With the current transition period due to end in December 2020, this will be an immediate and pressing issue and will present another deadline. A sensible strategy for all sides would be to extend the transition period. But as we have seen since the Brexit vote, the economically sensible option is not always chosen.