Brexit: Shutting border to biggest trading partner no recipe for success

Little consideration given to how EU including Ireland needs UK as much as UK needs it

Mark Kennedy of Mazars in Ireland: “In the welter of negative arguments deployed by both sides of the Brexit debate, little consideration has been given to how the EU, including Ireland, needs the UK just as much as the UK needs it. Everyone stands to lose as a result of a ‘Leave’ vote.”

Mark Kennedy of Mazars in Ireland: “In the welter of negative arguments deployed by both sides of the Brexit debate, little consideration has been given to how the EU, including Ireland, needs the UK just as much as the UK needs it. Everyone stands to lose as a result of a ‘Leave’ vote.”

 

A vote for the UK to leave the European Union on June 23rd next may not prompt an international crisis, but this should not divert attention from the fact that citizens of the UK and Europe benefit most from a Europe that includes the UK.

Unfortunately, however, in the welter of negative arguments deployed by both sides of the Brexit debate, little consideration has been given to how the EU, including Ireland, needs the UK just as much as the UK needs it. Everyone stands to lose as a result of a “Leave” vote.

To begin with, there is the damage to the European project itself. This is much more important than mere economics.

In what has been a farsighted and in many ways magnificent process since the end of the Second World War, the development of European institutions from the European Coal and Steel Community to the modern European Union has been a cornerstone of much of the peaceful prosperity enjoyed by many Europeans for almost three-quarters of a century.

At this far remove it is all too easy for us to forget the devastation visited on Europe by that catastrophic conflict.

Shared vision

The shared vision of many of those who worked to build the EU from its quite basic origins to its current format was that commerce and trade transcended economics; that they are a means of sharing culture, friendships and a common approach to society.

From that perspective, it must be clear that the EU is better for the UK, and the UK is stronger within the EU.

Economics matters of course. From a purely UK perspective, the three key immediate impacts of a Leave vote would be on exchange rates, inflation and interest rates.

The consensus scenario holds that sterling would fall in value against the euro by 25 per cent almost overnight, inflation would build progressively to somewhere north of 7 per cent, and interest rates would increase as a direct consequence.

None of this would be at all pleasant for the people of the UK, but the negative effects would spread far beyond its shores.

The cost of Irish exports to the UK would rise sharply, imports from the UK would be cheaper and may damage Irish competitors, while the capacity of British consumers to purchase Irish goods would be damaged by rising domestic costs.

Effective devaluation

Of course, the relative competitiveness of UK exporters may be damaged by the increased cost of capital, but that would not come close to completely offsetting the effective devaluation of sterling.

Of immediate concern to many on this island will of course be the prospect of new trade barriers between us and our closest neighbour and most important trading partner.

These could take the form of new tariffs and other invisible barriers as well as, it has been suggested, physical customs posts along the Border with Northern Ireland.

The customs posts disappeared with the Single Market and most of the tariffs and other barriers ceased to exist with the Anglo-Irish Free Trade Agreement of 1965.

While it would appear to be in the interest of both countries to preserve the happy state of affairs which has existed up until now, this would be easier said than done.

Our relationship with the UK would change fundamentally in the wake of a Leave vote. The UK would become just another country outside of the EU and the tariffs and other trade barriers which would arise as a result would be beyond our direct control.

Furthermore, our capacity to secure bilateral deals with third countries is severely constrained by dint of our EU membership.

The UK’s heritage as a trading nation would more than likely ensure over time that the new arrangements are entered into both between the UK and the EU and the UK and the Republic of Ireland.

The UK would not turn its back on European markets, and the strong and historic relationship between these two islands would endure - but not without severe dislocation in the short term.

‘Crisis’ claims

The question in all of this is one of time. How quickly or slowly would the UK’s relationships with Europe be reassembled? Regardless of how long it takes, I am unconvinced by the “crisis” claims made by many on the “Remain” side.

Yes, there is a strong likelihood that a Leave vote would tip the UK into recession, and this would have knock-on effects throughout Europe and for Ireland in particular.

But it would be in everyone’s interest, both in London and Brussels, to minimise this impact - and we can be sure that all involved would move might and main to ensure that the worst consequences are avoided.

In this context it is worth examining whether there are any positive consequences which could compensate for the net negative impact of a Brexit vote.

For Ireland and the rest of the EU there is the possibility that FDI from outside of Europe would more likely seek a base in the EU than in an isolated UK - and Ireland would probably gain more than most from that tendency.

Ireland might also gain from the relocation of some financial institutions from London, but that is by no means a certainty.

It is difficult to see any other positives arising and certainly not for the UK - which would have to renegotiate trade agreements and suffer a dramatic loss of international influence.

Oddly enough, from the perspective of the day-to-day lives of UK citizens, almost nothing would change.

The laws and ways of doing business within the UK would remain almost completely unchanged.

This is in part because of the nature of the interaction between European and UK law which was summed up in a famous quote from Lord Denning, an English judge.

In his ruling in a 1974 case (Bulmer vs Bollinger), Denning noted in relation to the then recent European Communities Act 1972 that the treaty does not touch any of the matters which concern solely the mainland of England and the people in it. These are still governed by English law. They are not affected by the treaty.

However, when we come to matters with a European element, the treaty is like an incoming tide. It flows into the estuaries and up the rivers. It cannot be held back.

Denning was right. The mingling of European-originated law and practice with national statutes inevitably mixes things up in a very practical way.

Astute lawyers and accountants, and their clients, base many business decisions on an understanding of law that encompasses not just the statute book, but also case law, interpretation, and what in time becomes day-to-day business practice.

Layer mingles with layer to such an extent that in time it is hard to separate what is “national” and what is European.

Business unchanged

Simply put, a departure of the UK from the EU would in many respects leave the UK way of doing business unchanged. The question at a macro level would become how to practically permit UK businesses to interact with EU-based trading partners in a structured, positive way.

The truth is that the kind of “cricket on the village green” images of sovereignty bandied around do not amount to much more than poetic licence in a globally connected world.

Yes, the UK would be free to shut its borders, but as we in Ireland learned in the 1930s, shutting your border to your biggest trading partner is not a recipe for success.

Sovereignty can be exercised in many ways, but only that which enhances the wellbeing of the citizen is worthwhile.

We can only hope the citizens of the UK have this in mind when they vote on June 23rd.

Mark Kennedy is managing partner with Mazars in Ireland

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