News Dan O'Brien

Wednesday 26 October 2016

Big EU players can take Brexit hit - it could be knock-out blow for us

Published 07/07/2016 | 02:30

Pedestrians walk past the former European Central Bank HQ in Frankfurt Photo: Krisztian Bocsi/Bloomberg
Pedestrians walk past the former European Central Bank HQ in Frankfurt Photo: Krisztian Bocsi/Bloomberg

We live in an ever more interconnected world. So goes the cliché, even if that doesn't make it any less true. But some are more interconnected than others.

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Small countries are almost always more plugged in to the rest of the world than bigger ones. One important reason for this is because they do not have the scale to make big, complicated, mass-production goods such as cars. Countries such as Ireland, Denmark and Greece make no cars or trucks. Everything with tyres that moves in these countries is bought from abroad.

Click here to view full-size graphic
Click here to view full-size graphic

That contrasts with western Europe's four largest countries. Britain, France, Germany and Italy all have auto industries. As such, people in those countries are less dependent on imported vehicles to get about.

Among the upsides of being small is that levels of prosperity are usually higher than in big countries, at least in the developed world. There is not universal agreement on why this is, but it's probably to do with the nimbleness that comes with small size, which gives minnows an advantage over bigger fry when it comes to changing direction, darting about and snapping at opportunities.

Being small and open also comes with downsides. It makes a country more vulnerable to changes that happen beyond its borders. If ever there was an example of that, it is Brexit.

Measuring the impact of Brexit on different countries is not an exact science given the multiple channels of interconnectedness that exist in the modern world, but trade is one of the most important. It also has the advantage of being easy to measure.

From the trading perspective, Ireland is extremely vulnerable to Brexit. When the value of everything businesses in Ireland sell to the UK - both goods and services - is added up, the total runs to tens of billions of euro annually. When we measure it as a percentage of GDP (ie. the output of an economy), it comes in at a bit under 20pc, as illustrated in the accompanying chart.

This is a massive figure, and there are few countries anywhere in the world which are as dependent on a single partner. To illustrate just how big this is, consider the US: America's exports to every country on the planet combined equal only 13pc of its GDP. In other words, when it comes to selling stuff overseas, we earn more from Britain alone than Americans do from the entire world.

Alongside Ireland in terms of export dependence on the British market are two of the continent's smallest countries. Luxembourg is the only EU member country more dependent, thanks to Grand Duchy's large financial services hub which is umbilically attached to the city of London. Malta is the third most dependent among the EU's 27 members, thanks also to its own (newer) international financial services sector and the massive tourism links to its former colonial master.

Along with Ireland, these two EU countries have most to fear from Brexit economically. But as their combined population is smaller than Dublin's, their influence on the Brexit negotiations will be even more limited than Ireland's.

Now consider the EU's biggest countries - Germany, France and Italy (in order of economic size). Many pro-Brexit campaigners made much of the importance of the UK market to these countries, arguing that it was in their own economic interest to give Britain the advantages of the single market without the constraints. The Brexiteers' knowledge of economics is as poor as their planning for what would happen if they won.

The exports to the UK of the big three continental economies stand at 3pc of their GDP. Though not insignificant, if their exports to Britain were cut in half it would not tip their economies into recession. If Irish exports to the UK were halved, Ireland would suffer a depression.

If most countries have less economic interest in giving Britain a good deal than is often believed, matters are further complicated by the internal politics in the bigger members.

Take Germany. Angela Merkel is sometimes talked about as if she were the queen of Europe. This is far from the case. Even in her home country she is not as dominant as it sometime appears from the outside.

Her foreign minister is Frank-Walter Steinmeier, the leader of her coalition partner, the Social Democrats. As often happens in coalitions, the parties sometimes take different views. That happened after the Brexit vote when Steinmeier invited his counterparts from the other five founding members of the EU to Berlin and stated that Britain had to exit quickly. Within days, Merkel was taking a much less impatient stance. As Chancellor, she has more say on big calls, but the decision-making process is much messier in Berlin than is often portrayed.

The same is true across the capitals in Europe, as governments scramble to work out how something that is utterly without precedent will play out. The incredible complexity of withdrawing from what is essentially a layer of government will have effects that nobody has yet thought about. There are countless hours thinking, analysis, discussion and arguing ahead.

While there is immense uncertainty surrounding when, how and under what terms the UK leaves the EU, if London does take the plunge in the end, one thing is clear: Ireland, Britain and Europe less connected. That will come at a cost. For everyone.

Irish Independent

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