Seven bad things (and one good) that will hit Ireland after Brexit
At the Oireachtas symposium on Brexit, columnist Dan O'Brien addressed the gathering. This is what he said.
Published 25/09/2016 | 02:30
Brexit has for many decades been the stuff of strategic nightmares for Ireland. Being pulled between our closest neighbour, drifting out into the north Atlantic, and the continent which is vital for our prosperity is never a place we wanted to find ourselves. But the nightmare is now upon us.
The consequences of Brexit are multiple, almost all are negative. Only one consequence offers an opportunity. But even that, if maximised, will only partially offset the damage caused by the others.
Here are eight consequences of Brexit, ranging from the widest, global implications to those impacting Ireland's narrower but no less vital interests. The list is not exhaustive by any means, but it does reflect the overwhelmingly negative impact of our nearest neighbour's probable departure from Europe's most important political and economic structure.
1. Brexit will make Europe less influential in the world
The UK is the second largest economy among the current 28 members of the EU. It accounts for 16pc of the total EU economy. As such, when and if Britain leaves the EU, the bloc will shrink in economic size by almost one-sixth.
Because size matters in international affairs, Europe's clout in global decision-making will decline commensurately. When it comes to negotiating trade deals with other countries and other blocs, Europe without Britain will have a weaker hand to play. That will be particularly important if and when a deal is ever attempted with the rising superpower China.
In international bodies, such as the World Trade Organisation, and in international forums, such as the G20, the EU's views will count for less. This will not be transformative for Ireland, but as the EU is the only meaningful way the State has to exercise influence on global economic issues, it amounts to a tangible loss.
2. Brexit will make Europe a less attractive place in which to invest
The EU is currently the largest economy in the world, slightly bigger than the US. With the departure of the UK it will fall into second place globally. A smaller and more fragmented European market will mean less outside investment into the continent, all other things being equal.
As is the case with the first point, this will not be transformative, and companies from around the world will continue to invest in Europe's rich and stable markets. But the Brexit effect can only be negative. For Ireland, a country whose economic model is founded on attracting foreign investment, this is yet another concern.
3. Brexit will make the EU less open to the world
Of the 28 current EU members, there is a broad range of perspectives on openness to trade and investment with the rest of the world. Orientations depend on many things, including history and economic structures. Among the existing member countries, Britain has long been one of the most open looking when it comes to international commerce. Its departure is likely to shift the centre of gravity in Europe towards a less liberal, more protectionist position.
Indeed, that may already be in evidence. In recent weeks, ministers from two of the other big three European countries - France and Germany - have declared the painfully negotiated trade and investment deal with the US dead. As one of the most open economies in the world, and one with an inherent interest in maintaining international openness, Britain's departure will make the EU a less comfortable place for Ireland.
4. Brexit will make the EU less liberal internally
As is the case with openness to the world, Britain has tended to be among the liberalisers in making Europe's single market freer and more effective. That has made it an ally of Ireland in many, if not most issues in the EU when it comes to economic policy choices.
The manner in which businesses and markets are regulated is one example. While there is often legitimate debate around the most effective kind of regulation, it is important that when agreement is reached the cost of implementing rules for businesses is not needlessly high. Britain has been to the fore in providing the analytical rigour - thanks to its high quality and well resourced civil service - to ensure that EU regulation is not excessively and needlessly burdensome. Without a British voice at the table in Brussels, there is a risk that countries with more statist instincts will call the shots.
5. Brexit will make Sterling weaker than it would have been if the UK had remained
Irish exporters, and in particular indigenous Irish exporters, watch the euro-Sterling exchange rate like hawks. That is because an adverse movement can wipe out their profits and threaten their businesses, as has happened to some companies in the agri-food sector over the summer.
Many things determine exchange rates, but over the longer term the economic outlook of an economy is among the most important factors.
As there is overwhelming agreement among economists that Brexit will be bad for the British economy, the fall in sterling of 10pc vis-a-vis the euro after the June referendum is likely to be permanent. This will make Irish-made goods and services more expensive in Britain and require even more effort by businesses here to cut costs and remain competitive.
6. Brexit will reduce Ireland-UK bilateral trade over the longer term
Another area of longer-term agreement among the economists is that the more barriers that exist to doing business, the less business that ends up being done. Britain's departure from the EU will, at the very least, mean new barriers to cross-border commerce between the EU and the UK. If, as is increasingly likely, Britain leaves the single market when it leaves the EU, these new barriers will be considerable.
This will impact much more on Ireland than the other remaining 27 EU member countries, with one possible exception. In 2014 the value of Irish goods and services exports to the UK amounted to 17pc of the economy's GDP, second highest after Luxembourg.
For most other EU countries exports to the UK are in low single digits. For example, French exports to Britain account for just 2.5pc of its GDP. It is easy to see why Paris is much less concerned about Brexit than Dublin.
7. Brexit will result in Irish jobs moving to the UK
Among the most traditional motivations for foreign direct investment is to jump over trade barriers that exist between countries. Rather than exporting from, say, the US to Europe and paying tariffs on those exports, American companies over the decades have set up subsidiaries on this side of the Atlantic. This has allowed them to service European markets while avoiding costly tariffs and other barriers.
The higher the new barriers to trade between Britain and Ireland, the more companies based in Ireland which service the UK market will have reason to relocate at least part of their operations to the UK. Such barrier jumping will lead to job losses in Ireland. The only question is how many.
8. Brexit will result in British jobs moving to Ireland
Jumping trade barriers works both ways. While Ireland stands to lose some jobs, it probably will gain more jobs from Britain as a result of Brexit. This is the sole upside for Ireland from the UK departing the EU.
There are two broad potential sources of jobs. First, British companies which serve the EU market. Second, foreign companies in Britain which service the same market.
It is very hard to predict how many jobs will leave or where they will go, but one indicator suggests that there will be a considerable number. Britain has the second highest stock of foreign direct investment in the world, and much of that investment is EU focused. As Ireland has a very good track record of attracting foreign investment, there are considerable opportunities to lure some of these relocating jobs.
But despite the opportunity to attract jobs from Britain, the net cost of Brexit will undoubtedly be large and long-term for Ireland. Among the only sources of hope is that the enormous cost and complexity of getting out of Europe becomes apparent to the British political class and the British public.
If that happens there is a considerable chance that the decision will be reversed. This is a nightmare from which we may yet awake.