Wednesday 23 October 2019

Brendan Keenan: 'Despite all the crude talk, agreement is possible as Brexit deadlines loom'

British Chancellor Philip Hammond turned Project Fear into Project Hope. Photo: PA
British Chancellor Philip Hammond turned Project Fear into Project Hope. Photo: PA
Brendan Keenan

Brendan Keenan

Maybe it is time to start thinking about life after a soft Brexit. It would not be nearly as nasty and brutish as a hard one, but it would still be a peculiar, difficult arrangement beset with unknowns - known and unknown alike.

The shape of such a thing is known, although we cannot yet say for certain if it will come to pass. It would involve a longer, probably vaguer transition period, where things would go on as before until a final deal on Britain's relationship with the EU is agreed.

It is a sad thought that this is how it was meant to be all along - with the withdrawal agreement giving effect to next March's exit separate from the new arrangements which would follow.

As this is written, chaos and crisis, along with a full international border on the island, are still possible, but perhaps no longer probable. The Irish question is still the big sticking point but it seems impossible that a full international border could be erected because of attempts to prevent, ahem, a border on the island.

Let us assume that sanity prevails. Michael Collins's words are remembered and Ireland settles for the possibility of achieving a permanent frictionless border in future talks rather than the impossibility of establishing one now. (Assuming it is allowed to settle for that by the EU).

We must also assume that the British Labour Party will realise the electoral consequences of bringing about chaos and crisis by voting down whatever formula British Prime Minister May brings back from Brussels.

Britain then ceases to be a member state in four months' time but remains in a transitional union and nothing changes, in Ireland or elsewhere. But the old issues resurface as years of detailed negotiation and planning begin. The question is how the British economy will fare in this semi-detached condition, and the Irish economy with it.

The most important factor is the most unpredictable - the exchange rate. Currencies do not lend themselves to logical links with economic conditions but the fall in sterling from €1.40 in 2015 to €1.15 now (a drop of 18pc) has clearly more to do with Brexit than anything else.

The fall was sudden and precipitous. For more than a year, though, sterling has been fairly steady around present levels. Is that a bet on a hard Brexit or soft? Occasional panics, and jumps on good news such as we saw last week, suggest a no-deal exit would mean further falls. That, by the way, is not a forecast, but one can look to ratings agency S&P for that.

Forecasters have been reluctant to look at the possible consequences of no deal. Presumably, they are still afraid of the Project Fear jibe which was so effective in the Brexit referendum, but S&P did not mince its words.

It predicted a recession lasting for more than a year, with the economy shrinking by 1.2pc next year and by 1.5pc in 2020. By 2021, economic output would be 5.5pc lower than would have been the case with an orderly exit and transition period.

Unemployment would rise from its present historic lows of 4pc to 7pc. House prices would fall 10pc over two years, while inflation would rocket to almost 5pc by the middle of next year.

Perhaps worse in the medium term is the view that Britain's S&P credit rating, which was cut from the top triple-A rating after the referendum, would lose another notch. Only the most swivel-eyed Brexiteer or dyed-in-the-wool Marxist would risk voting for that.

More likely it's toe to the can and off down the road of the transitional period - which at the start may look very good indeed. A glimpse of that was to be seen in the British budget, where UK Chancellor Philip Hammond received praise for turning Project Fear on its head to get Project Hope.

He held out the prospect of a 'Brexit dividend' if there is a withdrawal agreement. There is real cash involved too - at least in the way that governments do their accounts. The £15bn (€17bn) officially set aside to prepare for a disorderly Brexit could be spent on nicer things.

The Bank of England's central forecast is that the spurt from a deal might be enough to prompt an interest rate rise. But its governor, Mark Carney, said the central bank would struggle to find the tools to rescue the economy in the event of a no-deal Brexit.

There was the clear whiff of an election about the budget. Income tax was cut. The amounts were small, ranging from 3p in the pound for the least well-off to 4.5p in the pound for the best. The Labour Party said it would not reverse these if elected. What a lot Mr Corbyn has learnt in a short space of time.

More to the point, Mr Hammond said tax rises would play no part in reducing borrowing. If austerity means the elimination of deficits - perhaps the best definition - it is coming to an end in the UK, but not because it is no longer needed.

Before the budget, Mr Hammond had the prospect of eliminating borrowing by 2024. After it, the target has borrowing to still be almost half of this year's figure in five years' time. This is the old, old UK problem and it is hardly the best way to enter into the uncertainties of the transition period.

The last five years have not been much fun. Welfare payments have been frozen for four of them and will continue, after the budget, to be frozen for another year.

Health spending increases have been held to a paltry 1pc a year for the last eight years, which compares with an average 4pc annually since the National Health Service was established in 1948.

Nothing like that happened in supposedly bankrupt Ireland - a difference in political choices which is rarely acknowledged here. The effect on the NHS has been dire and most of the available new money has gone there.

The unanswerable question is whether, at some point in those five years, the UK will secure a final deal with the EU which allows those forecasts to be met. The necessary range lies between continued membership of both the customs union and single market at one end, and a free trade deal along the Canada lines, but with some extra access, at the other.

Anything short of that and a crisis will re-emerge. Even before that, the expected difficulties of reaching a final deal may draw attention to the weaknesses in the UK economy and public finances.

That will not be good for confidence and investment. Sterling will remain volatile, but may stay within its recently established range, which is the most important factor for Irish businesses. They should be prepared, however, for a bumpy ride along the way.

Like their UK counterparts, they will face the dilemma as to how much time and money should be spent covering against the risk of an eventual minimalist agreement, complete with tariffs and barriers, versus relying on sense to prevail at the end and the customs union at least to remain intact.

If the dilemmas facing Irish business are difficult, those facing the Irish Government are worse. Do we simply hope that the transition period, where there is no Border problem, becomes a permanent deal; or do we, however belatedly, seek an agreement on the Irish question acceptable to all the major players on the island?

There has been much talk of saving the Belfast agreement via the backstop, but little mention of the fact that there would be no Belfast Agreement without the years of painstaking negotiation with all involved which led to it.

A transition gives time for similar negotiations on the Border issue. A backstop, if required, which does not have cross-community support will be a source of harm, not good. Despite all the crude talk in some quarters, agreement is possible. There are a lot of interests in common.

The dilemma for Dublin is the old one of balancing the interests of the Republic against those of the island as a whole. Direct negotiations might call the solidity of the Republic's EU membership into question. Continued failure to negotiate means continued danger to both peace and prosperity in the North.

Just as in business, it is hard to run such political risks when it may all prove unnecessary in the end. Just as in business though, calling it wrong could be very costly.

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