Sunday 25 August 2019

We're finally facing the hard Brexit facts

As the Halloween deadline draws closer, the stark reality of a hard Brexit appears to have finally dawned on the Government, writes Dan White

Tánaiste Simon Coveney, centre, with Paschal Donohoe, Minister for Finance, and Helen McEntee, Minister for European Affairs, after the release of the Government's updated Brexit contingency plan last Tuesday. Photo: Damien Eagers
Tánaiste Simon Coveney, centre, with Paschal Donohoe, Minister for Finance, and Helen McEntee, Minister for European Affairs, after the release of the Government's updated Brexit contingency plan last Tuesday. Photo: Damien Eagers

After more than three years of hoping that it might all work out in the end, the Government finally accepted the likelihood of a 'hard' no-deal Brexit last week. With the clock ticking down to the October 31 deadline, prepare for impact on Halloween.

"It is the Government's assessment that there is a significant risk of a no-deal Brexit on October 31 (or thereafter) and, accordingly, work on no-deal Brexit preparations continues to be taken forward as a matter of priority across government departments and agencies," was how the Government's updated Brexit contingency plan, which was published last Tuesday, bleakly put it.

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In the event of a hard Brexit, there will be checks at, or close to, the Border, with most if not all on the southern side of the frontier, the Government's updated contingency plan concedes. Photo: Mary Turner/Bloomberg
In the event of a hard Brexit, there will be checks at, or close to, the Border, with most if not all on the southern side of the frontier, the Government's updated contingency plan concedes. Photo: Mary Turner/Bloomberg

"A no-deal Brexit will be an unprecedented event, bringing with it disruption and severe negative economic impacts… The impacts would be very damaging and in the first year following a no-deal Brexit, it is predicted that the growth rate would be almost 3pc lower than currently projected...

"A no-deal Brexit will have severe negative effects in a number of sectors and among smaller and medium-sized businesses, and it will be widely felt on a regional basis.

"The impacts will be felt most notably in many exporting sectors, including agri-food, indigenous manufacturing and tourism, as well as in importing sectors, especially those characterised by just-in-time supply chains, such as parts of the retail sector."

For an official government document, the real meanings of most of which are heavily cloaked in cliché and euphemism, to express itself in such blunt terms is virtually unprecedented.

"The rhetoric has been stepped up in trying to communicate how negative this could be. The Government is hoping to push those who didn't take it seriously in March that a no-deal Brexit could be forthcoming," says Goodbody Stockbrokers chief economist Dermot O'Leary.

The updated Brexit contingency plan follows hot on the heels of the summer economic statement, which sets out the groundwork for next October's Budget. The statement envisages two possible scenarios.

Firstly, an orderly Brexit, in which case there would be a budget surplus of 0.4pc of GDP in 2020 and, secondly, a disorderly Brexit which would see the surplus transformed into a deficit of between 0.5pc and 1.5pc of GDP. Going from a surplus of 0.4pc of GDP to a deficit of 1.5pc would result in a hit of almost €7bn to the Exchequer.

This would mean that the €700m tax and spending package the Government had been hoping to unveil in advance of a probable spring 2020 general election would disappear faster than snow in July.

Along with the hoped-for €700m pre-election war chest, 50,000-55,000 Irish jobs could disappear in the event of a no-deal Brexit. The ESRI economic think-tank also paints a depressing picture of the likely consequences of a hard Brexit. In a report published in March, it estimated that in the event of a "disorderly" Brexit, Irish GDP would be 2.4pc lower after two years and 5pc after 10 years than would otherwise have been the case, and that exports would be 4.7pc lower after two years and 8.3pc after 10.

So is the Government right to be worried about a no-deal Brexit? Certainly, the noises being made by the likely winner of the Conservative Party leadership election and next British prime minister Boris Johnson about the UK leaving the EU "come what may" by the October 31 deadline point very strongly in that direction.

The foreign exchange markets also seem to be taking the risk of a no-deal Brexit more seriously. Sterling fell to its lowest level against the euro for two years last week, making life more difficult for Irish exporters selling into the UK market. While most exporters will be able to weather the current exchange rate of €1.11 to £1, the worry is that as October 31 looms closer without a deal, the British currency will fall even further.

What might happen to the euro/sterling exchange rate in the event of a no-deal Brexit, with a Johnson government likely to attempt to offset the economic shock by letting the exchange rate take the strain, hardly bears thinking about. Others are not entirely convinced that, when confronted with the abyss, the UK will leap into the unknown.

"The costs of a cliff-edge Brexit are so severe that a way will be found to reduce those costs," says IBEC director of policy Fergal O'Brien.

Ever since Britain voted to leave the EU in June 2016, one of the Irish Government's main goals has been to avoid the re-emergence of a hard border on the island of Ireland.

It was to prevent this from happening that the UK and the 27 remaining EU member countries agreed in December 2017 to the so-called backstop, that would keep Northern Ireland in the EU single market and customs union, while allowing Britain to leave. Last Tuesday's document may well mark the moment at which the Irish Government's hopes of avoiding a hard border began to evaporate. While stressing that the Government was still committed to "guaranteeing, through the backstop mechanism, that there will be no hard border on the island of Ireland", it conceded that, in the event of no deal, "it will not be possible to mitigate many of the risks associated with a no-deal Brexit".

After repeating the various arguments against a hard border, the contingency plan goes on to state: "Without the withdrawal agreement and the backstop, there are no easy answers... There should be no illusion: a no-deal Brexit would result in far-reaching change on the island of Ireland. This would particularly impact on North-South trade, which could no longer be as frictionless as it is today. The impact of tariffs and of the customs and SPS [sanitary and phytosanitary, basically health checks] requirements and associated checks necessary to preserve Ireland's full participation in the single market and customs union would be significant for the operation of the all-island economy, and would involve additional costs for and disruption to businesses throughout the island."

Translated into plain English, that means, in the event of a hard Brexit, there will be checks at or close to the Border, and that most or all of those checks will not be in Northern Ireland but on the southern side.

After fighting so hard for the backstop, a measure that contributed enormously to the defeat of the withdrawal deal negotiated by outgoing British prime minister Theresa May, it looks as if we are going to end up with a hard(ish) border after all.

Of course, Brexit, even a no-deal Brexit, will not all be bad news for Ireland. In last March's report, the ESRI wrote: "While the UK's exit from the EU will adversely affect Irish trading activity, with significant negative implications for the wider economy, a strong argument can be made that the impact will be offset in part as a result of FDI [foreign direct investment] being diverted into Ireland."

All of the major studies that have been conducted on the topic have concluded that Brexit will reduce the flow of FDI into the UK by between 20pc and 30pc.

This creates an opportunity for Ireland, already one of the largest destinations for FDI in the world and, after Brexit, the only English-speaking country in the EU.

ESRI estimated that FDI inflows into Ireland would increase by 2.7pc if the UK left the EU with a deal, and by 3.3pc if the country left without a deal. Clearly, it is an ill wind that blows no good. When the EU granted Britain a seven-month extension to the end of October in April, EU Council president Donald Tusk warned the UK: "Please do not waste this time." Unfortunately, with half of the extension having now elapsed, that is exactly what is happening. With Johnson not scheduled to become prime minister until July 24 and the EU bureaucracy set to take its annual summer break in August, it will be early September before the two sides can sit down and talk with one another.

That leaves very little time to tie up a deal by Halloween. Even if the two sides can somehow sort out their differences, IBEC's O'Brien believes there is no way that most Irish businesses can be ready for a no-deal Brexit by the end of October.

"Business needs a destination. Deal or no deal, it needs time to adjust. There is no way all businesses or the Government are going to be ready for a cliff-edge by the end of October. It simply cannot be done," he said.

With the October deadline now just months away, are we headed over the cliff-edge of a no-deal Brexit or will something give at the last minute?

For those who hope for the latter, last week's comments from Ursula von der Leyen, who takes over as EU Commission president at the beginning of November, that she "does not see any problems" with granting the UK a second extension, provided a ray of hope.

"The risk [of a no-deal Brexit] is there. It is higher than it was at the start of the year. It is right to prepare for it. There will be massive consequences for households and consumers. It would mean unravelling all of the benefits of the single market, that have been built up over the past few decades, virtually overnight. I believe that pragmatism will eventually prevail," O'Brien concludes.

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