Monday 22 April 2019

Irish business counts the cost of possible Brexit as UK referendum closes in

As polls show an even split or a slight lead for the outs, Brexit, which would have a huge impact on this country, is looking like a real possibility

London mayor Boris Johnson is a high-profile supporter of the ‘Out’ campaign
London mayor Boris Johnson is a high-profile supporter of the ‘Out’ campaign

Dan White

On June 23, just 80 days from now, British voters will be asked to choose on their country's continued membership of the EU. With 14pc of our exports still going to the UK, employers' body IBEC has warned that 'Brexit' would reduce the competitiveness of Irish exports in the key British market by 30pc.

The longer the referendum campaign drags on, the greater the chance of Brexit. The most recent opinion polls show UK voters either evenly split or slightly in favour of EU withdrawal.

Until the IBEC wake-up call, we in this country seemed completely oblivious to the threat posed by Brexit. This is despite the fact that sterling has lost almost 12pc of its value against the euro since mid-November. This makes Irish exports more expensive in the British market and holidays in this country dearer for British visitors - 41pc of the 8.6 million overseas tourists who travelled to Ireland in 2015 came from the UK.

Over 90pc of Irish exports went to the UK when we first joined what was then the EEC in 1973. On the face of it, our EU membership has been extraordinarily successful in reducing our economic dependence on our nearest neighbour with the proportion of our exports going to the UK falling from more than nine-tenths to less than one-seventh.

Look again. While the multinational hi-tech sectors have successfully diversified away from the UK market, indigenous exporters are still heavily dependent on the British market with 41pc of our 2015 food and drink exports, about €4.4bn worth, going across the water.

The Department of Jobs, Enterprise and Innovation calculates that the multinationals spent just 18pc of their sales, virtually all of which were exported, on Irish goods and services in 2013 while Irish-owned companies spent two-thirds of their sales, only half of which were exported, on Irish inputs. This means that €1 of indigenous exports, most of which go to the UK, is worth approximately €3.50 of multinational exports to the Irish economy.

When filtered through this higher expenditure by indigenous companies on Irish goods and services, our true dependence on the UK market is much higher than is indicated by the CSO trade statistics, probably closer to a third. Britain still matters a lot to the Irish economy.

Britain has had a problematic relationship with Europe ever since it refused to sign the Treaty of Rome, which first established what is now the EU, way back in 1957. Old-timers will remember that this is not the first British in/out vote, there was a previous referendum in 1975, which the "ins" won with two-thirds of the vote.

The complacent assumption in this country is that history will repeat itself on June 23. How realistic is such an assumption if, God forbid, there were to be another major terrorist atrocity or a further worsening of the Europe-wide migrant crisis between now and polling day? As the former British Prime Minister Harold Macmillan replied when asked what he most feared "events, dear boy, events".

Just how bad could things get for us if Britain votes to leave the EU? In its most recent 'Quarterly Economic Outlook', employers' body IBEC paints a bleak picture of what life could be like for us here in Ireland post-Brexit.

The first impact of possible British withdrawal from the EU, weaker sterling, is already being felt. The euro has already risen in value from 70p in mid-November to almost 80p on Friday. And it could get much worse. IBEC is forecasting sterling/euro exchange rate of 85p by June and, if Britain votes to leave, parity within two years. This combination of Brexit fears and a British current account deficit now running at over 7pc of GDP, the highest since records began in 1772, makes the prospect of a sterling collapse look frighteningly real.

Even at 85p, indigenous Irish exporters and the tourism industry would struggle. The consequences of parity don't even bear thinking about.

At the same time as a sterling collapse was wreaking economic havoc on this country, the EU and the UK would have to negotiate a free-trade agreement. Given the ill-will which would accompany Brexit, this could take two years or even longer. In the meantime, Irish exporters would have to operate in a very uncertain environment with all that this meant for jobs and investment.

"A UK exit would send Ireland, Britain and Europe into uncharted and treacherous waters. The value of sterling has already fallen significantly, a vote to leave would prompt a further significant depreciation, heaping pressure on businesses trading with the UK", says IBEC chief executive Danny McCoy. "The UK's continued membership of the EU is of overwhelming strategic importance to Ireland and Irish business."

Of course Brexit wouldn't be all bad news for Ireland. We would be well-positioned to benefit if UK-based companies, particularly in the financial services sector, choose to relocate in order to remain within the EU. On the other hand, no longer bound by EU state aid rules, the UK would be able to compete much more aggressively for overseas investment projects.

So just how real is the prospect of Brexit? IBEC puts the possibility at 30pc. Others put it even higher, with Citigroup chief economist and former member of the Bank of England's Monetary Policy Committee Willem Buiter reckoning the chances of Brexit at 35pc.

So why aren't we doing to more to prepare for possible Brexit? While the absence of a government certainly doesn't help, the real reason for official Ireland's apparent passivity in the face of this threat almost certainly runs deeper.

Ever since the publication of TK Whitaker's paper 'Economic Development' in 1958 signalled the end of the protectionism of the De Valera era, successive Irish governments have pursued a policy of greater engagement with Europe. This policy has been strongly backed by Irish business. Unfortunately, the UK, which joined the EEC at the same time we did in 1973, has never shared our enthusiasm for all things European.

While the impact of a possible sterling collapse and trade disruption caused by Brexit would be severe, we would ultimately weather the storm. If the events of the past eight years have demonstrated anything, it is the extraordinary resilience of the Irish economy.

Far more severe would be the psychological consequences as Irish policymakers were forced to seriously question the main thrust of Irish foreign and economic policy for the first time in almost 60 years. We could be waking up in a very different world on June 24.

Sunday Indo Business

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