Monday 10 December 2018

If Brexit follows Grexit, should we think about Irexit?

Enda Kenny and David Cameron at Downing Street on Thursday. Photo: Chris Radburn/PA
Enda Kenny and David Cameron at Downing Street on Thursday. Photo: Chris Radburn/PA
Dan O'Brien

Dan O'Brien

Should Ireland leave the EU? There are very few people who now advocate this course of action, even after all that has gone wrong with the euro and despite some legitimate grievances about aspects of how Ireland has been treated by EU institutions in recent times.

But Europe is changing fast. No change would affect Ireland more than a British exit from the EU. While there are clearly some opportunities for Ireland if that happens, the net cost of our nearest neighbour departing the quasi-federal system of European government in which the two countries currently participate would be strongly negative.

Might the best solution - or the least bad - be for Ireland simply to follow Britain out if it votes to leave?

Membership of the EU is about interests. Ireland joined because most people believed that it was in our interests to do so. When the costs and benefits of membership of over 40 years are weighed up, the gains have been enormously positive in my view (although the calculus has become somewhat less positive in recent times).

I am convinced that Ireland would still be a relatively poor economy today if we hadn't joined, largely on the basis that there would never have been such a large inflow of foreign direct investment, which is here primarily to service the single European market. As foreign companies account for 90pc of all Irish exports, it is clear just how important this investment is for Irish prosperity.

But when the facts change, one needs to be prepared to change one's mind. The head of Ireland's main business lobby group, Ibec, recently pondered the possibility of Ireland leaving with Britain, should the forthcoming UK referendum lead to a Brexit. Speaking to Danny McCoy this week, he said he in no way advocates that course of action, and that his comments to a German newspaper were misinterpreted, but that no option should be ruled out and all possible courses of action must remain open to consideration.

It is very hard to disagree with this.

One reason Ireland might consider following Britain out is in order to preserve, as far as is possible, the important trade links between the two countries. That would particularly be the case if London failed to negotiate access to the EU single market and trade barriers had to be erected between our economies.

But this argument has its limits. While the trade relationship with Britain is very important, it has diminished greatly in significance over the decades. When Ireland joined the then EEC in 1973, Britain bought half of Irish goods exported and accounted for the same proportion of all the goods we imported.

But as the chart shows, exporters' dependence on the British market has declined ever since. Last year, the share of total Irish goods exports accounted for by Britain fell to yet another historic low, standing at just 13pc.

Import dependency on the UK is also much reduced, trending downwards from the early 1970s to the turn of the Century. It has stabilised over the past 15 years, with roughly 30pc of goods imported into Ireland coming from our nearest neighbour.

As Ireland's trade profile has been radically changed by the astonishing growth in services exports, this aspect of the commercial relationship must also be considered in any analysis of the Ireland-Britain commercial relationship.

Although some of the growth in services exports, the value of which now equals goods exports, is likely to be the result of multinationals' clever accounting practices, it is reflective of a great deal of real economic activity, particularly in the technology and financial services sectors.

But here again, the importance of the UK market has declined. From the official data (which only goes back as far as 2003), Britain's share of Irish services exports has fallen from one quarter to 18pc. On the import side, Britain accounts for only one tenth of all services purchased from abroad.

Given all this, it is very hard to see how Ireland's interests would be best served by leaving the EU to protect trade with a partner that has been shrinking in importance for a very long time. And if exiting the EU meant having to impose barriers to trade with the EU single market, then it is absolutely clear that cost side of the equation would likely be very large.

It should be recalled that a non-Britain EU is Ireland's largest trading partner. That is the case overwhelmingly because the aforementioned foreign corporate sector services that market from here. If Ireland shaped up to exit the EU along with Britain, it would raise questions about access to that market. That would greatly reduce this economy's attractiveness for foreign companies.

And let's be very clear: with one in five jobs (directly and indirectly) and 90pc of exports accounted for by these companies, doing anything to undermine the FDI sector would be not far off suicidal.

Another big reason militating against exiting the EU with Britain is the currency.

As Greece and the world holds its breath this weekend, nobody doubts the seriousness of the situation for that country. Leaving a currency and establishing another one in a short time is a nightmare scenario for any economy. And the more interconnected an economy is, the greater the cost. While Greece is one of Europe's least interconnected economies, Ireland is one of the most.

Although there is a possibility that Ireland could retain the euro on departure (Montenegro is not in the EU, but uses the euro, just as Panama uses the US dollar), it is more likely that there would also be a currency change. Assuming that Ireland did not adopt sterling, how would re-establishing a national currency pan out?

In the short term, a great deal would depend on expectations of the new currency's strength vis-a-vis other currencies, and vis-a-vis the euro in particular. Any large deprecation would blow Ireland Inc's national balance sheet apart and cause the sort of meltdown Greece will face if it departs in the coming weeks.

That is because the external liabilities of all Irish residents now exceed €3,100bn (that is not a typo). Most of this is accounted for by Dublin's international financial services centre. But even when that portion is excluded, the figure is still huge, at over €700bn.

Because almost all of the external liabilities are denominated in euro, a fall in the value of a new Irish pound relative to the euro would cause a surge in debt-servicing costs and destroy the balance sheets of the Irish State and many companies.

Meltdown would ensue.

If, on the other hand, the new currency remained stable against the euro and other countries, a transition could be managed. However, exposing the economy to such a risk, along with the many disruptive effects of establishing a new currency, would appear to rule out giving up the euro in any circumstances.

There are many other aspects - some positive, it should be said - to quitting the EU. But all are dwarfed by FDI and currency considerations. With the huge costs and risks involved, I simply cannot envisage a scenario when any Irish government would believe it to be in Ireland's interests to leave the EU.

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