Brexit Stage Left

If Britain does vote to leave the European Union, the biggest losers will be the 4.68 million Paddies living a few hundred miles due west of them.

The risks are enormous. The ESRI’s recent report is probably the best work done so far on just how hard of a whack we’ll get if the denizens of perfidious Albion give the EU – an organisation so bureaucratic it once standardised how bendy a banana can be – the flick.

The ESRI’s report is largely speculative. It begins with the impact of a full Brexit on trade, on foreign direct investment, on energy, and on migration.

The report analyses the strength of the economic links between the two countries and asks what might happen to these links should Britain leave the common trade area. Ultimately, we’ll lose on all fronts. The depth of our intertwining with Britain’s economy is profound – far more than I had realised before reading the report.

A financial cliff

Trade typically makes both countries better off. The converse of that is also true – reducing trade will tend to make both countries worse off. Our trade would drop 20 per cent with Britain and some sectors – like the pharmaceutical industry – would be much more negatively affected. A strategically applied import tariff for packaged medicines, say, which alone makes up nearly 13 per cent of our British exports, or on textile products, which as a sector sends 30 per cent of all of its exports to Britain.

Sectors that are concentrated in regions will also be disproportionately affected. Take textiles. These are produced in Donegal and Waterford, and a tariff would represent a large economic shock to the regions, increasing local unemployment and migration.

But don’t forget that the newly unemployed wouldn’t be able to jump on a boat to Britain to work. They would have to apply for visas, and in a climate when Britain’s attitude to migrants is more negative than it has been in decades.

A commercial uncoupling

FDI would fall in Britain, which would slow the British economy and harm ours as a secondary effect. Britain’s amount of inward FDI is the largest in Europe and the second in the world after the US. Almost 45 per cent of this is financial services. Britain’s position as a world leader in financial services is at risk. Britain might well become our direct competitor in the race to the bottom to see who can save multinationals as much tax as possible. Its current corporation tax rate of 20 per cent is already flagged to fall to 18 per cent in a few years. Brexit may well see it fall further.

Decoupling the all-island market for energy from the EU’s regulatory and climate targets might leave Ireland vulnerable to many shocks. Outside the EU, there would be a lower chance Britain would reopen discussions on trade in renewables and on other environmental targets.

Take meeting our climate targets by 2020. We’ll have to invest heavily in even trying to meet these targets. British firms will find it harder to compete for Irish business, because they may not make the grade in terms of regulatory stringency.

On the other side, Irish firms will have to make these investments and British firms won’t, which will change the competitive edges each of them have.

Our ‘special relationships’

Now throw in the Transatlantic Trade and Investment Partnership (TTIP), the other set of upside and downside risks to the Irish economy over the coming decade. If TTIP pushes Irish enterprises into more US trade because of the elimination of non-trade barriers, our linkages with Britain will weaken by more than we expected.

Despite its penchant for banana straightening, the EU does a lot of good things, such as enforcing environmental standards, enhancing cooperation, and supporting sectors like agriculture and research and development. British farmers, now without the direct supports of the common agricultural policy, would be severely affected.

British universities are currently the largest recipients of the EU’s Horizon 2020 research and development grants, worth around £1.7 billion to them. Brexit would remove British universities from the Horizon 2020 rich list, and damage the research output of the country as a result. That might be good for Ireland, as we compete with Britain for these grants.

Keep calm

What’s great about the ESRI’s report is how calm the analysis is. Even the House of Commons report on Brexit was a little breathless in places. In the end things will even themselves out.

The last time a free trade area broke up was during the break-up of the Soviet Union. When Czechoslovakia became the Czech Republic and the Slovak Republic in the early 1990s, trade intensities declined, but by less than expected: the moment of doom for Britain and Ireland may not come.

It is remarkable how persistent bad ideas can be. Brexit, the threat of Britain leaving the European Union, is one of them. A political wheeze designed to keep his party together may well backfire on David Cameron. It’s clear he doesn’t want a referendum. He would lose a seat at the most important table for his country. Negotiations are ongoing to avoid a Brexit referendum, but tough talk on migrants and their benefits — the undermining of the free movement of labour principle the EU is built on — may well mean Cameron sleepwalks us all into a very unpleasant place.

What can Ireland do to prepare? The Taoiseach’s office is occupied with this at this very moment. Ultimately, it will come down to politics trumping economics in the short run. In the long run, we all know economics wins. Brexit is much more of a risk than an opportunity for Ireland.