February 22, 2016
The Irish bureaucratic establishment has been warning that Brexit would be a disaster for Ireland. The Taoiseach has intervened, saying he hopes that Britain remains in the EU.
Irish ambassadors have been explaining why Brexit would be catastrophic for Irish business. The working assumption in bureaucratic circles appears to be that leaving the EU would be bad for the British economy and even worse for us.
In Ireland, the British debate is being presented as a battle between the head and the heart. The beating heart of England, with Anglo-Saxon blood flowing through it, is being painted as nationalistic, atavistic and backward. Little Englanders want to take England back to a dark period of splendid isolation.
When seen from the standpoint of the Irish bureaucratic elite, who have been exposed to the sophistication of Brussels for the past half century, these English/British nationalists are seen as politically backward, offensive and not plugged into the realities of the global economy.
Bureaucratic Ireland sees English nationalism as isolationist, backwards and passé, while the same Irish bureaucratic elite is embarking on a national jamboree celebrating the victory of similarly isolationist, inward-looking and ethnically divisive Irish nationalism.
The basic idea we are being sold is that our nationalists were and are enlightened, but their nationalists were and are stupid. In terms of the economic parameters of the debate, the Out side are seen to be emotional and, economically, couldn’t be trusted with a sweetshop. Contrast this with the In side in Britain, who are portrayed as sensible, measured and financially literate.
The truth is quite different. There is no evidence that an Out vote will spell economic disaster for Britain at all. And if Britain doesn’t suffer economically, there’s no reason to worry about the impact here.
Yes, Britain is our largest trading partner, but you know what trading partners do? They trade. This won’t stop. So the €1 billion in trade a week between Ireland and Britain will continue in the event of a Brexit.
At this stage, let us look at what the likely impact of Brexit will be on the British economy.
This week, the excellent British fund management company Woodford Funds published a comprehensive economic report on Brexit which was undertaken by Capital Economics, an independent economic consultancy.
They found that both the Out and the In side were overstating their claims and that in reality the impact on Britain’s GDP would be modest.
There are a number of significant things that will change. The main one is immigration.
Since 2004, annual net migration from the European Union rose to significant levels of around 100,000 people per annum since the Eastern European countries joined the EU. It has more than doubled since 2012, reaching 183,000 in March 2015.
This is a major issue for Britain, and it is reasonable to suggest that low-skilled immigration will be reduced substantially after Brexit.
In contrast, a system attracting higher-skilled immigrants à la Canada or Australia will be instituted.
This will raise low-skilled wages in Britain and reduce profitability of companies operating in agriculture and hospitality, but raise productivity in higher-skilled industries.
There is absolutely no way that Irish migrants to Britain will be affected, as an open border between both our countries has survived intact, even at the height of the Troubles. This won’t change.
In terms of trade, 45 per cent of all British trade is with the EU. Given that total exports account for 30.5 per cent of British output, this means that the value of all goods and services exported to the European Union are equal to 15 per cent of the British economy. And 18 per cent of all EU exports go to Britain.
No one has any interest in this stopping. The Germans simply sell too many cars in England for this to end. The chances of a trade deal even after Brexit are very high unless political vindictiveness overshadows commercial common sense. Hostile trade relations are in no one’s interest.
In terms of direct foreign investment, 44 per cent of all investment into Britain comes from the EU and 28 per cent of all investment into the EU comes from Britain. This shows how interdependent the economies are.
Initially, investment flows may be affected, but once the currencies settle down, there’s no reason to believe that investment flows will change.
The Out side claims that less red tape will make Britain a better place to invest, while the In side says the uncertainty associated with the new regime will slow investment. The reality lies somewhere in the middle – swings and roundabouts.
For Ireland, a possible problem would be if a more independent Britain competed more aggressively tax-wise for direct foreign investment.
This would be a problem for us. However, it is possible that remaining in the EU would be seen as an advantage – but that would only be marginal as long as competitiveness wasn’t an issue.
This brings us to sterling. There is little doubt that sterling would fall swiftly after Brexit because there may be worries about Britain’s large current account deficit and how it might be financed. But again this will be modest and not permanent.
Next up, the financial markets. Leaving the European Union could lose Britain its “passporting rights’. These allow British-based institutions to sell into the rest of the European Union without having a branch there.
This could be a big opportunity for the grubby business in Ireland of “brass-plating’ because big banks in the City would have to move certain functions to places like Dublin to be able to trade in the EU.
The short-term loss of some banking business would bring down house prices a bit in London and, in contrast, this could push up prices in Dublin.
There is lots of talk about a new border with the North – this is nonsense and doesn’t stand up to a jot of common sense analysis. First of all, who will erect it? We both opted out of Schengen and so we’ll just stay out of it and we’ll carry on as before.
If Brexit happens, it won’t make a huge difference. Once Britain’s economy is doing okay, we will too. Indeed, financial services might expand in Dublin and so too might foreign investment flows.
There is too much at stake between Britain and the EU to make a period of economic hostility after Brexit likely. However, if Britain begins to fracture thereafter, all bets are off. Why don’t we come back to that next week?