STABILITY IS AN attractive idea for nations and governments.
Take the UK, which financed its role in the First World War largely by perpetual bonds known as consols. Consols were used by the British Treasury to pay for troops, ammunition and public works as long ago as the Napoleonic War.
They were also a testament to the stability of the UK parliament and the sterling currency: the surety of the British empire was so complete that such instruments were considered credible.
Close to a century later, in March 2016, Ireland issued a 100-year bond at an astonishingly low annual yield of 2.35%. (Remember the Irish state pushing 10% for a 10-year bond in November 2010 before the IMF came in?)
To make it all even more amusing, the bond is denominated in euros, a currency that didn’t exist before 1998 and almost disappeared in 2012.
This is before we consider the idea of the stability of the European Union, the impact of climate change, the potential for a serious slowdown in the emerging market economies and China. The benchmark for stability seems to have fallen considerably.
Scepticism
Into this fraught situation, Brexit has entered. The UK political system has projected an internal dispute within the Tory party into a debate on membership in the European Union.
UK scepticism of the Common Market and eventually the EU was always front and centre going back to the 1950s when it declined to become involved in the 1959 Treaty of Rome and focused on what was considered a rock-solid empire and a so-called “special relationship” with the United States.
Rejection of the single currency placed the UK into lower gear of the two-speed Europe. Since 2008, the management of the Eurozone crisis, the open toying with the expulsion of Greece in a financial de facto sense added fuel to the skepticism.
The hamfisted treatment of the North African and Middle Eastern refugee crisis by the EU has once again made the EU seem less like a framework for effectiveness and more like a broken-down car limping along from summit city to summit city leaving a trail of smoke, oil and bills to be paid sometime in the future.
Given all that, Brexit can look pretty attractive until you start getting your calculator out.
The Common Market was about trade. It created one of the most effective customs unions in the world and in the international context where the only countries able to negotiate individually are economic giants like China and America, the EU provides the framework where trade negotiations can take place with some modicum of success.
In that context, the reality of Brexit is that it will cost a lot of money, not just to the UK but also to Ireland. The estimates made by the Centre for Economic Performance at the London School of Economics has Ireland suffering a negative economic impact that is around 80-90% of the size of the UK losses.
Repercussions
The economic impact of Brexit to both jurisdictions cannot be underestimated. The UK represents in goods trade around 10% of exports and 25% of imports and in services about 20% of exports and 10% of imports.
The UK is still a major trading partner for Ireland, even though in terms of exports the US is the single largest destination country. Estimates by the National Treasury Management Agency put the losses for Ireland at 3.1% of GDP by 2030.
In terms of unemployment, there could be as much as a 1% increase in unemployment and significant wage reductions for low-skilled and high-skilled works, as high as 5% according to Economic and Social Research Institute estimates.
Ireland’s position as fully part of Europe and Economic and Monetary Union and a former bailout country means that it is knitted into the EU even if a Brexit takes place.
The common travel area with the UK, an essentially single labour market and a long political and legal history with Britain result in a situation where Ireland is in many ways closer to the London that it would be to Paris or Berlin, despite a policy of relative movement away from Britain.
Why is Brexit going to be so expensive for the UK and therefore Ireland? In 1973, around one third of UK trade was with the Common Market. In 2014, the 27 other EU members accounted for 45% of the UK’s exports and 53% of UK imports. EU exports comprise 13% of UK national income.
Trade reductions brought about by tariff and nontariff barriers will reduce income. In the optimistic scenario, there is an overall fall in income of 1.3%. In the pessimistic assessment, that goes to 2.6%.
In cash terms, Brexit reduces average income per household in the UK by £850 (€1,066) per year in the optimistic scenario and £1,700 (€2,132) per year in the pessimistic scenario.
Swati Dhingra of the London School of Economics calculated that households would lose out by roughly £453 (€568) per year on average due to the reduction in foreign direct investment (FDI) alone before adding in the trade effects.
After accounting for the loss of trade with the EU, lower FDI and lower immigration, he reckoned that GDP would be between 1.3% and 2.6% of GDP lower (£850–£1,700 per household in Britain), rising to between 6.3% and 9.5% after the dynamic on productivity are included.
As the UK makes up only 18% of the EU’s single market, the idea of bilateral agreements with the US are unlikely to be easily brokered and when they are concluded they will not be as favourable as under a single umbrella.
All EU countries would lose income after Brexit. The overall GDP fall in the UK is £26 billion to £55 billion (€32 billion to €69 billion). The rest of the EU would lose €15 billion to €35 billion of income. Overall, factoring in the losses in productivity due to reduced pan-EU trade the cost of Brexit substantially increases to 6.3% to 9.5% of UK GDP.
Displacement
The situation for Ireland will be a shock where the economic cost is only a minor part. With over 400,000 Irish citizens living in the UK, 230,000 British citizens living in Ireland, and the border with Northern Ireland, Brexit poses the possibility of the potential displacement of those individuals.
This would be a significant challenge to the Irish economy and new diplomatic and legal structures would need to be agreed due to the unique history of Anglo-Irish relations.
The latest YouGov figures in the UK show a statistical dead heat with both sides at 38-39%. Brexit will be one of the most risky events of 2016 along with the US presidential election and the potential for a hard landing of the Chinese economy – and it is a real possibility.
It is a risk that, if it takes place, Brexit will have a very costly impact on the Irish economy and force the now excellent relationship between London, Dublin and Belfast to be redesigned, opening up cans of worms that all parties would desire to keep closed.
The European Union’s existence is being challenged and the debate, as it heats up in May and June, will do much to illustrate the failures of the European project thus far. This will weaken the EU but may encourage much needed reform.
European movements that jeopardise the existing political situation, including the Valencian and Scottish separatist efforts, will find renewed energy from the Brexit debate.
My recommended reading for all parties would be Edward Gibbon’s Decline and Fall of the Roman Empire: “Vicissitude of fortune, which spares neither man nor the proudest of his works, which buries empires and cities in a common grave.”
Fortune can deliver all manner of outcomes but preparation for them is key. Ireland needs to develop contingency plans.
Senator Sean D Barrett taught economics for four decades at Trinity College Dublin. He is an independent member of Seanad Eireann for the University of Dublin and a candidate in the upcoming Seanad election.
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