For once, Ireland’s civil servants got it exactly right. No, I haven’t been hitting the Blue Nun early. Honest.
The recently drafted National Risk Assessment placed the threat of the UK leaving the European Union as a real and negative threat to the Irish economy, and a taskforce from the Department of the Taoiseach has been working for more than a year on contingency plans for Ireland in the event of a Brexit vote.
The decision to leave has historic consequences, and we need to think in terms of decades, not days.
I write these words almost 100 years after British guns opened fire on the Somme. The EU, an economic vehicle designed to stop centuries of political upheaval, is now seeing calls from across Europe for similar referendums and exit strategies. David Cameron is gone, and the likelihood of a snap general election in the United Kingdom – should we really even call it that? – is very high.
Populist revolt
The economic effects of Brexit are not merely financial. It will affect the real economy greatly. But where did this populist surge come from? Remember that the UK has an unemployment rate of 5.1 per cent, its debt levels are stable, and its economy is growing, albeit modestly. Despite how unequal their society is, it is remarkable in these circumstances that a populist revolt, based almost entirely on nostalgia, negativity, and emotion, rather than facts, was able to change the more than 50-year integration project of the European Union.
The English and Welsh peoples revolted against their establishment, the facts generated by their intellectuals bounced harmlessly off the myths created by the Leave campaign. The Leave vote was actually strongest in the regions most economically dependent on the EU. The intellectuals failed to convince ordinary people not to vote against their own interests. The Brexit campaign was a tabloid triumph where facts simply stopped mattering.
There will be theses written on the effect of the tabloid media on public opinion during this campaign, but nobody will read them, because it’s modern Britain. Last year poor Britons hit by years of austerity voted in David Cameron, who promptly reduced their standards of living if they were on almost any kinds of benefits. They voted as a group to reduce their living standards further.
The Scottish people and the people of Northern Ireland voted to Remain. This potentially sets up another series of EU referendums. Northern Ireland’s economy, for example, depends on huge fiscal transfers from the EU which will never be matched by Westminster alone. The farmers of the North may become a potent lobby to join the Republic.
Contagion effect?
Look at this from the EU’s perspective. This is the first exit from the EU by a major economy like the UK. Several regions around the EU may well want to follow the UK’s example, with the hard Left and hard Right in each of the remaining 27 countries using the lever of the migrant and refugee crisis. Brexit could cause a contagion effect across the EU in places like Flanders and Gibraltar.
The Leave campaign have absolutely no plan for what comes next, and the next UK government will be tasked with implementing Brexit, creating layer upon layer of uncertainty, of risk, for both the UK and for Ireland. Essentially political opportunists, they will make it up as they go on. A great nation’s future is being entrusted to populist, blundering bluffers.
The people of Sunderland for example, who were first to declare their intention to leave, are unlikely to be moved by the plight of the financial markets, but they are affected by prices of the goods and services they import and export, their young people have just lost the right to live and work in more in 27 other countries, and the investment uncertainty Brexit caused will mean fewer jobs for them. One third of the doctors who treat them were trained overseas.
Don’t believe this nonsense about the Brexit process taking two years. It will take closer to ten years. A political, legal, and commercial divorce will have to take place. The complexity will be stunning, and it will cause yet more bitterness. This will be a Keynesian stimulus for lawyers, negotiators, economists and other associated parasites for years to come.
The irony is that people who voted to get rid of European bureaucracy will spend years paying bureaucrats to figure out the exit details. For Irish readers, imagine a dozen overlapping judicial inquiries and you’ll get the idea. Remember that none of the challenges the UK faces has gone away. The productivity challenges, the fragile current account deficit, the EU’s migrant and refugee crises, the problem of inequality, and the UK’s century-long decline as a world power are still there.
Feeling the pain
Ireland, soon to be the largest English-speaking country in the European Union, will have a soft border between the Republic and the North, and then very likely a hard border. Calls to re-integrate Northern Ireland and the Republic will only grow. Ireland will experience a negative trade shock which may cut bilateral trade with the UK up to 20 per cent.
The Summer Statement sets the parameters for the Republic’s budgetary spending this year and into the medium term. It was released only last week. Every forecast is contingent and all are of course wrong, but this forecast is likely to be substantially revised in the coming months, as the uncertainty around Brexit increases.
An example: the day to day spending of the Irish government on things like public sector wages and child benefit is forecast to rise from €51.9 billion in 2016 to €58.6 billion in 2021, while capital spending on things like roads and hospitals is forecast to rise from €3.9 billion in 2016 to €7.1 billion in 2021. How credible, now, are these numbers? They are based on estimates of how much tax we can take in, and those tax take increases come from the growth of the Irish economy.
The Summer Statement actually takes account of the Brexit situation, estimating that Ireland would get whacked. If I were a TD in the South East, where large numbers of UK-exporting businesses are located, I’d be really worried right now.
A 1 per cent reduction in UK GDP would reduce Irish GDP by approximately 0.2 per cent, relative to the estimates, over two years. This implies a possible fall in Irish GDP relative to baseline in the range of 0.5 to 1.2 per cent. But the models are always wrong—the modelers themselves, all very smart people, would acknowledge this. It could be much worse. No model shows the Irish economy benefitting from Brexit, but there’s at least €3 billion of the fiscal space that may evaporate, not to mention a realignment between the US, the UK, and the EU.
A UK in recession would be a serious drag on Ireland’s recovery as a weaker, poorer UK convulsed by Scottish and perhaps Northern Irish referendums and endless negotiations with a hostile EU. The UK economy will be reconfigured. For example, businesses that have set up there to serve the entire EU market will have to re-strategise, and perhaps relocate.
Ireland’s fiscal space has been reduced by Brexit. Some of the increases in public services ordinary people recently voted to have increased will now not happen. The problem is that we don’t know what the impact of Brexit will be on our economy.
We talked about the voters in Sunderland. The voters in towns like Shannon, who aren’t that concerned with the movements in equity, currency, and bond markets, but who want better jobs, better healthcare, better housing and better schools, have been affected by Brexit. They don’t know it yet, and they may never know it, because the improvements in capital spending in particular simply won’t take place.
The chances of it being a net positive for Ireland are very slight. It’s a bad day for Ireland.