Brexit blues for all-Ireland economy

So, the British people have spoken. Brexit it is.

Acres of newsprint have been taken up since the vote of 23 June speculating on what it all means. In a nod to the summer’s big cinematic blockbuster, the date has been proclaimed by some erstwhile Leave campaigners as the UK’s ‘Independence Day’.

But, while the people may have voted, uncertainty reigns.  Nobody truly knows what it means, what will happen, or when.

Scottish independence. The fate of the border dividing Ireland. The financial future of the City of London. The extrication of a country from the mass of European legal, regulatory and constitutional fabric. The future of the European project itself. Era-defining challenges lie ahead not only for the UK and its four constituent nations, but for the entire European political class.

More than most, Ireland has skin in the game. But, rather than speculating on some of the bigger existential questions, this column focuses narrowly on the prospects for economic relations between the North and South of our island.

Come what may, a ‘hard’ border with passport controls is unlikely ever to be introduced. The free flow of people North and South is likely to continue unabated. The alternative is unthinkable; a practical and political impossibility.

For years, the fluctuating exchange rate and differential excise duties have made for a roaring cross-border trade. This will continue. The recent and ongoing sterling devaluation means long tailbacks out of Newry are likely over the coming months. For many in the Republic, Christmas shopping just got cheaper.

Assuming the UK leaves the EU, it is possible that random customs checks for goods could eventually be introduced between North and South, as is currently the case between Norway and Sweden. This need not be of much practical consequence if – as with Norway and Sweden – both countries are part of the EU’s single market. But, Norway, Iceland, Switzerland and other non-EU members, pay a price for access to the single market: they pay into the EU’s budget, accept the free movement of people and accept the vast bulk of EU legislation without having a say in its drafting.

Such a relationship would seem to be at variance with the stated demands of the Brexiteers, who nonetheless wish to remain in the single market. Resolving  this fundamental paradox will constitute the core of the Brexit negotiations. As an example, Switzerland voted in 2014 to end freedom of movement of people by 2017 so as to stem immigration. But, if it follows through, it may exit the single market by default. Like the UK, they can’t have it both ways.

If the UK were to exit not just the EU, but also the single market, that would be a game-changer. It’s hard to see in this case how eventual customs checks between Northern Ireland and the Republic could be avoided. In a worst case – though, in my view, ultimately unlikely – scenario, there could even be tariffs on imports and exports between North and South. Not only would this roll back all-island economic integration, but it would devastate communities on both sides of the border. Such an exit from the single market would likely hit the North harder than the South given the former’s now narrower industrial base and its more limited exports further afield.

The main reason the North’s private sector has stagnated and declined in relative terms since partition is the Republic’s success in attracting foreign direct investment in recent decades. To help redress the balance, the North had been granted permission by London to match the South’s 12.5% corporation tax rate by 2018. The prospects for this move are now unclear, but may be moot. Firstly, the UK Chancellor has signaled an intention to bring the corporation tax rate for the entire UK much closer to the Irish rate. So, it would not just be the North that would become a more attractive destination for investment. Secondly, and more importantly, if the North and the rest of the UK exits the single market, they won’t be able to compete with the Republic as a base for multinationals wishing to sell into that single market.

Such an outcome may seem unthinkable – and the politics fraught with danger – but this would be the logical conclusion of a Brexit from the single market.  Not so long ago, even Brexit from the EU was unthinkable to the powers that be, so the possibility cannot be discounted.

Ultimately, the big decisions will be made at European level and will take several years to play out. Realistically, there is only so much in the way of contingency planning that we can undertake in the face of an impending disaster. But, every community on this island deserves that the authorities do their utmost to prepare for the worst, while agitating for the best. In the short-term, this means making the most of existing North-South bodies and cotinuing to stress Irish exceptionalism at EU level. While the execution may have been politically cack-handed, there is merit in the Taoiseach’s idea of a dedicated all-island, Brexit-specific forum. But, it needs buy-in from all communities. After all, we’re all in this together.

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