The UK Government has set June 23, 2016 as the date for the referendum “In-Out” on maintaining Britain’s EU membership. Opinion polls show a very similar outcome, and an Out result would undoubtedly change the landscape of Irish business leaders, writes Oliver Mangan, Chief Economist at AIB.
The issue of the UK referendum on the EU is now at the heart of the UK. We see this as the main UK and Irish risk in 2016 as a vote on leaving the EU would have profound economic and political consequences for both countries. In our view, this is a 50/50 vote on whether the UK decides to go to or stay in the EU.
Impact on the UK economy: uncertainty over trade agreements
Most studies show that leaving the EU would have a negative impact on the UK economy. It can take up to a decade for the full economic impact on foreign direct investment (FDI), trade flows, migration, etc. to be felt. The negative impact would obviously be negative for Ireland, given its close ties with the United Kingdom.
The key question is what type of trade agreement would be concluded following a Brexit between the UK and the EU. The more the UK seeks to gain control over its policies and regulations, the harder it will be to negotiate a meaningful trade agreement with the EU. In order to reach a preferential trade agreement, the UK is likely to have to comply with EU rules and regulations.
This would be a major disadvantage for the United Kingdom if it complied with the rules of the World Trade Organization (WTO), which would probably require the imposition of duties. Around 45% of British exports go to the EU. So this is an important market. In contrast, the UK accounts for only 10% of EU exports. Therefore, the United Kingdom is not as important to EU trade as the United Kingdom.
Commercial impact on Ireland
Ireland has very close trade and economic relations with the United Kingdom, and Brexit would therefore have a significant impact. Trade with the United Kingdom would at least incur administrative and regulatory costs and possibly higher tariffs. A recent ESRI report suggests that bilateral trade could also decline significantly. Sectors such as agriculture, retail, energy and financial services are likely to be hit hardest by Brexit.
The main Irish exports to the United Kingdom are food, pharmaceuticals, ICT and a wide range of services, while on the import side energy, finished goods and services are important. Ireland is the fifth largest export market in the United Kingdom. About 33% of the products imported from Ireland come from the United Kingdom. It should be noted that the United Kingdom imports more goods into Ireland than the rest of the EU.
Border problems in Northern Ireland
The border with Northern Ireland would become an external land border of the EU after Brexit. This could raise all sorts of issues related to customs, passport controls, etc. depending on the impact of Brexit on the movement of goods, services and persons between the UK and the EU.
Transnational investment between Ireland and the United Kingdom
There are significant transnational investments between Ireland and the United Kingdom. British companies are particularly active in Ireland, especially in retail and financial services. Britain is also Ireland’s most important tourist market, while the UK is the most visited destination for Irish travel abroad.
Impact on the retail and food industries
Brexit could cause major problems for large retailers and other companies which Ireland and the United Kingdom consider to be the single market for the distribution, sale, bookkeeping and administration of goods. A Brexit would have serious consequences for the Irish agricultural sector in particular as the United Kingdom absorbs about 35% of Ireland’s food exports. The likely weakening of the British pound after Brexit would also have a negative impact on our competitiveness against the UK.
Possible advantages of the IDE
Foreign direct investment is an area where Ireland could benefit from Brexit as it would be the only English speaking country in the EU to serve as a gateway to the European single market. The United Kingdom would be much less attractive for foreign direct investment, which needs access to EU markets. Ireland could attract companies from the UK, especially in the financial services sector, but must maintain its presence in the EU or access EU markets. However, this is a double-edged sword as some Irish companies may be tempted to relocate part of their business to the UK if this is their main market.
Obvious Sterling Risk
Brexit represents a major event risk for the pound sterling. The euro has already risen by more than 10% against the pound since the beginning of December, from 70% to over 78%. At the same time, GBP / USD rose from a high of $ 1.59 last summer to around $ 1.40.
If the UK decides to stay in the EU, we would expect the pound to recoup some of its lost share and fall to 74-75p from the euro. The GBP / USD is close to 1. 50 USD. This increase in the British pound would benefit Irish exporters in the United Kingdom. We do not expect the British pound to reach a record high last year, about 70 basis points versus the euro and 1.59 against the dollar, as markets no longer expect the Bank of England to raise their interest rates in the short term.
It is expected that the British pound will suffer further losses in the event of a Brexit vote. This leads to cheaper imports from the United Kingdom, but has an impact on Irish exports to this market. The euro should at least reach the 2013 level of between 85 and 86 basis points, but could well reach the high of 90% for 2011. a form of trade agreement. The euro is also likely to lose ground as a Brexit would be a blow to the EU. EUR / USD could fall to last year’s level (USD 1.05). GBP / USD is likely to reach $ 1.25 and Brexit $ 1.15.