Irish eyes: A Dublin view of Brexit

The recent border spat between the UK and the EU regarding the Irish border has been very much in the news over recent weeks. Whilst Brexit is seen from London primarily as a problem for the UK, the view from Dublin is rather different. After all, Ireland is the only other EU country to share a land border with the UK and although Ireland is not quite as dependent on the UK as it was in  the 1970s, it remains a significant export market. Indeed, the UK is still the second largest Irish export market and remains the largest source of imports. Consequently, Ireland has a lot to lose from a Brexit which results in significant obstacles being placed in the way of the frictionless border that currently exists between the north and south.

Looking at it from another angle, the Republic is Northern Ireland’s largest external trade partner and frictionless trade is important for the wellbeing of the Ulster economy – the very same region which supports the DUP, which in turn is propping up Theresa May’s government. But Ireland is a significant export market for the UK  as a whole, and last year the UK exported more to Ireland than to China and India together. When politicians say that they do not wish to see the re-imposition of a hard border, they really mean it. The UK and Irish economies are linked in other ways, too. For example, energy markets north and south of the border are heavily integrated, with an all-island electricity market in existence since 2007 which sees Northern Ireland relying on electricity imports from the Republic to make up for insufficient local generation capacity. By contrast, Ireland is heavily reliant on the UK for natural gas imports accounting for 96% of Irish gas usage in 2014.

Whilst the single electricity market is not dependent on the EU’s legal processes, Ireland does rely on EU regulatory measures to cope with potential fossil fuel shortages. Indeed, Ireland stores its emergency oil supplies in the UK which might become a problem if the UK is no longer bound by EU legislation on resource sharing.

Having established that the economies are heavily integrated, the ESRI[1] attempted to put some numbers on the potential effect of a  hard Brexit on the Irish economy. They assumed three outcomes: (i) the UK reaches an EEA-style arrangement with the EU; (ii) a free trade agreement, in which goods are freely traded across borders but financial services are not and (iii) a “hard” Brexit in which the UK falls back on WTO rules. These significantly reduce trade between the UK and the EU, and in turn reduce UK GDP by between 1.8% and 3.2% relative to baseline “over the longer run”. The ESRI’s simulations suggest that over a ten-year horizon, Irish output is reduced relative to baseline by 2.3%, 2.7% and 3.8% in simulations (i), (ii) and (iii) respectively (see chart). In other words, the damage to Ireland is actually greater than that inflicted on the UK.

Unlike a decade ago, the Irish economy is better placed to withstand any such shock. For one thing, the extent of the downturn between 2008-11 (GDP declined by 11% from peak-to-trough with domestic demand down by 23%) was exacerbated by a huge fiscal tightening which is unlikely to be repeated. Moreover, the international backdrop is more favourable, with the euro zone economy growing more strongly and the US – upon which Ireland is heavily dependent for FDI – also on a much more solid footing. Nonetheless, the last decade has been a particularly difficult one for the Irish economy and the last thing it needs now is a further exogenous shock. Given the downside potential for the Irish economy in the event of a hard Brexit, it should come as no surprise that both the Irish government and the EU27 attach so much importance to the border question. It is an issue that the UK government cannot afford to ignore.

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[1] ‘Modelling the Medium- to Long-Term Potential Macroeconomic Impact of Brexit on Ireland’, The Economic and Social Review, Vol. 48, No. 3, Autumn, 2017, pp. 305-316