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.
[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
