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At the end of next month, the UK is set to leave the EU. While everybody has known and understood the significance of March 29th 2019 since the Article 50 process was triggered two years ago, it is quite staggering the lack of progress that has subsequently been achieved.
The problem is that the EU side is quite clear about what it wants to achieve, which is to preserve the integrity of the Single European Market. The UK side is so deeply divided, that all it really understands is what it does not want, but there is absolutely no consensus about what it does want.
Having had her Withdrawal Agreement comprehensively defeated a few weeks back, the Prime Minister scored a rare victory last week in Parliament when she supported a victorious motion to have the so-called Irish backstop renegotiated with the EU. The EU appears adamant that it will not renegotiate the backstop, to which she signed up to a few short months ago and which she argued was the only option a few weeks ago. Parliament also voted to avoid a no-deal Brexit, which does not make very much sense, because in theory at least, if the EU agrees to revisit the backstop and if no alternatives can be found, then a no-deal Brexit would appear to be the only real option. However, nothing can be taken for granted in relation to the deeply divided UK parliamentary process at the moment.
It has appeared inconceivable to me since the beginning of the process that if the UK and Ireland have different trading arrangements, a hard border could possibly be avoided. The real issue is that the strip of land between the Republic of Ireland and Northern Ireland is not just the Irish border, post-UK exit, it will become the EU border. As such, it will be the only land border between the UK and the EU. Consequently, the EU side will be adamant that this border be airtight and that the integrity of the Single European Market be preserved.
Strangely, last week the UK Parliament also rejected a motion to seek an extension to the process. However, a number of senior UK politicians have suggested in subsequent days that a delay would be sought from Brussels to get the required legislation in place and so on.
The Prime Minister now believes that when she returns to Brussels over the coming days ‘she will be armed with a fresh mandate, new ideas and a renewed determination to agree a pragmatic solution that delivers the Brexit that British people voted for, while ensuring there is no hard border between Northern Ireland and the Republic of Ireland’. This statement appears to be laced with inherent contradictions, but anything is possible at this juncture.
It is really hard to say where this process is going to head over the coming weeks but the possibility of a no-deal Brexit by accident rather than by design looks somewhat more real. Hopefully, sense will prevail in the UK political system, but that trait has been in short supply for some time. There have been a number of salutary warnings in recent days from Airbus, Dyson and particularly Nissan. In relation to the latter, Nissan has warned that it may move the production of its X-Trail out of Sunderland, which incidentally is a constituency that voted for Brexit back in 2016.
A concern for Ireland is that while on the surface, the EU appears totally supportive of the backstop agreement, I get a sense that faced with a hard Brexit, powerful business interests in Germany and elsewhere who sell a lot of stuff into the UK, might not be quite as enamored with the failure of the EU to renegotiate it and risk a no-deal Brexit. The one thing Ireland has going for it, is that the border is an EU rather than just an Irish border.
The Department of Finance published some early thoughts on how Brexit might affect the Irish economy. Under a no-deal Brexit, the view is that the Irish economy could be 4.25 per cent smaller than the current projections in five years time. Employment would expand more slowly and the unemployment rate could rise by 2 percentage points, and the public finances would deteriorate. Around 50,000 jobs would be at serious risk. Agri-food and the indigenous manufacturing exporting sectors are not surprisingly deemed to be most vulnerable. The Department also figures that by 2023, the economy would be 6 per cent smaller relative to a hypothetical ‘no Brexit’ scenario. The Department will give more detail when it publishes its April economic forecasts.
These forecasts may be overly pessimistic, but only time will answer that question. In the event of a no-deal Brexit, the Irish economy will continue to function and will be forced to adjust, just as it had to when we originally joined the EU and then when we broke the link with sterling in 1979 when we joined the European Monetary System (EMS). Unfortunately, we didn’t adjust very well after the commencement of EMU and the results were not positive, ultimately resulting in the economic crash in 2007. In the event of a no-deal Brexit we will have to up our game and focus on building up the attributes that should characterize a modern dynamic economy.
On the financial markets, there is still an amazing sense of calm in relation to Brexit. Between January 10th and January 25th, sterling appreciated from 90.23 pence to the euro to 86.56 pence. This move was obviously heavily predicated on a Brexit deal, and not surprisingly, since the Parliamentary vote last week, sterling has lost some modest ground, but probably not by enough given the heightened risks. In the event of the UK crashing out of the euro on March 29th without a deal, sterling could easily and fundamentally should go all the way to parity or above. On the other hand, as market movements showed in January, a soft Brexit would be a major boost for the UK economy, and sterling and all UK financial markets would benefit enormously.
The bottom line is that nobody really has a clue where Brexit might go over the coming weeks. My gut sense has been and continues to be, albeit with waning confidence, that pragmatism will prevail and the UK will initially have the process extended, and eventually agree a deal. Hopefully the majority of MPs who oppose a no-deal Brexit will rise to the fore.
The views and opinions expressed in this article are those of the author.