“In the midst of chaos, there is also opportunity.” - Sun Tzu, The Art of War
Once the initial shock of Britain’s vote on June 23 to leave the EU had passed, much of the media coverage last week in Ireland focused on the downside risks for our economy. Naturally any uncertainty about the political and economic status of our largest trading partner and closest ally is a cause for concern. And a number of sectors, in particular farming and food, are particularly exposed to a change in our trading relationship with the UK.
However we are going to have to get used to living with uncertainty - notwithstanding what some of the candidates for Tory party leadership might say, it is possible that the UK may not identify its preferred Brexit option or trigger exit negotiations with the EU for up to 12 months. Why such a long delay? Because any concessions to the British during exit negotiations would play very badly within France and Germany who both face elections in 2017 and significant calls for similar referendums in their own countries. In fact within France there is likely to be a strong desire to play hardball with the UK in the short term in order to highlight the risks of Brexit to its own anti-EU factions.
In any event, once the dust has settled there are two realistic paths for the UK outside of the EU. First there is the so-called ‘Norway’ option. This amounts to membership of the European Economic Area (EEA), which entails full access to the single market in return for a significant contribution to the EU budget and continued freedom of EU citizens to live and work in the UK, but with no role in influencing the rulebook for the single market. However it is highly unlikely that this option will pass muster politically given that the Brexit campaign was all about restricting free movement of workers.
Given the political straitjacket that any new Prime Minister will find themselves in, it is more likely that they will pursue the ‘Canada’ option - in other words a free trade agreement with the EU without full single market access and free movement of workers.
Which of these two options is better for Ireland? Much depends on the detail of what emerges but the reality is that at an overall economy level whatever Brexit option is pursued will be at best neutral for us. However certain sectors are likely to do better than others depending on what option is pursued. The EEA approach would be best for our food and agriculture sector as it would effectively preserve the current level of access exporters enjoy to the UK market. While a Canadian-type free trade deal would not be disastrous for Irish exporters, it would almost certainly entail a lesser level of access to the UK market than currently exists.
The sector most likely to gain in a Canada scenario would be financial services. This is because financial institutions that currently use London as a base for access to the entire EU market would then lose their right to offer services throughout the EU while being registered in one country - the so-called ‘passporting’ rights. They would inevitably look to other EU locations for passporting purposes and despite strong competition from Paris and Frankfurt, Dublin in particular has a number of very compelling advantages in attracting and retaining financial institutions looking to relocate. This may ultimately lead to a significant jobs boost for our capital city - the flipside of which is increased demand for housing and better public transport.
Finally, under the most bullish scenario there may also be a significant FDI boost to Ireland as some of the €35b inward investment into the UK last year peels away and arrives instead on our shores as the only English-speaking nation in the biggest market in the world. An FDI boost of this magnitude would clearly have profoundly positive impacts on our economy, society and culture, but it is far too early to call this one.
Overall there is very little Ireland will be able to do to directly influence the shape of the final deal that emerges. However what we certainly can do is to mitigate the risks from Brexit for our economy by maximising the opportunities it presents. John F Kennedy was fond of pointing out that the Chinese word for crisis was an amalgam of two characters, “danger” and “opportunity”. To put ourselves in pole position for any Brexit opportunity, we need to find a way to bring forward capital spending to tackle key deficits in housing and public transport, make a strong case for our key strategic sectors like food, agriculture and financial services and ensure that the impact on Ireland both the Republic and the North is factored into the final Brexit deal.