Taking shelter from the hard Brexit rain

Taking shelter from the hard Brexit rain
Taoiseach Leo Varadkar at a press conference with British prime minister Theresa May. The Taoiseach, predictably, has insisted that the Irish economy is strong enough to weather a no-deal outcome, without being plunged into recession. Picture: Sam Boal/Rollingnews.ie

Should a no-deal Brexit occur, Ireland could learn much from the ways that Finland and New Zealand handled their major trade crises in recent decades, writes Kyran Fitzgerald

The Brexit bogeyman, the prospect of no deal, lurks, and casts a shadow over the festive season.

The icy hail is already hitting parts of our economy. A case in point: Exports of beverages to the UK fell by 11% in the first half of the year, compared to the same period in 2017, according to the Drinks Industry of Ireland lobby group.

Earnings, in euro terms, from sales in Britain, fell by over 20% between May 2015 and May 2018.

A no-deal departure would have much greater consequences, as supply chains across many industries are strained to breaking point.

Business leaders are nervous.

Businessman Niall Fitzgerald, the former boss of Unilever, has pleaded with the Government for greater flexibility on the border backstop.

His intervention, whether or not it is based on a correct analysis of the political situation, is a sign of the degree of nervousness at the heart of a reliably pro-EU business establishment.

Taoiseach Leo Varadkar, predictably, has insisted that the Irish economy is strong enough to weather a no-deal outcome, without being plunged into recession.

We may soon find out.

But other countries have experienced, in the past generation and away from conditions of war, shakeups that would put even the messiest of British EU exits in the ha’penny place.

I will leave to one side the painful transitions endured by countries in eastern Europe and the former Soviet Union, not least because many of these economies and societies still face many challenges.

Two stories, however, concern western economies plunged into deep recessions following the disappearance, in each case, of their major customer.

Finland owed much of its prosperity to close trading with the USSR.

The collapse of the USSR coincided with the bursting of a property bubble, and the onset of an economic depression, in Finland around 1990, circumstances that would become familiar to Ireland 15 years later.

The second example is New Zealand, which was stripped of its most important export markets in 1973, after Britain joined the European Community and the ‘common market’.

New Zealand had been known as ‘Britain’s farmyard’.

By 1960, it was the third most prosperous country, in terms of income per head. It had grown fat on the UK’s return to prosperity.

By 1970, 90% of its butter exports, and 75% of its cheese exports, went to Britain. But trouble lay ahead.

In 1960, over half of its total exports were UK-bound.

That share had fallen to a still hefty 36% by 1970. But Britain’s first application for EEC entry, in 1961, meant that the writing was on the wall.

The New Zealanders opted for a twin strategy of diversification and of deals aimed at providing producers with a transition period.

This might have worked better had it not been for the two 1970s oil crises, which hit the country hard.

Whereas Ireland was aided through the 1970s recession by EEC funds and the Common Agriculture Policy, the New Zealanders were hit by a global drop in unsubsidised food prices.

Unemployment soared and taxes rose.

New Zealand dropped to 27th in the global income league, ranking alongside Portugal.

But the 1980s brought a partial restoration in its fortunes. First, China embarked on reforms and its economy began to grow.

Eventually, a huge new market for New Zealand food would open up.

And the GATT — the General Agreement on Tariffs and Trade — talks began and global trade started opening up. These were a boon to a commodities producer like New Zealand.

New Zealand’s then finance minister, Roger Douglas, unleashed deep-seated reforms.

Government departments and agencies were privatised, en masse, saving the taxpayer large sums. Farm subsidies were slashed. The process was painful and controversial.

There were many farmer suicides. In time, the agricultural sector rebounded and continues to play a dominant role, alongside tourism.

China’s commodity boom and growth across Asia have helped greatly.

Demand for New Zealand produce soared. Today, China is New Zealand’s biggest trade partner.

The Chinese are investing heavily, something that actually concerns many New Zealanders.

Currently, average income per head is well over $40,000 (€35,366) and the unemployment rate is relatively low.

New Zealand has made the transition, but it took time and with no little dislocation.

Finland had boomed through the 1980s. A reform of banking laws triggered a credit boom.

Finnish producers enjoyed an export boom, extending from paper to shipbuilding.

But the collapse of the Soviet economy coincided with the bursting of the debt bubble.

The USSR had accounted for almost all of the Finnish foreign trade. And that market disappeared overnight.

GDP fell by 13% and unemployment jumped from 3.5% to 19% to produce a bone-crunching economic crash. Unemployment in construction rose to almost 50%.

Finland had over-invested in physical plant and equipment. As part of a restructuring, generous investment tax incentives were dropped.

However, spending on education was maintained, along with the bulk of what economists refer to as ‘social investment’ in employment training

The Finns got lucky in that the 1990s was a boom era, but they made their own luck by focusing on technology and the development of their citizens’ skills.

They were also able to help exporters by devaluing their currency.

The Finnish government played a big role in directing investment into newer industries.

The result was the mobile phone maker Nokia, a major force up until around 10 years ago. As Nokia contracted and was taken over, the country went back into a milder recession, but it has rebounded, as new enterprises have been created.

Prosperity has returned, but economists fret over the country’s rapidly ageing population and the need for social security reform.

The Finns and New Zealanders have reacted in differing ways to the challenges they faced, but both countries have endured, because they have been willing to tackle their problems straight on, with tough reforms.

The real message is that Ireland is capable of surviving the challenges of a no-deal Brexit and such an outcome remains, on balance, unlikely.

But we must be prepared to react decisively by, for example, embarking on the sort of reforms in farming policy or government spending control which successive generations of politicians have ducked.

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