Uncertainty the main factor weighing on activity in short-term

The vote to leave the EU in the UK referendum last week is likely to have profound economic and political consequences for it, Ireland and the EU.

Uncertainty the main factor weighing on activity in short-term

Already the British Prime Minister has announced that he will resign by the autumn.

The most immediate impact was felt in financial markets, which saw sharp falls for sterling and stock markets.

For firms trading with the UK, apart from the big impact of the sharp fall in sterling, business will continue as usual over the next couple of years, albeit against a backdrop of heightened uncertainty and weaker economic activity.

This is because it is likely to be at least two years before the UK actually leaves the EU. The current free trade arrangements will stay in place until then.

The referendum vote, in itself, does not trigger a UK departure from the EU.

To begin the departure process, the UK government must invoke Article 50 of the Treaty on European Union and formally notify the EU authorities that it wants to leave the EU.

It is unclear when it will actually do this.

The outgoing Prime Minister has indicated that it will be a decision for his replacement to make.

The new Prime Minister may well be in no rush to do so.

The Treaty provides for a two-year period for discussions on the arrangements for exiting the EU once Article 50 is invoked.

This period can only be extended with the unanimous agreement of all other member states.

Thus, the earliest the UK would leave the EU is likely to be the end of 2018, but it could well be the end of 2019 or later.

Indeed, it is not definite that Britain will leave the EU. There could be a second referendum in the UK on either revised EU membership terms or on the actual exit terms themselves.

A large majority of British MPs want the UK to stay in the EU.

There may be efforts by Parliament to put the issue to the electorate again, for instance in circumstances where a very poor exit deal was on offer from the EU with no access to the Single Market, or if the UK Government managed to renegotiate its membership terms with the EU.

Most studies show that leaving the EU would have a significant negative impact on the British economy.

There would obviously be negative knock-on effects for Ireland given its close ties with the UK.

Uncertainty will be the main factor weighing on activity in the short-term, especially investment.

The EU exit negotiations will be a prolonged and complicated process, with an uncertain outcome.

Foreign direct investment (FDI) into the UK will be negatively impacted, especially if there is uncertainty over free trade with the EU.

We may well see the EU adopt a hard line on trade in the exit negotiations with the UK on the basis that if concessions are granted to Britain, other countries may also consider leaving and seek similar arrangements.

Indeed, there are already calls in some countries to hold referendums on EU membership.

Thus, the most that may be offered to the UK is for it to remain in the EEA (European Economic Area), thereby largely maintaining free trade with the EU, similar to Norway.

This option might not prove attractive to the UK, though, as it is unlikely to be allowed to take control of immigration policy.

Britain would also have to still abide by EU rules and regulations and make a contribution to the EU budget.

However, it might prove to be the only real option available to the UK and it would validate the referendum result.

Some 40% of indigenous Irish exports go to the UK, so it is a vital market. It is important to note that Ireland cannot negotiate a bi-lateral trade deal with the UK.

Those trading with the UK, at a minimum, would face non-tariff barriers, including increased administrative and regulatory costs, if it leaves the EU.

It would be a major drawback for trade if the UK had to fall back on WTO rules, which would likely involve the imposition of trade tariffs.

Naturally, the Irish government will do all it can to try and ensure such an outcome is avoided.

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