Brexit shows the need for EU reform

Last week I looked at the potential impact of Brexit on the UK economy and concluded that in the short term it would be very negative for the economy, but the longer-term impact would depend on what sort of trade deal the EU would agree with Britain.

The short-term negative impact is playing out already.

GDP growth slowed to just 0.4% in the first quarter of 2016 and the year-on-year growth rate declined to 2.1%, which compares to 2.6% a year ago.

While global economic and financial turbulence would have taken their toll in the early months of the year, it is clear that Brexit uncertainty did contribute.

This week, an index of economic uncertainty produced by Stanford University in California showed that economic uncertainty has hit its highest level in Britain in 19 years, which is saying something.

Industrial activity is at its lowest level since 2013; commercial real estate transactions are reported to be down 40% in the first quarter; and the Bank of England has warned that many UK companies are putting business decisions on hold until after the referendum on June 23.

For Ireland, any semblance of economic slowdown and uncertainty in the UK is not good news.

The reality is that despite the trade diversification that has occurred since 1999 and the advent of the euro, the UK is still a very important trading partner for Ireland, and particularly for indigenous exporters.

Last year exports of goods to the UK totalled €15.5bn, and service exports were roughly the same.

The food and beverage sector is particularly exposed, as the UK accounts for over 41% of exports from the sector.

We imported €17.8bn worth of goods from the UK, and €10bn worth of services.

The EU is based on the creation of a zone where there is free movement of goods, people and capital.

If the UK were to leave the EU, there would be a significant question mark over the future of all free movement, particularly goods.

Of more immediate concern, however, would be a further slowdown in the UK economy and a further weakening of sterling.

Both would damage Irish exports to the UK, increase imports, and damage the attractiveness of Ireland as a destination for UK tourists.

Since November, sterling has lost almost 15% of its value against the euro. If the risk of Brexit were to increase or materialise, sterling could easily fall another 15%.

This would not be good news for Ireland. Other issues of uncertainty would include the land border with Northern Ireland, the all-island energy market, the future stance of UK corporation tax policy and the loss of a sensible ally around the EU table.

There is a possibility that if the UK left the EU, it could pursue a much more aggressive policy on corporation tax, thereby challenging Ireland’s undoubted primacy in that area.

I also believe, that if Britain leaves the EU, Ireland would become much more vulnerable in its efforts to stave off the pressure from France and Germany to increase the 12.5% rate.

On the upside, with the exception of Malta, which is not a serious competitor of Ireland’s on the FDI front, Ireland would become the only English speaking country in the EU, which could boost investment from the US.

However, in the short-term Brexit poses many more risks than opportunities for Ireland.

Longer-term, the impact would be heavily determined by what sort of trading agreement is reached between the EU and the UK.

It would not be possible for Ireland to negotiate bilateral trade deals with the UK, unless every EU member state was to agree.

That could be problematic, because the remaining EU countries might not adopt a very conciliatory approach to the UK.

Of course, Ireland would adjust and adapt in the longer term, but in the short term the risks are clear.

The best outcome would obviously be a vote to stay in, but it might be hoped that in the event of such a vote, the EU would actually reform itself and address the many shortcomings that the flawed EU structure obviously has.

In the event of a UK vote to leave, similar reform would be necessary to offset the possibility of other countries following the UK out.

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