As much as the General Election 2016 has been to the forefront of our attention in recent weeks, the vote which may actually have a greater impact on the Irish economy is the upcoming referendum in the UK on its membership of the EU. Conor Folan of McDowell Purcell’s Corporate and Commercial Department looks at the possible implications for Ireland and its business community.
A Leap into the Unknown
Whatever about the general public, the powers that be in Ireland are aware of the risks posed by a British withdrawal from the European Union. In his speech to the Confederation of British Industry in London last November, the Taoiseach Enda Kenny noted that such an eventuality would pose “a major strategic risk” for Ireland. Why so? For starters, more than one third of Irish imports currently come from the UK, and it remains our single biggest export market in Europe also, with 16% of our exported goods and services going there. In turn, Mr Kenny noted that Ireland is the UK’s 5th largest export market, with over Stg£14 billion of British goods and services sold here in 2012. The status of the trading relationship between both countries is therefore of huge significance, and anything which threatens to disrupt it, or even introduce uncertainty into the mix, will not be welcomed.
Best Case Scenario
If the Brexit side succeeds, then they and all other stakeholders will want an orderly negotiation and disengagement from the European Union. The best case scenario may involve the EU agreeing to a relationship with the UK similar to that which has been put in place with Norway or Switzerland for example. The arrangement in place with these countries means they effectively have to abide by much of the legislation emanating from the EU, despite being disadvantaged by not having any input into drafting such laws or shaping relevant policymaking. It may even come to pass that major currency fluctuation, large-scale corporate relocations and the most inconvenient form of barriers to trade are avoided.
In this scenario the commercial impact on Irish businesses and their trade with the UK would be quite minimal. Any initial uncertainties would likely pass in a relatively short space of time once the legal and practical elements of the arrangement are agreed.
Worst Case Scenario
At the other end of the scale, if ill will was to emerge between the remaining member states and the UK, the negotiation for its exit could become acrimonious and unpleasant. Some aggrieved parties may insist upon ensuring that the British do not benefit from their withdrawal less it undermines the rest of the union and is seized upon by nationalistic elements in their own countries who might be encouraged to try something similar. A worst case scenario would see the imposition of tariffs and other barriers to trade which would seriously impact the flow of goods and services between the UK and the EU. The free movement of capital and people would also be hindered to an extent not yet known. The biggest loser (other than the UK itself) would undoubtedly be Ireland.
An anticipated weaker Sterling, and trade barriers, would decrease the demand in the UK for Irish goods and services. This could threaten the viability of many businesses here and lead to job losses. The ESRI (Economic and Social Research Institute) released a report in November in which it estimated that trade between the UK and Ireland could be diminished by as much as 20% on average across various industries following the imposition of trade barriers between the two. This would be disastrous for the Irish economy. At the very least it is likely there would be significant currency fluctuations which would affect contracts between Irish and British trading partners who may be tied into contracts denominated in one currency or the other (many commercial contracts now specifically address the issue of Brexit should it ultimately transpire). Businesses that operate on tight margins could be severely affected. The land border between Northern Ireland and the Republic may even need to be manned and enforced again, leading to disruption to trade, travel and potentially political instability on that part of the island. It may become necessary for Irish businesses to terminate or renegotiate commercial contracts that are no longer financially viable and instead seek new suppliers or markets in other jurisdictions.
Any Potential Benefits for Ireland?
As with any political upheaval or change to the status quo, the drawbacks are often accompanied by opportunities. If the current strengthening of the Euro versus Sterling continued it would mean that Irish consumers and businesses could get better value for their money than in the past. Foreign direct investment from the US or Asia that may have been earmarked for London may end up being re-routed to Dublin instead if such investors consider having a foothold in the EU to be more important. Given that we speak the same language and that flight times from London are short, the Irish capital may be seen as an attractive alternative. Additionally, UK domiciled entities seeking their own branch in a newly existential EU member state may also contemplate this jurisdiction as the most convenient location, with a resultant inflow of resources and job creation.
At the moment there are still too many unknown factors at play to be able to accurately predict either the outcome of the referendum or the precise effect on Ireland following a vote to leave. It is fair to say however that Ireland and its business community would prefer that the UK remains our partner within the EU rather than have to deal with all of the uncertainty and risk that Brexit would entail. However, with this now being a very real possibility, it is recommended that Irish businesses with significant interests in the UK or large exposure to Sterling, should at the very least initiate their own internal discussions at board level to consider their options should problems arise vis a vis that market. It may also be worthwhile for companies to now review their relevant contractual commitments and the termination or amendment options under same so that they are not scrambling to do so later.
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