For Ireland and Irish business, the impact of Brexit – if it happens – divides into two. First, there is concern about the immediate impact and particularly the risk of a sharp fall in the value of sterling. Second comes a host of longer-term questions, related to the future trading relationship between Ireland and one of our key markets and the wider macroeconomic impact.
The trouble is that neither of these is in any way predictable. In the short term, official sources confirm that a sharp hit to sterling on the foreign exchange markets is what they see as the clearest immediate risk. Brexit will, according to pretty much all the economic analysis, damage UK growth and hit its economic prospects. On this basis, most expect sterling to drop in the event of a Leave vote – or in advance of it if the market becomes convinced that “Leave” is likely.
Effect on dollar
There are a host of ifs and buts here. Will the sterling hit be short- or long-term? How much will it be initially? Will the euro also lose ground as well as sterling, given the uncertainties for Europe, leaving the US dollar as the big winner?
All this matters in terms of the impact on Irish business.
Government sources believe that big businesses dealing with Britain will have hedged their currency exposures, effectively buying insurance against a sharp fall. The NTMA, which manages the government’s cash and borrowings, will have done the same. But no hedging can protect exporters in the event of a prolonged sterling drop. And Government sources fear that many smaller exporters, in sectors from food to engineering to software, may not have the same hedging in place, and so could quickly face a choice of whether to accept lower euro revenues for UK sales, or try to increase their prices.
The second immediate area to watch is the yield on Irish government bonds. This has crept up in recent days, amid some nervousness. The thinking is that Brexit could affect growth and the economic outlook here, and possibly – despite Government protestations to the contrary – in the long term even raise questions about Irish membership of the EU and the euro. So far borrowing costs remain low, helped by massive European Central Bank buying, and it is possible that after an initial sell-off things may stabilise. But nobody knows.
Fortunately, the NTMA has already raised €5.5 billion this year of its annual target of €6-€10 billion. The commercial State companies have also raised billions in funding in the market in recent months, and are mostly flush with cash.
Beyond that, official sources say the problem is nobody knows what will happen after Brexit, so preparing is near impossible. Key questions remain about whether, for example, once the process is complete, Irish exporters would face tariffs selling into the UK, and what kind of controls might be needed at the Border.
Technically, Britain would notify its intention to leave and would then leave within two years.
But when this notification would come, what manoeuvring might take place in the meantime, whether the two-year period might be extended and what arrangements for trade would exist afterwards remain uncertain.
"It's likely that business will continue as usual in terms of trade and free movement until the UK fully withdraws from the EU," says Michael Jackson, managing partner at Matheson. "This interim period may allow Ireland to more effectively argue for its interests to be protected, like the Common Travel Area and borderless travel between Ireland and Northern Ireland."
For business, this would provide some time to adjust, but also create new, long-term uncertainties.
Britain could also move to introduce “pro-business” measures to try to limit the damage post-Brexit, Jackson said, creating new competitive factors for Irish business. There has even been speculation in London about a further cut in corporation tax there.
