Three key questions emerge for the Irish economy from the UK general election. As the Brexit talks start in the next few weeks – assuming they get going on schedule – these three issues are inextricably linked and all relate to the impact of the election on these negotiations.
What will it mean for the value of sterling?
The value of sterling against the euro is a key issue for Irish exporters to the UK. Weakness in the UK currency makes life harder for exporters as it squeezes their profit margins and makes it harder to compete.
It also makes it easier for UK companies to compete here. Sectors such as food, where upwards of 40 per cent of exports go to the UK and where margins are typically tight, are particularly exposed.
The UK currency fell sharply overnight as it became clear that the Conservatives would not get a majority. However, having gone well over 88p to the euro, sterling eased back later and its fall of about 1.5 per cent was much less dramatic than in the immediate wake of the Brexit vote.
A number of market analysts said the possibility of a softer Brexit due to the weakening of the Conservatives’ position was giving the currency some support. However, it clearly remains vulnerable to further political uncertainty or to anything which delays or endangers the Brexit talks, due to start on June 19th.
What will the nature of Brexit be?
The big question for Ireland is whether the Brexit talks can now succeed, what the negotiating position of a weakened Theresa May will be and what kind of deal can be done. The harder the Brexit, the greater the economic risks for Ireland.
An ESRI study showed that growth could be not far off one percentage point lower for a few years after Brexit, due to the hit on trade from tariffs and other barriers to trade. However, there are other factors too – including the prospect of inward investment, on the plus side.
If the Brexit talks can succeed, this could remove two risks for Ireland. The first is by doing a trade deal which would remove the risks of tariffs, or at least minimise them, while making new customs arrangements as painless as possible. The second is by agreeing a transitional deal covering the period after Britain leaves the EU, but before a new trade deal is done.
This would lower the immediate economic risk as Britain leaves at the end of March, 2019. All eyes will now be on whether the talks start on time and what the mood music is as the two sides head into the first tricky issue of sorting out Britain’s exit bill.
What it will mean for the island of Ireland?
Theresa May is to rely on support from the DUP to stay in power – and this will come at a price. It remains to be seen how this will affect the Government's strategy in relation to the North, where it has received EU agreement that the North could return to the EU, in the event of a vote for a reunited Ireland.
The DUP’s central point is that it does not want a special status for the North, a concept which Sinn Féin supported, to allow the North to remain in the customs union.
The Government has not argued for this, though incoming taoiseach Leo Varadkar gave the concept support in a policy discussion document during the leadership campaign.
However, the DUP argues that, economically, while this special status would allow free trade across the Border, it would mean customs checks and possibly tariffs between the North and Britain, which would be damaging, as this is the main market for the North’s firms.
The DUP has supported Brexit and the idea of Britain forging new trade relationships beyond the EU – which would involve leaving the customs union. At the same time it has said it will seek a “frictionless” Border with the Republic.
The Government shares this goal in relation to the Border, but once the UK leaves the customs union – and barring some special deal – some checks on the Border will be inevitable.
The DUP has also hinted it has special concerns for some sectors, likely to include farming and agriculture. A softer Brexit, involving as free trade as possible, would suit the DUP, though it remains a strong supporter of Britain leaving.
