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How Ireland can survive the flight from Britain’s shadow

Monday, March 6, 2017 12:24
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The Taoiseach needs to give his speech writer a high five, or maybe a fist bump. Because in the last few weeks, we have had two dingers from Enda Kenny.

The first was his Brexit speech, which was understandably overshadowed by the McCabe controversy, but is well worth reading, because Brexit will affect every person on this island, North and South. In that speech, the Taoiseach rightly said: “History has rarely been idle in Ireland.”

In another speech, recognising the distinct ethnic status of the Traveller community, Kenny ended with: “May all the people of our nation live in the shelter and never in the shadow of each other.”

This second phrase, perhaps deliberately, echoes a banquet speech given by President Michael D Higgins on his historic state visit to Britain. There the President said: “Ireland and Britain live in both the shadow and in the shelter of one another, and so it has been since the dawn of history.”

Higgins was himself quoting from an old Irish proverb: “Is ar scáth a chéile a mhaireann na daoine.” This translates roughly as: “It is in each other’s shadow that we flourish.”

Ireland in the shadow and the shelter of Britain. Travellers in the shadow and the shelter of the settled people.

And history never idle. Remarkable parallels.

I found these phrases bouncing around in my head last week. Like many phrases, they can be applied to many situations. The very power of language is in its generality.

Over the last 43 years, Ireland has worked hard to escape the shadow of Britain by forming ever-closer ties with the European Union and the United States.

If history is not idle, neither is our government. Brexit is coming, and the government’s preparations for it are increasing in their intensity. Ministers and officials are ringing up the air miles bouncing around Europe to make the case for Ireland’s special status to their colleagues, all of whom will have a vote on the eventual Brexit deal.

Using legal precedents around German reunification seems to be the central pillar of the Irish argument to retain free movement of goods and services and people across the island of Ireland. This is a good strategy, as the legal angle is often received well at the EU level.

But while the strategy might be good, the end result is unlikely to be. The sketch of this deal is beginning to be seen. And despite the hard work of our government, with each contour added, things look worse and worse for Ireland.

Think about how we are exposed to Brexit. We are exposed because we are so open. Ireland is in a rare group of countries whose exports and imports are more highly valued than the entire output of the country.

We are exposed in a way no other European economy is to Brexit

Other countries which have this weird feature include Luxembourg, Singapore, Malta, Slovakia, the United Arab Emirates, Vietnam, Hungary and the Maldive Islands.

As one measure of openness, over the long run, from say 1960 to 2015, Ireland has grown its imports much more and faster than the average of advanced economies. Because of our exposure to international conditions, however, our growth has been much more volatile than the rest of the world’s as well.

We are exposed because of our industrial structure. Indigenous firms are far more in the shadow of Britain than their multinational counterparts. Sectors such as agri-food and fishing, tourism and energy employ hundreds of thousands of workers, often in small enterprises of fewer than 50 people.

We are exposed because of what we buy from Britain to sell. For our home-grown firms, in terms of intermediate goods – the stuff they use to make the things they sell – Britain is still their biggest market.

The food and beverage sector sources 12 per cent of its intermediate goods from Britain, while traditional manufacturing sources 22 per cent of all its goods from there. Britain represents 65 per cent of the food and beverage sector’s turnover, and 49 per cent of the electronic equipment sector’s turnover.

For traditional manufacturers, Britain is 36 per cent of all their exports.

  Exports Imports
Sector Share of turnover from exports (%) UK exports as share of total exports (%) UK as share of turnover (%) Share of intermediate goods sourced from UK (%) Share of intermediate goods coming from the UK (%)
Food and Beverage 65 15 9 12 48
Traditional Manufacturing 36 36 13 22 47
Materials 38 26 10 25 46
Electronic Equipment 49 26 13 25 30

A smaller, poorer, tariff-laden Britain would be very bad for each of these sectors, unless they are given serious state support to help them expand into the Middle East and Asia. Here the correct policy move is a vast increase in the budget of Enterprise Ireland, working on an all-island basis.

We are exposed because of the dual nature of our economy. What do we export to the world? Mostly chemicals and pharmaceuticals. In 2015, for example, we exported €66 billion in the chemicals and pharmaceuticals sector – mostly driven by multinationals, which is why Belgium, the headquarters of many of these multinationals, is a larger export partner by value and volume than Britain.

The domestic agri-food business is, by contrast, worth around €11 billion in terms of exports, but employs hundreds of thousands more workers in Ireland.

When the two high-tech, multinational-dominated sectors of pharmaceuticals and electronic equipment are excluded, exports fell by over €900 million or 3 per cent in 2016. The depreciation of sterling was largely to blame. The value of Irish food exports to Britain is down nearly 6 per cent year-on-year.

We are exposed because, despite the progress of the last 40 years, we are still in the shadow of Britain. A range of studies from within Britain and from international institutions show a loss in output there over the short and medium term because of Brexit. This means an economically smaller, poorer Britain which still buys a large amount of Irish stuff – and so Brexit will act as a brake on our growth.

Luckily, most of the growth in the economy is coming from the domestic sectors now, not the export-focused sectors. Domestic demand for goods and services increased by 3.9 per cent in 2016.

This year looks set to continue this trend of solid growth of around 3 per cent in consumer spending and underlying investment, with 2018 forecasts of around 3 per cent as well. Brexit will come in 2019. We have time, and a short space of time it is, to get our strategy right.

We are exposed because we trade in a currency that is not our own, the euro, with another currency, sterling, that is wholly controlled by Britain.

In an excellent report to the Institute for International and European Affairs, Dan O’Brien quite rightly points out that the business models of indigenous Irish exporters are highly sensitive to the euro-sterling exchange rate.

A large movement in this rate can easily wipe out their profits and threaten the solvency of their businesses. The precedent for businesses going to the wall because of currency movements was established in 2016. Remember, when things get bad for Ireland, we have no monetary policy to offset downturns as Britain has, because ours is set by the ECB.

Ireland’s incredible openness, the dual nature of its economy, its industrial structure, the likely impact of Brexit on Britain and the monetary policy arrangement of the EU mean we are exposed in a way no other European economy is to Brexit.

To flourish beyond Brexit, Ireland must strengthen its domestic firms and support them in diversifying away from Britain as their main market. Despite being a minority government, our policy makers must move quickly to establish the means to help our firms prosper beyond Brexit.

We need Enterprise Ireland on horse tablets, and now.


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