Keystone Column 96 – Brexit: the state of play

Keystone Column 96 – Brexit: the state of play

This week, we are focusing on the state of play in Brexit. Below, we provide a guide to the various scenarios it potentially presents for Irish business.

Brexit in context – the state of play

Some interesting contextual matters floating around in advance of the next leaders summit in Brussels in December from an Irish perspective:

a) Many sources now rate a hard Brexit, possibly quite soon, as 50/50 at the moment based on the instability in the UK.

b) The UK government was shown this week to be (still) woefully ill-prepared for negotiations. They admitted that sectoral level analysis (perviously stated to be in excruciating detail) according to Brexit Minister David Davis does not actually exist. Awkward.

c) The progress the EU understood to have been made on reciprocal rights for EU/UK citizens and on settling the “bill” for leaving the EU has taken a few steps back in the past ten days. Senior sources in Brussels place the blame firmly on the instability in the UK government which has changed its position on these non-negotiable points since the Florence speech and the last round (round 4) of EU/UK negotiations. This has rocked the state of play and respective positions held.

d) In this context, the Irish border comes back into light as it remains an insoluble question. The Irish Farmer’s Association, which has an office and effective lobbying operation in Brussels, published a Brexit report on the needs of Irish farming in March 2017.  Their fifth recommendation (page 41) is one that may be seen as a work around for what many see as an inevitable hard border. The IFA are calling for time bound, targeted suspension of State aid rules for the farming sector. In other words, the solution is to take out the cheque book and pay to solve the border question while focusing on the bill and “freedoms” questions. Not the state of play you hear spouted on the radio (should you be listening). The IFA’s call is as follows and is being seriously considered as we understand it:

” The market disturbance caused by the sterling depreciation is impacting unequally on different Member States and different sectors, depending on their exposure to trade with the UK. Ireland, and the Irish agri-food sector in particular, are hugely impacted by the exchange rate movements that have occurred as a result of the UK referendum.

EU State Aid limits must be extended in Member States that have been disproportionately impacted by the depreciation of sterling, and whose competitiveness versus their EU trading partners has been undermined.”

 

Jargon Fact checking
Hard Brexit A deal that would see the UK crash out of the EU and the WTO. They would have to apply to the WTO for membership. It is unclear at this stage whether they will be able to apply for membership before leaving the EU. The EU can block such an application.

 

This implies UK can set its own economic, trade and social policy priorities and is outside the jurisdiction of the ECJ. They are outside the Single Market and the Customs Union.

Soft Brexit A deal that entails a future relationship that has closer ties than WTO rules imply. Due to the politics of immigration in the UK, this seems unlikely at this point in time.

 

This implies access to the single market (or customs union at a minimum, diminishing the effects on the Irish border question), passporting access for financial services, free movement of capital and people (some soft controls), EU budget contribution and compliance with EU regulations with very limited influence on the regulations.

Uniquely complex border Ireland does not and never has had a uniquely complex border. It is no more complex that Finland’s with Russia and less complex than Norway’s with Sweden and Greece’s border with Albania. There are a number of complex, lengthy external border to Europe’s east with Belarus & the Ukraine, Russia, Moldova, Serbia, Macedonia and Bosnia. The Turkish border is at its most complex in Cyprus which officially remains in a state of de facto occupation.

The point of this is that Ireland will get sympathy from our EU partners but not much more than that. Every other state has to police the border and get on with it. It is neither unique nor the most complex.

The Bill While much focus is on the untying of collateral obligations on the part of the United Kingdom, the bill is not a hard bill. Indeed, many of these obligations will take several years to untie and are likely to run past the 2019 deadline and any potential extension to this deadline under a transitional arrangement.
Reciprocal Rights The EU wanted to achieve a deal on this rapidly but UK is the party that has dragged its feet on this. The immigration issue is a bigger political issue in the UK with respect to this aspect of the deal than it is in the EU. The EU will not compromise on freedom of movement principles. A hard Brexit will happen first and Merkel, Barnier, Juncker have all said this.
NI vs Scotland Any special deal for Northern Ireland, including any potential border poll, which may be required as a result of the Good Friday Agreement, has implications for Scotland. The SNPs fortunes have taken a hit since Brexit but the Union is exposed to reciprocity principles for its constituent parts. It matters little at this point that a Border poll would be very unlikely to see a change in the political status of Northern Ireland – it may be a constitutional necessity as the GFA, an international treaty that is lodged with the United Nations, assumes both states are part of the EU.
NI vs the Irish State The Irish State is seeking as cohesive a solution as possible for Northern Ireland officially for now. It is far from clear that Ireland will continue to do so in the long run however. Should, for instance, a UK state engage in tax arbitrage, customs arbitrage or other legitimate trade tactics following a hard Brexit, the Irish State may adopt stronger realist policy stances and reduce the current focus on interdependent policy positions.
The Irish State vs UK The Irish State has an interest in avoiding a hard Brexit even if that is the UK’s position. The Irish State also has a large number of Irish Nationals that are EU citizens living and/or working in the UK. While Ireland may be speaking softly, it is in Ireland’s interests to ensure EU citizen’s rights are as strong as possible in the UK. It is also in Ireland’s interests to position itself in the event of a hard Brexit to take advantage of the areas Britain thrived in while a member of the EU.
The Irish State vs EU The Irish State is repositioning itself within the EU and reviving its diplomacy playbook from the days of Margaret Thatcher – triangulating our positions. This is evident to anyone familiar with diplomacy. The Taoiseach has attended meetings with the Nordic and Baltic States and with the Visegrad groups of central European states. Broadly speaking, these groups oppose ever closer integration. He has also met with ardent Europhiles like Emmanuel Macron – Ireland’s ally on Common Agricultural Policy since 1972. This week, there was talk of a new “Hanseatic League” emerging as a counter weight to the Franco-German axis and Ireland is very much part of this. Sweden, Denmark, Finland, the three Baltic States and Ireland are developing common positions and interests as a block of small and medium sized states. The Netherlands and Germany are staying friendly with this emerging grouping also. The UK asked if Teresa May could attend and were given a firm “no”. Collectively, this gives the States a population of 26.5m where they cooperate placing them ahead of Romania and behind Poland, Spain, France and Germany as a grouping. It is a smart move. Where the Netherlands cooperates with the group (should they ever do so), only France and Germany will represent a larger population (the UK is being excluded for the purposes of this).
Hard borders The UK is not just facing a hard border in Ireland but also in Spain with Gilbralter. The Spanish government is displaying its view of territorial integrity currently. All of the current third countries the EU has borders with have customs control.
Trade deals The UK cannot commence negotiations in substance with the EU or the any other party until it has left the European Union without the unanimous agreement of the members. It is unlikely that they would get this so it isn’t being formally sought.
Transitional period The UK may be offered an additional 20 months (up to the end of 2020). This is shorter than the Chancellor of the Exchequer wants. He envisaged a period of up to five years.
WTO membership The UK will have to become a member so there may be an inter-regnum period. A transitional period with the EU’s permission to submit an application to join the WTO is the only way the UK can avoid crashing out of the global system of trade. While this could be straightforward if the UK sticks to the EU’s terms with the WTO, it should be noted that it is a lengthy process for some states. Vietnam took 11 years, China 15. The UK is an advanced open state but in whose interest is it for the UK to have an easy passage?
Making Brexit Painful There is a strong view in the EU and across leading new members that are very influential like Poland that non-membership must be demonstrably worse than membership. The UK is a large, important market but this is about politics, not economics.
Currency issue The currency issue has the capacity to amplify the benefits and pitfalls of the exit from the EU for both Ireland and the UK. A weaker sterling may compensate for tariffs in many areas but it makes Irish companies seeking to supply the UK uneconomic. Most Irish trade is priced on a long term absolute base Sterling/Euro relationship within a margin of error of £1 = €1.15.

 

Keystone recommends:

www.etenders.gov.ie – register to obtain the latest tenders from State bodies

www.supplygov.ie – the latest lower value tenders for trades / supplies from local authorities

www.tenderscout.com – a tender engine highlighting opportunities in Ireland and overseas