Business Growth

Keystone Column 96 – Brexit: the state of play

By 10th November 2017 No Comments
Keystone procurement suppliers

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

Many sources now rate a hard Brexit as 50/50 at the moment based on the instability in the UK. It is clear that the UK government is not ready for the negotiations. They admitted that sectoral level analysis of the impacts of Brexit do not actually exist. This is despite a Brexit Minister stating they were excruciatingly detailed.

Progress to date

The progress the EU understood to have been made on reciprocal rights for EU/UK citizens has taken a few steps backwards in the past ten days. Senior sources in Brussels place the blame firmly on the instability in the UK government. It 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.

The border question

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 a hard border. The IFA is calling for time bound, targeted suspensitime-bounde 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).

Below, we outline some of the key considerations and buzz words and give our take on where things stand.

Types of Brexit

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 the 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). It affords passporting access for financial services, free movement of capital and people (some soft controls). It also implies an EU budget contribution and compliance with EU regulations with very limited influence on the regulations.

Areas of dispute

Uniquely complex border: Ireland does not and never has had a uniquely complex border. It is no more complex than Greece’s border with Albania. There are a number of lengthy external borders 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. Therefore, it will probably run past the 2019 deadline.

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.

 

Special deals?

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 ruling nationalist party in Scotland, is unlikely to pass up the opportunity to seek an extension of any special status afforded to Northern Ireland.

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 UK vs. the Irish State: 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 is 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 to take advantage of the areas Britain thrived in while a member of the EU.

The Irish State vs the 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.

Next Steps

Hanseatic League: A new “Hanseatic League” is emerging as a counterweight to the Franco-German axis in the EU. Sweden, Denmark, Finland, the three Baltic States, and Ireland are developing common positions and interests. The Netherlands and Germany are staying friendly with this emerging grouping also. Collectively, this gives the States a population of 26.5m ahead of Romania and behind Poland, Spain, France, and Germany as a grouping. It is a smart move. When the Dutch join the group, only France and Germany will represent a larger cumulative population.

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 any other party until it has left the European Union without the unanimous agreement of the members.

Endgame positions

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. The have to submit an application to join the WTO. This could be a lenthy process is the UK deviates from the EU’s terms with the WTO. For instance, Vietnam’s deal took 11 years to negotiate and China’s took 15 years. 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 that non-membership must be demonstrably worse than membership. The UK is a large, important market but this is about politics, not economics.

The currency issue: The currency issue has the capacity to make things worse. A weak sterling may compensate for tariffs in many areas but it makes Irish companies uneconomic exporters. Irish Trade traditionally relies on sterling being worth about 15% more than the the euro.

 

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