It has been the week in which the huge difficulties facing the Brexit talks have been starkly highlighted – and the risks this brings for our economy and businesses.
Having won a diplomatic victory in Brussels in getting recognition on the issue of a future united Ireland, the Government published a document on its negotiating position which was all about the economy. It presented a detailed official view of what was at stake for business – and a plan to try to limit the damage and take advantage.
But there is one big problem and it is an issue almost completely outside our control. There is a risk that the talks will break down at the first hurdle. The EU side is insisting that, before any talks on a new trade deal between Britain and the EU in which the interests of the Irish economy will feature, significant progress must be made on settling its exit bill – the agreed amount to cover its future liabilities to the EU.
But the temperature has risen dramatically this week as both sides trade insults. The European Commission says Britain is in denial about the realities of Brexit. And the British government is accusing the EU of trying to interfere in the general election.
There now seems to be two roads the Brexit talks can take. One is the slow and tortuous one. The other would be quick and brutal.
New trade deal
The long road would involve difficult but ultimately successful talks on Britain’s exit bill, and then lengthy talks on a new trade deal.
While the exit bill would need to be settled before Britain leaves at the end of March 2019, talks on a new trade deal would be likely to drag on much longer, well into the 2020s on most estimates. This would require some transitional arrangement for the rules that would apply after Britain leaves the EU, but before the new trade deal.
This would bring many challenges for Irish business and a long period of uncertainty. But at least there would be the prospect of an agreed process, the gradual emergence of clarity and the hope of a trade deal which would allow exports and imports to continue relatively freely between the UK and the Republic.
The short and brutal road would be more dangerous. A breakdown in the talks could lead to the UK leaving the EU with no deal between the two sides – the so-called “ train-crash Brexit”. This would lead to the immediate erection of customs barriers, tariffs – special import taxes or customs duties on goods going to and coming from the UK – and huge uncertainty on how the rules and regulations which govern commerce and the movement of people would apply in future.
There would be different problems in each sector. In aviation, there would be questions, as Ryanair head Michael O’Leary said, about the rules governing air travel between the UK and EU. In the meat and diary sector, exporters to the UK would face significant tariffs, which would cause difficulties and business closures. On the seas, nobody would be sure who had the right to fish where, a big issue for Ireland with a fleet that fishes in UK waters. And on and on.
Nightmare scenario
Because this is such a nightmare scenario, everyone has assumed that it will probably be avoided. But this week has shown that this risk cannot now be dismissed.
A chasm is emerging between what the EU is demanding and what Britain might be prepared to pay to exit – the first issue in the talks. And relations are deteriorating day by day. Both sides are showing every sign of digging in, with reports of a dinner bust-up between UK prime minister Theresa May and European Commission president Jean-Claude Juncker.
The leaking of details of the dinner by the European side were as controversial as the contents.
Then came reports that the EU side was seeking to up the exit bill which Britain must pay to leave the Union, based on existing commitments to future EU spending programmes and costs.The EU side had previously put out a figure of €60 billion on the exit bill – seen as a negotiating figure likely to fall. But this week the Financial Times reported that, on the basis of statements from Berlin and Paris on how the bill would be calculated, the initial total demand for the up-front payment could rise to over €100 billion.
The net cost to Britain would be a bit less, somewhere between £55 billion and and £75 billion, according to the FT's figures, as it would still benefit from some EU programmes for a period.
Softening-up
There is, no doubt, some pre-negotiation softening-up here on both sides. The context – a British general election – cannot be ignored, with British prime minister Theresa May upping the ante further in a speech on Wednesday, accusing European officials of trying to interfere in the poll.
“There are some in Brussels who do not want these [Brexit] talks to succeed,” she said, apparently referring in particular to the leaked account of the dinner she had with European Commission president Jean-Claude Juncker at 10 Downing Street.
The real key indicators of the chances of success in the talks will come after polling day. But the risk for Ireland is that the two sides drive themselves so far apart before that point that the talks are doomed, or at least gravely endangered, before they even get going in earnest.
The Irish side is looking on nervously. Minister for Foreign Affairs Charlie Flanagan tried in a recent interview with the Financial Times to urge calm. Above all, Ireland needs the talks to be kept on the rails.
“I would say to my European colleagues, don’t get hung up on the magnitude of the cheque,” Mr Flanagan said. “We want to give a fair wind to the negotiations and we don’t want anything early on that is going to cause conflict. Let’s agree the principle of liabilities first, and then go away and work them out, rather than going down a cul-de-sac over one particular issue.”
But Ireland is only one player in the talks, and we appear to be halfway down the cul-de-sac already. A strategy document published by the Irish Government this week said that the exit bill talks should be conducted in a “constructive,fair and measured way”. Unfortunately, right now no one is listening.
Aggressive noises
Senior Irish sources have watched this week’s events with some concern. One emphasised that the commission – responsible for the more aggressive noises from the European side – does not have a free hand. It is the member states that will make the final call. Also, few believe that the €100 billion figure is in any way realistic.
That said, the EU may push Britain to pay €40 billion-€50 billion. Europe will not want to let Britain get out “on the cheap”, not least mindful not to encourage others to follow in the years ahead. But there are also more prosaic considerations. Without a wedge of cash from London, there will be a big hole in the EU’s medium-term financial framework, which outlines EU spending plans up to 2020. This would mean either cuts in existing spending programmes, or higher contributions from other member states.
The Government and Irish business leaders face a problem: they aren’t sure what to prepare for. A Government strategy document published this week indicated that the Irish focus, having secured agreement on the key political concerns, is now moving to economic issues. It showed that the planning machine is cranking up at a national and sectoral level. But as the document says, “the first priority is to achieve an orderly withdrawal of the UK from the EU.”
And this is what is now in doubt, unless things can be got back on the rails following the UK general election.
There is a lot at stake. The UK accounts for 17 per cent of our exports and 14 per cent of imports, but, for Irish-owned industry, the percentage is around 40 per cent. Some areas of the food and engineering sectors are hugely reliant on the UK.
Cost in jobs
Some 1,500 companies, employing 100,000 people and supported by Enterprise Ireland, export to the UK. A hard Brexit, according to all the economic calculations, would hurt SMEs, rural Ireland – particularly the Border counties – and sectors such as food and farming particularly. The cost in jobs could be as high as 40,000.
Irish business is, not surprisingly, calling for the negotiations to get under way in earnest, and not to get hung up on the exit bill.
“It is vital that the negotiations quickly move beyond the highly political issue of the Brexit divorce bill,” says IBEC chief economist Fergal O’Brien. “ From an economic perspective, the amount of money involved in the direct financial aspects of the exit is probably only 1 per cent of the 10-year economic cost which EU citizens could face from a hard Brexit. The negotiations must reflect that economic reality.”
If the talks progress, the action plan being developed by the Government can try to prepare the economy and business to limit the damage, while at the same time chipping away in the background at the talks to try to ensure that key Irish issues are sorted. These would include, for example, the maximum level of free trade as possible in future, customs checks with the least possible disruption and the addressing of key sectoral concerns in areas such as food and fisheries.
But if the talks collapse, it will be hard hat time. Tariff barriers would immediately go up between the Republic and the UK once Brexit happened – meaning special taxes or customs duties would be put on imports going in both directions, at levels set by the World Trade Organisation, the body which governs world trade. In some cases these are as low as 2 per cent, but in others, typically in parts of the food sector, they are up to 50 per cent. In all cases, new paperwork, bureaucracy and delays will apply.
“If we don’t get this right, it could signal the end of cross-Border trade in some industries,” said Brian Keegan, the director of public policy and taxation at Chartered Accountants Ireland.
Customs duties
A survey by the institute has highlighted one key, practical issue. Many Irish companies have little expertise in applying customs duties, having not had any need to deal with them on EU trade since 1992. Most accountants and legal advisers also have little expertise in this area.
So far most companies trading with the UK have not focused on this, focusing instead on the volatility of sterling. “While for certain industries such preoccupation may be well founded, among others it might signal a lack of awareness of customs obligations,” say Keegan. Sooner or later Irish companies will have to start dealing with this customs issue. And if the talks do collapse, it will be just one of the issues.
“There is real cause for concern in business about the level of uncertainty for trade, customs and the Border in the event of talks collapsing,” Ian Talbot,chief executive of Chambers Ireland, the umbrella body for Ireland’s chambers of commerce, says.
“The potential disruption to the movement of people and goods is very significant, as are the costs, implications and collection methodologies of WTO tariffs. As there is no precedent, it is difficult for businesses and Revenue authorities to adequately plan for such a scenario, particularly against the backdrop of a deadline of March 29th, 2019 that becomes fixed in stone.”
Business, above all, craves certainty. Now, not only do businesses not know what the Brexit talks might bring, but there is the risk of the talks falling apart altogether. Businesses need, as soon as possible after the UK election, signs that negotiations are getting back on track and, ideally, an early recognition by both sides of the need for some level of certainty on what is planned. Both IBEC and Chambers Ireland identify this issue of bringing some level of certainty to planning as key, then allowing the detailed issues to be worked through.
However , in the heat of this week’s war of words between London and Brussels, such calm logic seems a long way off.
