It is now wise to assume that the UK will crash out of the EU at the end of the year without a deal and that Ireland will suffer a significant economic hit as a result, the governor of the Central Bank Gabriel Makhlouf has said.
Speaking at a webinar event hosted by the Institute of International and European Affairs (IIEA), Mr Makhlouf said the Central Bank’s latest quarterly bulletin has an assumption that some sort of trade agreement would be negotiated between the UK and the EU.
However, he indicated that was no longer the bank’s assumption.
“It would be wise to plan on the basis that there won’t be a deal and that there will be a hit of between 1 to 2 per cent of GDP [gross domestic product],” he said.
The UK threw the Brexit talks into disarray last week by proposing legislation that would break international law by breaching parts of the Withdrawal Agreement which it signed in January.
Prospect
The souring atmosphere has increased the prospect of the UK exiting the transition period at the end of the year without an agreement.
The Central Bank believes the Irish economy will contract by 1-2 per cent in such a scenario. This would significantly amplify the shock to the economy from Covid-19.
“One of things I have been worried about for a while was that too many people were hoping that the transition period would carry on forever,” Mr Makhlouf siad.
“My advice has always been start planning for divergence,” he said, while noting the financial system as a whole in Ireland was ready for Brexit.
In his speech, Mr Makhlouf also warned that a second coronavirus lockdown would have “very serious” economic implications for the State.
“Another lockdown across the whole country would have very serious implications for the economy and for the community at large,”
“Do I think it would be inappropriate under any circumstance? Of course not, I’m not a health person,” he said.
“If we were certain we could eliminate this virus and we were certain of the timescale then perhaps that’s what we should do,” he said.
“But my observation is that that’s highly unlikely so I think it’s better if we learn to live with it and that the economy does continue to work,” he said.
The Government is due to announce a new five-level alert plan or roadmap for living with the virus on Tuesday.
Mr Makhlouf said the impact of the pandemic is going to be around for a lot of 2021.
“What businesses and households need right now is a sense of what is the plan for this longer-term period so they can start to make arrangements,to try and put some order either in their home lives or the business decisions they have to make,” he said.
Mr Makhlouf said just as the 2008 financial crisis has revealed the global economy’s exposure to risk, the pandemic has revealed the world’s reliance on global supply chains.
Review
The Governor spoke about the ongoing review of the European Central Bank’s monetary policy strategy, which will consider how the ECB can continue to achieve its objective in the current environment.
He said, "In times of calm and times of crisis, the mandate of the ECB Governing Council is always to maintain price stability. To fulfil this mandate, the monetary policy measures of the ECB Governing Council must transmit smoothly across the euro area."
He pointed to the legacy of structural change left by the pandemic, noting two important and changing areas: globalisation and digitalisation which “will have implications for the way we live, work, consume and communicate and, therefore, the effective transmission of monetary policy across the euro area”
He highlighted other factors that impede the transmission of monetary policy such as “risk aversion across national lines, an incomplete banking union and the absence of fully integrated financial, capital and credit markets all of which have been thrown into sharp relief as a result of the pandemic”.
