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Getting ready for Brexit

Posted on October 21, 2016 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The prospect of the United Kingdom leaving the European Union presents a once-in-a-generation challenge for the Northern Ireland Executive, the Irish Government and citizens across this island.  A recent paper by economists at the Department of Finance [UK EU Exit – An Exposure Analysis of Sectors of the Irish Economy] summarises the situation facing producers south of the border in a very succinct way:

“Overall, excluding the Pharma-chemical sector, the exposed sectors are mostly Irish owned, regionally based, have relatively low profit levels and have a greater share of small and medium- sized enterprises. In addition they have a relatively high multiplier and account for a relatively high share of employment in regions which have experienced a slower labour market recovery since the financial crisis period”

In short, we may be in for a bumpy ride with job losses and factory closures pending in some sectors and in some regions (and not just in border areas or in the agri-food sector which is particularly vulnerable). Focussing just on manufacturing, the two graphs (below) illustrate the degree of exposure for particular sectors.  In employment terms the Food and Beverage sector stands out as particularly vulnerable.

 Brexit 1

 Brexit 2

We need to diagnose quickly which sectors and enterprises are at particular risk not only from Brexit if and when it happens (which one presumes it will) but also from the short-term impacts of currency volatility. Building on that information appropriate supports must be put in place to re-train workers and better equip companies. In some cases, new markets may be found to replace markets that are lost. In other cases, it may be necessary to retrain workers for work in new sectors or enterprises.  Beyond a short-term response it is vital for the Irish Government and other actors to work together on medium-term plans to create a stronger and more innovative native economy capable of carving out new markets and raising productivity levels and living standards across the regions.  Now is the time to invest in infrastructure, broadband, public transport, research and innovation, higher and further education as well as renewable energy sources.

The standard reaction, so far, from the predictable quarters is to use the threat of Brexit to argue for no significant increase in the national minimum wage as well as argue for a movement towards ever lower personal and corporate taxes including retention of the temporary low VAT rates in the hospitality sector. At some point we need to decide where we are going and who we are with. Do we aim to try and play the European card and, at the same time, follow the UK to the bottom in terms of social legislation and labour market conditions or do we seek to better align our enterprise, wage and fiscal policy with comparable small open economies in Northern Europe?

We can’t have it both ways (for a thoughtful and provocative discussion of the choices facing Ireland post-Brexit the article “The Shock that will shift a nation’s business model” by Wolfgang Münchau recently in the Financial Times is worth a read). 

Never before has the choice of ‘models’ been more important. While Brexit threatens job losses, lower economic growth and uncertainty on many fronts from movement of people to goods and services it also affords citizens in the Republic of Ireland as well as in the United Kingdom to question what sort of society do we seek to build. Will the society of the future be:

  • Open and welcoming to new comers?
  • Dynamic and enterprising such as in Denmark and Finland?
  • Inclusive, equitable and competitive as in Norway and Sweden?
  • Highly productive, creative and resilient such as in France notwithstanding huge shortcomings and problems?
  • Sustainable and driven by a meaningful environmental policy such as in Germany?

One of the biggest areas of risk in the longrun is over dependency in both parts of the island on fossil fuel trade from Great Britain. We need to invest in new sources of energy as well as shift the carbon composition of Irish economic activity over time.  The gains of the single energy market on the island of Ireland must not be lost.  There is potential for the Irish electricity industry to meet excess UK demand for electricity as well as invest in cost-saving measures which will benefit consumers and producers across the whole island of Ireland.

Looking outwards to the European Union we need to seek ways of strengthening the social element of the Union and adapt the monetary, fiscal and social policy of the Union to better reflect the interests of citizens of Europe. In the case of the Republic of Ireland, rather than seeking to follow the UK’s example towards ever lower corporate taxes and lower labour standards and levels of pay we should seek to up the game by investment, native export-orientated enterprise and pro-equality policies. This is the best way to deal with Brexit.

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