Brexit's economic impact hasn't gone away

The economic recovery from the COVID-19 pandemic will be in its own right hugely challenging, involving multiple challenges to economic recovery, based on a complex, truncated return to a new normal of economic activity which isn’t in any way clear yet. In addition to a complex post COVID-19 reboot for Ireland, additional economic challenges loom – not least the impact of dealing with and planning for a rushed and poorly executed Brexit trade deal.

Based on the inflexible approach of the UK in its downright refusal to contemplate an extension of the withdrawal process, the prospects of a balanced trading relationship seem very remote. Given our unique linked trading relationship with the UK, particularly in high employment sectors like the agri food sector, Ireland's economic reboot will require specific focus and supports to try to manage the additional burden of Brexit.

Brexit is recognised by all economic commentators and political parties as a huge issue for Ireland, as is the compounding issue of what happens to the value of sterling against the euro.

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As the chart above shows, over the last 20 years or so the value of euro vs sterling has fluctuated by around 30%. Market commentary currently is suggesting that the UK is prepared on ideological grounds to go for a Britain-first sub-optimal trade deal because the negative economic impact can be wound into the overall COVID-19 downturn.

The same market commentary sees sterling falling to near parity with the euro as the UK devalues to try and cope with the double economic shock. For Ireland, as per the recession of 2008 to 2102, the realities of any economic recovery are heavily impacted by trade with UK / Northern Ireland and the Sterling Euro exchange rate.

Currency challenges

In 2008/9 in order to boost its own recovery the UK devalued sterling by 20% – this hugely impacted the economic recovery in Ireland, leading to a huge surge in cross border buying and a displacement of a large range of Irish agri and other key exports. Post-COVID-19 is shaping up for a similar currency challenge plus a very messy trade deal as the UK refuses any attempt to grant or ask for extension. Ireland is the meat in the sandwich here and must while supporting the EU, be upfront about the damaging impact on the Irish economy.

While Ireland has been looked after in EU-UK discussions since 2016, the need for substantial economic assistance has been muted by EU limitations because of state aid restrictions, including a wishful embrace of the Single Market as an all-purpose, get-out-of-jail card. It is important to remind ourselves that this time last year, EU DG Competition officials were suggesting that the EU Single Market could (as if by magic) completely accommodate the economic fracture of the UK's exit. The EU market perhaps – Ireland emphatically no.

So under EU state aid rules, no country can leave the EU. But the UK clearly has and the reality of this must be dealt with and not wished away in some ideological ivory tower policy statement.

Sparking recovery

The current suspension of EU state aid rules until the end of 2020 creates an opportunity for Ireland to approach the EU with a meaningful scheme focused on the sectors providing most employment in the Irish economy – agri food and the SME sector.

This could be built perhaps upon on the structure of the ABER scheme announced in February of this year with a much more realistic/meaningful regional aid support system and very essentially with much more significant levels of support allowed. In essence a scheme based on the true reality of the combined Brexit and COVID-19 challenge.

If Ireland has to borrow €40bn to underpin recovery from COVID-19 while dealing with Brexit, a €2-€3bn agri food support scheme can pay dividends in jobs and Irish economic activity. A meaningful, well-funded scheme can enable a realistic transformation to a greater value added industry profile while also supporting the market diversification required post a Brexit trade deal.

For Ireland politically as well as economically, the combined COVID-19 and Brexit challenges raise a number of fundamental issues. The first is depth and focus:

• Can we form a Government that understands the long-term nature of the post-COVID-19 recovery, while also appreciating the additional complexity that Brexit brings?

• Can we have a Government that will approach economic recovery pragmatically and realistically?

• A Government that will marshal the real strengths of the Irish economy, as in those sectors such as agri food that have a significant regional spread, that have shown resilience in the past and that support hundreds of thousands of jobs.

• A Government that understands that almost €160bn of our “formal GDP figure” disappears out of the Irish economy accounts annually in profit repatriation and transfer pricing (CSO, Eurostat).

• Can we have a Government that correspondingly understands that the broad agri food sector supports in excess of 260,000 jobs?

• Can this Government “support and promote” the agri sector as befits its real economic value and without prejudice to ideological misconceptions around the sector and climate change in particular.

European level

At EU level, given the now well-established realisation that the Single Market cannot automatically solve all the problems facing European citizens and economies:

• Can we utilise the current removal of state aid restrictions and the discussions on a pan-EU COVID-19 recovery to put forward an Irish economy recovery package that incorporates the unique challenges that Brexit and post COVID-19 recovery present for Ireland?

• Can we take a reality-based approach to the combined impact of new trade barriers and sterling devaluations on trade, not least between Ireland and the UK?

• Can we manage to not have the issue dismissed because EU state aid rules “assume “ that all European countries are not just in the EU, but also in the single currency / euro.

Post COVID-19 recovery will be complex and have unexpected aspects that may challenge embedded biases. A classic example of an unexpected outcome, based on the resumption of economic activity in China, has been the emergence of strong demand for private cars v public transport. So while COVID-19 reduced pollution through reduction of the traffic, a return to work favours private cars because public transport is seen as potentially risky because of the difficulty of implementing social distancing. What does that mean for policymakers? At the very least it means they must think before they act.