Ireland has limited shelter against Brexit storm

January 26, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Ireland is starting to feel queasy about the prospect of a UK exit from the European Union. Doomsday scenarios predict a 20 percent slowdown in trade between the two countries if Britons vote to go it alone. It could knock the stuffing out of an economy where the central bank reckons GDP grew 6.6 percent last year.

Around 1 billion euros of trade is conducted across the Irish Sea every week, mainly agricultural products, food and financial services. Any new trade barriers or tariffs following a UK exit could lead to Irish GDP per capita losses of up to 2.7 percent, according to Germany’s Ifo Institute. That would make it the biggest Brexit loser of all European countries.

The UK is Ireland’s second most important trade partner and destination for around 15 percent of total exports, according to Ireland’s Economic and Social Research Institute (ESRI). That might not sound dramatic, but indigenous companies are much more dependent on the UK than foreign-owned firms, sending 43.5 percent of their exports there.

The movement of people across the Irish Sea is just as intense – the Dublin-London flight route is the busiest air corridor in Europe and the second busiest in the world, according to the Dublin Airport Authority. The UK has long been a safety valve for labour when Ireland’s economy periodically gets into trouble. A common travel area between the countries predates EU membership, but it’s not clear what would happen after a UK exit.

Dublin doesn’t seem hopeful about snaffling displaced foreign direct investment from its neighbour either. An EU exit could dent Britain’s 1 trillion pound-plus inward FDI stock. But analysis of foreign investment patterns over the last 10 years suggests any FDI bonanza is likely to be small, the ESRI reckons.

That leaves nabbing London’s status as a financial hub. The appeal is obvious – Dublin would be the only English-speaking big city still in the euro zone, and would be a serious option for American investment banks’ EU operations. But in order for Dublin to feel comfortable hosting a much larger financial system, it would need the euro zone to complete its banking union via a mutually funded deposit guarantee scheme – unlikely, given German opposition to underwriting other euro zone banking systems. Ireland’s best hope is that Brexit doesn’t happen.

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