Major changes in UK may destabilise North’s economy

When Ireland left the United Kingdom in 1922, the future status of the North was not fully resolved. It took more than 70 years to settle that thorny issue in a manner acceptable to the two governments and to almost all of the people on the island.

During the Scottish referendum, while many in Ireland had a sneaking sympathy for Scottish aspirations for independence, there was an unexpressed national interest in pulling up the drawbridge and hoping that Scotland remained in the UK because of the dangers a UK break-up would have posed for the North.

The Brexit decision creates new uncertainties about the status of the UK, in particular because of the fracturing of a sense of national identity embracing Scotland as well as Northern Ireland.

While, on balance, Brexit will have negative economic effects for Ireland, the biggest concern is that major constitutional changes in the UK will destabilise the Northern Ireland economy. The economic implications for the North may, in turn, have significant political and social consequences.

The North’s economy is an integral part of the UK economy and will suffer along with the rest of the UK the adverse economic consequences of Brexit. As the North has strong trade links with the rest of Ireland, it is more vulnerable than the rest of the UK to the negative consequences of any future trade barriers on this island.

Economic challenges

While Brexit poses major economic challenges for the North, an even bigger threat is the fact that its economy is massively dependent on transfers from London amounting to around 30 per cent of its income. This subvention is needed to maintain the North’s current high standard of living. This makes it virtually impossible to leave the UK.

One recent study of the economics of a united Ireland, on the basis of extremely optimistic assumptions, concluded that a united Ireland might be beneficial for Northern Ireland. However, one of the assumptions was that Ireland would continue to provide the current massive level of transfers that come from London.

The scale of such transfers for the Republic would place a far greater burden on the population here than even the recent years of financial crisis, reducing household income by almost 15 per cent.

Such a dramatic reduction in the standard of living in the Republic would be needed to fund a permanently higher standard of living in the North. Thus a united Ireland is hardly possible on economic grounds.

An alternative “Celtic Fringe” option, where Scotland and the North would leave the UK and join the EU would be equally implausible given the burden for Scotland of supporting the huge transfers that keep Northern Ireland afloat.

Only the large and wealthy English economy can afford to continue funding the North at the current rate. However, here lies the real concern. If Scotland were to seek independence to join the EU, the large transfer to the North would be even more obvious than it is at present.

Even if the UK continues in its current format, the rise of English nationalism threatens the future of the transfers. It seems likely that in a UK suffering the significant costs of Brexit, pressures on government resources could well see a reconsideration of the transfers which allow the North to experience better services than in some parts of England.

Real danger

The real danger for Ireland is that a combination of new economic borders on this island, the negative consequences for the North of Brexit and cutbacks in the generosity of London could have very negative consequences for living standards in the North. In turn, this could be destabilising politically and socially.

While any cut in transfers would hit the North, the scale of transfers it needs rules out any other option for the North. A united Ireland would impose such costs on the Republic (or the North) that it would be unacceptable.

Unless and until Northern Ireland develops a self-sustaining economy reliant on growth from a vibrant private sector, it must hope that London continues its support.

A key task for the Irish Government in the coming months is to try and minimise new barriers between Ireland and the North that could have serious economic and political consequences, and to encourage London to live up to its economic commitments to the North.