The interests of the North's economy have hardly featured in the debate on Brexit. It has all come down to a political negotiation and, right now, a debate on whether the backstop that would apply if there was no free trade post-Brexit would be a border on the island of Ireland or one down the middle of the Irish Sea.
Either outcome would hit the North’s economy, which needs a continuation of free trade in both directions – as indeed does the Republic. Both sides will hope this emerges from an eventual UK/EU trade deal, but, for now, that is a long way off. And the North’s politicians have not felt able to take the opportunity to propose solutions which might have allowed the North to turn into some kind of special economic zone post-Brexit.
Brexit is a danger to the politics of the North and the peace process – but also to its economy.There are risks, here for the North’s business and they are big ones. When you have an economy with an underdeveloped private sector and an extraordinary reliance on the public purse, this is about the last thing you would want. That much is clear from a paper presented by economists John FitzGerald of TCD and Edgar Morgenroth of DCU at the recent Dublin Economic Workshop.
So is the cost and possible consequences of a move to a united Ireland, a topic back under discussion, due largely to the impact of Brexit. While you could argue back and forward about how unity might work and who might pay for what, the central point is that the North’s economy is hugely reliant on the UK exchequer. If this cash was withdrawn following Irish unity – in whole or part – the financial and economic consequences for all of Ireland would be significant.
This doesn’t mean unity shouldn’t, or won’t, happen at some stage, but it does show that managing it and paying for it is a huge task. Were the Republic to pick up the bill, economists say the costs would be equivalent to those borne during the recent economic crisis.
And with personal consumer spending in the North probably still higher than that in the Republic (exact figures are not available), the politics of this would be tricky.
London transfers
The extent of the North’s reliance on the public sector and funding from Westminster is striking. The paper calculates that the transfer from the UK exchequer accounts for between 20 per cent and 25 per cent of the North’s GDP.
The transfer from London rose from 7 per cent before the Troubles to more than 17 per cent in the 1970s and, after falling back slightly, has risen again since the Belfast Agreement. Some previous studies have assumed that the UK government would take on some historical liabilities after unification – whether this happened would be important.
The agreement has been the bedrock of peace in the North, but prosperity has not followed. Hopes of a flood of inward investment and a new business dynamism have not been realised. The North has some extraordinary business successes, for example in areas such as tech, food and pharma. Just not enough of them.
Crucially, the level of investment in the North is very low. According to Prof Morgenroth, central exchequer spending in the North is higher than the UK average in pretty much every area, with the exception of support for enterprise, the kind of investment in business and training that might make a difference and give the North’s private sector some help.
Ireland’s big inflow of investment support from Europe after we joined the EU was a vital push to the convergence of our living standards with those in the core EU economies. Investment is also a key factor in the revival of the former East Germany, though unity there sparked a significant restructuring, business closures and migration and a catch-up process still far from complete. Economic transition is not easy.
In the North,with no government in Stormont and the uncertainties of Brexit, investment is going to remain depressed. And now new difficulties threaten, there is no sign local politicians have a strategy to deal with it. As the paper points out, with a bigger reliance than average on sectors most exposed to Brexit – such as agriculture, food and engineering – and the problem of integrated supply chains with the Republic, the North would be hit more significantly than most of the rest of the UK by Brexit.
Cause for concern
Just how significantly depends on how Brexit works out. And the current negotiations give some cause for concern. At the moment, the EU side is looking at the option of border checks between the North and the UK as part of the backstop, which would apply if there was no future EU-UK trade deal, or one that required border checks.
However, the paper by FitzGerald and Morgenroth warns that a border in the Irish Sea threatens disruption to the Northern Irish retail and distribution sector in particular, pushing up prices, cutting competition and costing jobs. The latest intervention by EU chief negotiator Michel Barnier shows that the EU is trying to minimise these checks and make them less intrusive as part of its latest backstop plan– but they will still happen. All eyes will now be on the reaction of the Conservatives and the DUP, so far opposed to any checks between the UK and the North.
These same sectors – along with cross-Border trade in areas such as food and animals – would also be exposed to a border on the island of Ireland, though the impact would clearly be different.
The UK has suggested that it remain in the customs union after Brexit to avoid the need for a new border in Ireland, a move the EU rejects as cherry-picking. A long-term trade deal between the EU and UK could remove at least some of the threat to the North’s businesses, or most of it if the UK remained closely aligned with the EU’s trading arrangements. It would also, of course, be a huge relief for the Republic.
But right now the risk is of Brexit delivering another hit to the North’s private sector and leaving the economy there ever more reliant on support from the UK exchequer. While this might make unity look more attractive to many in the North, it will make it look more expensive and tricky from the Republic’s viewpoint. Watching how the politics and economics of this collide after Brexit will be fascinating.
