Government deal must factor in Brexit threat

Fine Gael, Fianna Fáil and the Independents would do well to take a long, cold look at Britain’s looming referendum on Europe before they strike any deal to set a minority government in motion.

All talk in the election campaign and its untidy aftermath has been predicated on the rather dubious notion that Ireland’s impressive economic growth would continue without interruption for years, supposedly freeing up billions of euro for tax cuts and spending increases.

Sooner or later, of course, all political rhetoric must run the gauntlet of reality. In our case particularly, reality brings with it an unpredictable plebiscite next door in June which could shunt Ireland’s economy into the slow lane if Britain voted to leave the EU.

That this would be very bad news indeed is obvious, with a multitude of slippery political and economic and questions raised, and no easy solutions. Note also that Dublin's very special interests in the negotiation of Brexit terms would be at odds with any clamour in other EU capitals to make it difficult for Britain to leave.

Not that there’s been much talk about that. The referendum presents the prospect of a first-order strategic challenge to the State within 10 short weeks but you would not think so from the listless preoccupation with Dáil reform since the election.

Make no mistake, Ireland is the mouse that might just be squashed by the Brexit elephant. Perfectly dreadful for the mouse of course, but elephants do not tend to look underfoot as they trample around. This must prompt very crucial considerations for the incoming government, no matter who forms it. Issues arise on numerous fronts, among them the prospect of passport controls at the Border.

Market volatility

One big misapprehension, for example, is that the consequences for Ireland would not materialise until Britain actually left the union, which would not happen for at least two years. Yet that is a fallacy. The International Monetary Fund has already noted lower investment this year in Britain. Sterling has dropped too, lower growth is forecast this year and next, and a bout of financial market volatility is in prospect as polling on June 23rd approaches.

All of that could damage Ireland’s economy, heavily dependent as it is on clement conditions in the UK. A vote to stay would quash such pressure, yet the reverse is also true.

The situation would be likely to worsen appreciably as the reality of Brexit dawned and not just the risk of it. Even the pro-Brexit camp recognises the inevitably of a “shock” in that scenario. Viewed from this side of the Irish Sea, this raises concern about the possibility of recession in Britain.

Even if recession is averted, it’s difficult to foresee any upside for Ireland. Risks would magnify. This would raise questions over the merits of another tax cut next year and a spending increase, promised both by Fine Gael and Fianna Fáil in their respective election campaigns.

While the debate itself was dominated by argument over the “fiscal space” that might be available in the next five years, it’s quite possible that Brexit could dominate that very period.

Blundering Cameron

Observe, too, that the pro-EU camp in Britain is off to a pretty bad start in the referendum. If the credibility of prime minister David Cameron was cast from the outset as something of a silver bullet on the Remain side, his blundering response to the Panama leak delivered a deep self-inflicted wound. It’s still early days but these things do not help. This was on top of the Brussels bombings, seized by the Leave side as providing ground to close Britain off from the EU.

None of this will have gone unnoticed in the negotiation chamber in Merrion Street. If the starting point for the talks is that minority administrations are inherently vulnerable, then the starting point must take stock of Brexit risk. Any agreement – written or otherwise – must allow for the fact that the situation in which the next government finds itself could be subject to fundamental change within a couple of months.

In a new report on the referendum, analysts at UBS Bank in London say Brexit means different things to different people. “One investor would buy Ireland on an exit: ‘it will be the next big financial centre’; others would ‘sell Ireland given its large sales exposure to the UK’. Same day – opposite reaction.” The investors have a choice in this scenario. For the next government, however, the Brexit referendum will not be a matter of choice at all.