Batten down the hatches! It’s going to be a VERY bumpy ride …for us too
Cuts to USC, the so-called ‘rainy day fund’ and spending hikes are OUT as the fallout from Brexit hits home – but it’s not all bad
‘It is not an amicable divorce but it was not an intimate love affair,’ the rueful words of EU Commission chief Jean-Claude Juncker on Britain’s shock exit from the bosom of the EU. But where does it leave us? Markets have a tendency to overreact but there’s no denying the move will adversely affect both your pension pot and insurance costs. However, the dive in value of sterling will have both a credit and debit side. The projected loss to Irish trade from Brexit stands at 20%, so expect a narrowing of our ‘fiscal space’. On the upside, it could be a boon to our financial centres and foreign direct investment. And that’s not all...
STERLING
THe British pound fell over 7% to its lowest level in 30 years against the dollar on Friday.
France took Britain’s place as the world’s fifth largest economy as our neighbour looked set to lose its triple-A credit rating.
As all of europe was hit by fallout from Brexit, the euro fell too – so the gap with sterling was less than it might have been.
even so, the pound’s fall against the euro was dramatic – and looks set to continue.
That’s bad news for vulnerable smaller companies who ship 40% of their exports across the Irish Sea, where they will now be considerably more expensive.
On the positive side, weaker sterling is good for imports from the UK as we will pay less for them – or for anything bought across the border or through UK-based online retailers.
But snap up any bargains while you can, as the pricing differential may not last that long.
Britain imports much of what it sells, so prices may have to rise there too in the long run as sterling’s buying power diminishes.
BORDER
IRelAND has had free movement of goods and people with Britain since 1922. But we were always either both in or both out of the eU. Now, we can’t make such deals independently without consulting 26 other eU nations with which we share sovereignty.
They are none-too-happy about getting thrown into yet another crisis by Britain’s exit and may want to punish it to send a warning to any other countries thinking of following suit.
We’ll have our work cut out negotiating free movement of goods and people across the border after Britain incensed our eU partners.
eU Commission chief Jean Claude Juncker summed up the reaction: ‘It is not an amicable divorce but it was also not an intimate love affair.’
However, neither country wants to install border checkpoints or tariffs. leAVe campaigner Theresa Villiers, the North’s secretary of state, pledged: ‘It’s crucially important that the Common Travel Area remains.’
On the positive side of Brexit, it will be easier to get cross-border mortgages (an unforeseen consequence of a recent eU directive made this difficult apparently).
In the North, eU gender equality directives on insurance may be overturned, leading to cheaper car cover there for women and lower life insurance for men.
TAX
THe debate over whether we should spend ‘fiscal space’ money – ie spare Government cash – on services or tax cuts will become less pressing as the money for both dries up amid post-Brexit turmoil.
Fine Gael MeP Brian Hayes reckons Brexit will knock €3bn a year off our economic output.
‘The Department of Finance expected 5% growth this year. The uncertainty will knock 2% off,’ he said. ‘Where stands fiscal space? Nobody can answer that.’
So USC and other taxes may be here to stay – with less cash to fund ambitious programmes for housing or health.
Meanwhile, Ireland’s low corporation tax, which underpins our economy by attracting multinationals, is also under threat.
Ireland will lose a strong ally in the eU’s pro-enterprise camp. Without the British, what was a strong lobby will now comprise just Ireland, the Finns and the Dutch. This will leave the pro-tax consolidation French in the driving seat.
BUSINESS/ INVESTMENTS
THe eSRI think-tank has estimated that our trade will slump by up to 20% – a huge drop.
Finance Minister Michael Noonan put the subsequent loss to the exchequer as a result of this at €3bn between now and 2018.
Yes, that’s the same €3bn he had earmarked for our ‘rainy day’ fund that looks set to be exhausted when it has hardly begun.
With Brexit set to cost the world economy $200bn by the end of next year, Friday’s referendum result hit global markets hard.
While the FTSe shares index fell by 3.2%, shares were down by much more across the continent, as investors bet that Brexit would be even worse for europe than Britain. The pan-european Stoxx 600 Index slid 7% in its worst day since the height of the currency crisis in October 2008.
Markets in Frankfurt fell 7%, with those in Paris down 8% and Milan and Madrid slumping by around 12.5% each.
The Dublin market sank 7.74%, after dropping 16% at one point. Bank shares were worst hit. AIB fell 9%, while PTSB and Bank of Ireland crashed 17.5% and 21%.
The Government lost €360m on its stakes in BoI and PTSB alone, squeezing its ‘fiscal space’ even more.
Markets always overreact to shocks. But the fear is that Brexit could send seismic shocks along existing faultlines, such as Greece, triggering another financial crisis.
Prolonged falls in share values, particularly bank shares, would also hit pension funds leading to less money for your retirement – or for life assurance-based investment funds.
The €108bn invested here in pension funds will be worth a lot less today than they were on Thursday when a Remain vote looked likely.
General insurers also invest your premiums in shares and would have to raise car and home premiums cover costs if markets turmoil continues. It could also cost jobs as companies find it harder to raise money through shares markets to pay for growth.
TOURISM
THe UK is our biggest source of tourists with 4.5 million Britons visiting Ireland last year.
This year’s numbers were up strongly – but don’t expect that to continue in the second half of this year.
With sterling so weak and a postBrexit recession looming, fewer visitors are likely to cross the Irish Sea for holidays here.
Falling financial markets and general uncertainty will also hit tourism from other countries, putting jobs and businesses at risk in the hospitality sector.
The other side of the coin is that visiting the UK has rarely been cheaper so it’s a good time to take a break in Britain – or pay an overdue visit to your relatives there.
However, in the future when Britain does finally leave, you may need to present a passport and not just a driving licence at the airport.
And we may also no longer be entitled to free medical care in the UK, making it all the more important to buy travel insurance before you go.
FARMING
FARMeRS and food companies are set to be among the biggest losers in Ireland from Brexit.
About a third of our total exports to the UK are food products – worth around €10bn. And these are sure fall, according to a study by agricultural research institute Teagasc, which examined four post-Brexit scenarios.
The best outcome envisaged that Irish exports to Britain would drop €150m. That figure would be €800m in the worst-case scenario.
That worst-case scenario would hit farm incomes and cost hundreds of jobs in agribusiness if replacement markets couldn’t be found elsewhere.
Much depends on Britain’s posteU policies and whether it can buy food more cheaply on world markets, according to Teagasc.
Britain could even cut its own deals and buy cheaply from low-
cost producers like Brazil and Argentina, who don’t yet have trade agreements with the EU – or look to establish links with Commonwealth countries.
The other side to Brexit is that British-made food products would become cheaper thanks to weaker sterling. On the other hand, the EU massively subsidises farming. And if Britain fails to replace these supports in full, its food products may get dearer and Irish companies could replace them here on our foodstore shelves.
POSITIVES
LONDON is set to lose up to 100,000 financial jobs after Brexit – and Dublin is one of the cities being eyed as a potential alternative financial centre.
That’s because British-based banks and investment firms are set to lose their ‘passporting rights’ that enable them to trade across Europe.
Without those rights, they will have to set up separately capitalised subsidiaries inside the EU – in cities such as Dublin.
Reports on Friday suggested Morgan Stanley was moving 2,000 investment bankers from London to either Dublin or Frankfurt.
The report was denied but it highlights that the Irish capital is now seen as an alternative financial centre. This makes solving our capital’s accommodation crisis even more urgent.
Ireland could also benefit from more foreign direct investment from countries that want a foothold in the EU. Japan, for example, has already said it would invest elsewhere if Britain leaves – and Ireland is the obvious alternative.
WHAT HAPPENS NEXT?
UNDER Article 50 of the Lisbon Treaty, Britain’s departure from the EU will be negotiated over two years under terms to be decided by EU member states.
In the meantime, Britain will remain an EU member, subject to its regulations and with full benefits including free travel.
UK Brexit campaigners don’t like the EU calling the shots on its departure terms and may wish to leave sooner.
They have already spoken of throwing off the shackles of EU directives.
However, such an abrupt and abrasive exit is seen as unlikely, as it could damage Britain’s standing with its former partners and the international community even more than it has already with the Brexit vote.
The best outcome for Ireland would be for Britain to remain in the Single Market, continuing to enjoy free trade unchecked by tariffs, like non-EU members Norway, Iceland, Switzerland and Liechtenstein.
However, most of these countries contribute to the EU budget and are subject to many of its regulations.
If Britain had the same arrangement as Norway, for example, it would end up paying 94% of its current EU costs, while still following rules it had no say in drawing up – a scenario unlikely to appeal to Brexit campaigners.
Britain could negotiate its own trade agreements with the EU but that could take up to 10 years.
Ireland would like free trade re-established but the other 26 states won’t be so keen on giving the UK an easy ride after it triggered yet another EU crisis.
They fear a domino-effect with other rich, liberal countries such as Denmark and the Netherlands wanting out, as well as a rise in their EU contributions to make up for Britain’s departure.
Whatever happens, uncertainty looks set to linger for years, undermining economic prospects on both sides of the Irish Sea.