Brexit represents one of the biggest challenges currently facing Ireland.
While there is much uncertainty, both political and economic, around the final phase of Brexit, we know that Ireland is particularly exposed to Brexit and that any type of Brexit will have negative and potentially far-reaching impacts for the economy.
Today, more than three years after the UK referendum on EU membership, we are still unsure what form Brexit will take.
There is a whole spectrum of outcomes of varying degrees of economic cooperation possible between the UK and EU outside of membership that could result in some sort of very soft Brexit which would have relatively limited economic impacts or a more extreme hard Brexit where trade between the EU and the UK is conducted under the World Trade Organisation (WTO) tariff regime.
There is also uncertainty as to the economic impact of Brexit, in whatever form it eventually takes, as there is no precedent of a country leaving a major and deeply integrated block such as the EU.
Ireland is often highlighted as one of the EU member states that is especially exposed to the negative effects of Brexit.
This is not least because Ireland is one of the most open economies in the world which makes it vulnerable to external shocks in general but also because the UK is one of Ireland’s closest economic partners.
One of the key economic linkages between Ireland and the UK is in terms of trade – around 14 per cent of goods exports and 20 per cent of services exports are to UK. Imports from the UK are also significant – around 26 per cent of goods imports and 10 per cent of services imports are from the UK.
Furthermore, a considerable volume of Irish goods are shipped to and from the continent via the UK landbridge. Any increase in barriers to trade in terms of direct tariffs charged on goods or any of a range of possible non-tariff measures that add cost or delays to trade could lead to significant disruptions to trade.
Since before the referendum result, a significant body of research has sought to estimate the potential consequences of Brexit for the Ireland. These studies consider a number of scenarios that cover a range of possible Brexit outcomes and compare them to an alternative scenario of the UK staying in the EU.
Deal scenarios are based on the Withdrawal Agreement and are consistent with a high degree of alignment between the UK and EU in the future.
In no deal scenarios, the UK exits the EU without approving the Withdrawal Agreement and ultimately WTO tariff arrangements will apply to goods trade, there will be non-tariff measures and services trade will be negatively impacted.
These studies all find that the macroeconomic effects of Brexit are significant and negative for Ireland.
The ESRI macro-econometric model analysis focusses on the most well understood channels through which Brexit will affect Ireland, namely though lower trade, incorporating the impact of tariff and non-tariff measures, and the potentially positive impact of FDI diversion to Ireland.
We draw on microeconomic evidence to build various macroeconomic Brexit scenarios. We find that GDP in the longer term could be over 2.5 per cent lower in a deal scenario and around 5 per cent lower in a no deal scenario, compared to a situation where the UK stays in the EU.
This implies a slower pace of growth with negative consequences throughout the economy. Our results indicate that employment, in the long-run, would be just under 2 per cent lower in a deal scenario, and over 3 per cent lower in a no-deal scenario, compared to a situation where the UK stays in the EU.
It is important to state that the economy will continue to grow but at a slower pace than compared to a situation where the UK remains in the EU.
The negative trade shock associated with Brexit will reduce the demand for Irish exports and Irish firms will lose competitiveness because of the depreciation in sterling and higher import prices due to the increase in trading costs.
The loss in competitiveness would lead to some adjustment in the economy and there would be downward pressure on wages to help improve competitiveness. Lower employment, lower wages and higher import prices would also mean that households will have less disposable income in the long-run.
There is more uncertainty and variability about the short-run impact of Brexit on Ireland as it depends on how smooth any transition to the future arrangements between the UK and EU is.
By 2020, the level of real output in the Irish economy could be just over 0.5 per cent lower in a deal scenario and around 2.5 per cent lower in a no-deal scenario which incorporates some disruption effects, compared to a situation where the UK remains in the EU.
However, these are macro econometric-model based estimates and it is easy to think of a situation where uncertainty and additional disruptions to trade could lead to growth in the economy being more severely curtailed in the short run.
On a positive note, Ireland could benefit from the relocation or diversion of FDI from the UK which would raise output and employment in Ireland. However, the positive impact of additional FDI is not sufficient to outweigh the negative trade shock associated with Brexit.