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“It’s not just gamblers who have been caught unprepared by the Brexit vote - so too have most businesses” - Philippe Legrain advises Irish businesses to prepare

04 Jul 2016

They thought it would never happen – and now it has. Britons have voted narrowly to leave the European Union, without knowing when, how or where to. It is a leap in the dark – off a cliff, one might say – and it threatens to drag Ireland and the rest of the EU down too.

In 2013, when Prime Minister David Cameron first announced his intention to hold a referendum on Britain’s EU membership, I warned my then boss, European Commission President José Manuel Barroso, that the likelihood of the UK leaving was more than 50:50. At the time, most people thought I was mad. This complacency persisted throughout the referendum campaign, even when opinion polls showed Remain and Leave neck and neck. When the polling stations closed on 23 June, betting markets thought Remain was a racing certainty. So much for the notion that they have a special insight into the future! That is scarcely true when it comes to horse racing – let alone politics.

It’s not just gamblers who have been caught unprepared by the Brexit vote. So too have most businesses. Few have had a serious discussion about it at board level, let alone done proper contingency planning. That hard work is now a priority – not least in Ireland, the country that will be most affected by Brexit (after the UK itself). I urge you to prepare for the worst. Because while many are still in denial that Brexit will actually happen and others cling to the hope that it will happen in the least-disruptive way possible, the political turmoil and acrimony is such that a nasty divorce is a very plausible outcome. Far better to have a pleasant surprise if Brexit turns out better than expected than a nasty shock if your excessive optimism is dashed.

For now, the British government has delayed triggering the formal Article 50 process for exiting the EU. Most of the candidates vying to succeed Cameron as Conservative leader and prime minister want to wait until next year before starting the exit negotiations, although a couple want to act sooner. The negotiations are meant to last two years, which gives the EU the upper hand: it can wait until the last minute to present Britain with a take-it-or-leave-it offer, as the eurozone creditors did with Greece last year. Hence why only hotheads want to rush into them.

The future prime minister’s negotiating objectives are also unclear. Astonishingly, the Leave camp won the referendum without being forced to specify their preferred alternative to EU membership; indeed, they promised completely different things to different people. Even now, the Conservative leadership candidates – including the new runaway favourite, Theresa May – remain conspicuously vague on this. But the basic trade-off is simple: Britain must choose between membership of the EU single market and restrictions on EU migration.

There will be massive business lobbying to preserve Britain’s single-market membership by joining the European Economic Area (EEA) along with Norway, Iceland and Liechtenstein. But politically, this “soft Brexit” scenario seems implausible, since it would entail accepting EU rules without a say in setting them, paying into the EU budget without getting anything in return and accepting freedom of movement – an economic and cultural blessing, but a political bugbear.

It seems far more likely that Britain will initially trade with the EU on the basis of World Trade Organisation (WTO) rules, while negotiating a free-trade deal like the one that Canada has concluded with the EU, which is basically WTO-plus. This “hard Brexit” scenario entails tariffs and non-tariff barriers on goods trade and all sorts of obstacles to services trade.

In the hard Brexit scenario, Britain would be free to implement a points system to regulate EU and non-EU migration, while – one hopes – guaranteeing the residency rights of EU citizens already living in Britain and those of Brits elsewhere in the EU. I would not count on the common travel area between Britain and Ireland surviving. If there is freedom of movement from across the EU to Ireland and from there to Britain, it will be argued that Ireland is a “back door” into Britain.

On the plus side, Ireland can strive to woo finance, technology and other services businesses currently located in Britain, which face losing their passport to export freely to the rest of the EU. That in turn could boost Irish exports to the EU. And Ireland could benefit from an influx of hard-working, taxpaying, enterprising British and EU migrants who would otherwise have stayed in, or gone to, Britain.

But while specific companies and sectors may benefit, the downsides of Brexit for Ireland are likely to be huge. The massive uncertainty – about the future political direction of Britain, its trading terms and domestic regulations, the possibility of Scottish independence, the status of Northern Ireland and the further unravelling of the EU – is chilling. With investment and employment decisions on hold and consumers likely to pull back, Britain’s economy is on the brink of recession.

Ireland is already suffering financial contagion. A flight to (relative) safety has driven the pound down (and the euro up), hit share prices (although they have bounced back a bit), and driven down the yields on Irish government bonds. Economically, a UK downturn and a weaker pound will depress Irish exports to Britain, even before new trade barriers kick in. Cross-border supply chains will be disrupted twice over. The border between Northern Ireland and the Republic will become a hard border, disrupting trade and potentially the peace process. Sinn Fein have already called for a referendum on Irish unification.

The EU will also be a less hospitable place for Ireland. Without Britain, it will be more corporatist and protectionist – and more German-dominated, as the eurozone already is. There will be added pressure for corporate tax harmonisation – upwards of course. Assuming the Schengen Area of passport-free travel survives, Ireland will be pushed to join. And while Ireland is largely immune to the far-right xenophobia sweeping across northern Europe, the possibility of a President Marine Le Pen in France committed to a vote on Frexit is chilling.

So prepare for the worst – and let’s hope we are all pleasantly surprised.

Philippe Legrain is Visiting Fellow at the European Institute of the London School of Economics and a former adviser to European Commission President, José Manuel Barroso.

The views expressed in the posts and comments of this blog do not necessarily reflect the views of the Institute of Directors in Ireland. They should be understood as the personal opinions of the author. The content of this blog is for information purposes only and the Institute of Directors in Ireland is not responsible for the accuracy of any of the information supplied.