The Economic Effects of ‘Brexit’ on Ireland

In January 2013, British Prime Minister David Cameron promised a national referendum on the UK’s membership in the European Union. This referendum was conditional on Cameron’s winning the election and forming government. In the May general election, against all odds, Cameron secured a majority in the House of Commons. Consequently, the promised referendum is now scheduled for 2017. This historic plebiscite will have a profound effect on Britain. However, it will also bear significant consequences for the UK’s closest neighbour—the Republic of Ireland.

Under the current institutional structure, Ireland and the United Kingdom enjoy a close and productive economic relationship. The UK is Ireland’s largest trading partner and Ireland is the UK’s fifth largest trading partner. By current estimates, approximately €1 EUR billion worth of goods is traded between the two nations each week. In 2013, the UK accounted for 16.1% of Ireland’s total goods exports and 17.8% of its services exports. These goods and services include agricultural products, machinery and insurance. Ireland also imports more goods from the United Kingdom than it does from any other country. In 2013, 33.6% of Ireland’s imported goods came from the UK.

The economic and trade relationship between Ireland and the UK is aided by the free flow of capital, people and goods via the European Economic Community (EEC). If the UK chooses to renegotiate its relationship with the EU, its free market privileges will likely be put in jeopardy. An increase in trade barriers could decrease the volume of goods and services traded between the two nations. If tariffs are imposed by the European Union, the import cost of goods will either have to be absorbed or passed on to the consumer. British and Irish firms will also have to incur border fees, additional administrative costs and greater inefficiencies in respect to the movement of goods and capital. These factors, when considered in concert, suggest that a partial or complete UK withdrawal from the EU could bode negatively for Ireland’s economy.

In addition to trade, a British exit from the EU will significantly affect the Irish energy sector. In 2014, €6.5 billion (approx. 3.6% of real GDP) worth of energy products was imported by Ireland. Nearly 90% of these imports originated from the UK. Likewise, the UK and Ireland’s gas grids are linked through two interconnectors. The majority of Ireland’s gas consumption derives from this connection. Since 2001, Ireland and the UK’s energy grids are affixed through the East-West Interconnector and the Moyle Interconnector. The UK energy market also shares connections with mainland Europe and Scandinavia. Ireland, by contrast, seldom has a diversity of sources for its energy consumption. Ireland is, in effect, dependent upon the British market for an overwhelming plurality of its energy goods. If the EU imposes tariffs on a post-exit UK, they will likely be passed on to the Irish market. By some estimates, a 10% increase in energy costs will cause a 0.4% decline in Ireland’s GDP. Ireland will either have to adapt to these heightened costs or attempt to forge new energy relationships with other countries. Considering the extent to which Ireland’s energy infrastructure is connected to Britain’s, the former is more likely to occur than the latter.

To date, polling data suggests that the UK will likely stay in the European Union. What remains to be seen is whether or not this will be the final outcome in 2017. If Britain chooses to leave the European Union, Ireland will be placed in a perilous and precarious situation.

 

About Anthony Galea

Anthony Galea is a Junior Research Fellow at the NATO Association of Canada. He is in his third year at Trinity College, University of Toronto pursuing an Honours Bachelor of Arts in Political Science and European Studies. His areas of interest include trade liberalization, intellectual property protection and the history of Western diplomacy.