Why Brexit Will Be a Disaster for Ireland

In 2015, Ireland’s GDP grew at an incredible 8% clip, edging out even China, at least based on official numbers. This year Ireland’s GDP is expected to wax at about 5%. That still makes it one of the fastest growing economies in the developed world. But if the U.K., its principal trading partner, votes to exit the European Union on June 23, Ireland’s prospects for durable prosperity will fade from virtually assured to seriously at risk.

“We’ve been in the sweetspot for the economy, but the Brexit vote is bringing lots of unwelcome uncertainty,” says Fergal O’Brien, chief economist at the Irish Business and Employers’ Confederation (IBEC). “Our major corporations invest more in Britain than any other nation to sell our goods there, and it’s the first export market our small companies enter. Both of those flows could be in jeopardy if Britain leaves the EU.”

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A “leave” vote by the U.K. could reverse much of the progress from one of the landmark political achievements of the close of the last century, the Good Friday peace accord of 1998. That historic pact effectively ended the bloody fighting between the Catholic nationalists and Protestant unionists, who were defended by British troops, allowing workers and goods to flow across the once-heavily barricaded border between the two Irelands. A hallmark of the accord was the stipulation that crossing between the North and the South would always remain open to British and Irish workers moving in both directions.

But if the “leave” vote prevails, Britain might close the jagged, 300 mile frontier to control immigration from inside and outside the EU, a major goal of the “leave” contingent. The U.K. could even ban the 30,000 Irish workers who commute daily to jobs in such cities as Ulster and Belfast, who would no longer have the automatic right to work in Britain that they now enjoy under EU law. The delays for custom checks would also raise the cost of transporting everything from milk to diesel fuel across the border, hurting trade.

The Irelands are also a key flashpoint in the politics that will shape a newly independent Britain’s relations with the EU. A Brexit is certain to raise support in Northern Ireland for reuniting with its southern neighbor––and the EU. (According to recent polls, around 70% of voters in Northern Ireland favor “remain.”) Martin McGuinness, a top government official and member of Sinn Fein, a leading political party in Northern Ireland, opposes Brexit, but says that if it was to happen, the Irelands are obligated to hold referendums on reunification. Guinness argues that joining the Republic would restore the Northern counties to the community of nations where they belong, the European Union.

What’s more, the Northern Ireland defection issue could arise at the worst possible time for everyone, just when the U.K. needs to negotiate an harmonious new trade agreement with the EU. The prospect of Northern Ireland leaving Britain and joining the trading bloc it just left, would enflame tensions between Britain and the EU, making it extremely difficult to reach the open-border trade deals needed to ensure the prosperity of the two Irelands, and the U.K.

If Ireland doesn’t reunite, a Brexit would be devastating to Northern Ireland’s economy. Its prosperity depends heavily on agricultural exports and farm subsidies provided by the EU. The former would be endangered, and the latter eliminated, if Britain leaves the EU. The paradox––indeed the paradox Britain faces on all fronts on the Brexit issue––is that the government might be forced to install the same protectionist measures it castigates the EU for to protect jobs and livelihoods in Northern Ireland.

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Of Northern Ireland’s $9.2 billion in exports (for the year ending in September), around $5.1 billion, or 56%, went to other EU nations. And almost two-thirds of those goods traveled south to Ireland. Agriculture accounts for as much as 25% of the area’s private sector GDP. Northern Island is dotted with 25,000 farms, with around 60,000 residents in farming and food processing. The industry is dominated by dairy products and livestock, especially cattle. Northern Ireland sends around one-third of its cheese, milk, and beef to EU nations, and does over half of that EU trade with its southern neighbor.

What would be the impact on Northern Ireland’s exports, especially in the pivotal ag sector, if Britain leaves the EU? Although EU tariffs on imports from most nations outside the trading bloc are below 6%, the duties on agricultural products are far higher: It tacks 41% to the price of imported milk and cheese, and 22% for meat products.

In the event of a Brexit, the U.K. will seek a new free trade, no-tariff trade deal with the EU. But it could easily fail, since the countries remaining in the EU will want to avoid appearing to reward Britain for defecting. If Northern Ireland’s farmers face the same up-to-40% tariffs that effectively bar ag exports from the rest of the world, the markets in France, Germany, and especially Ireland, will slam shut for Northern Ireland exports.

As a result, those beleaguered Irish farmers will need to sell all of their milk and beef in the U.K. They’re already producing a lot more of both than British consumers can drink and eat. Today, the EU takes care of that problem by paying its farmers inflated prices for their output to keep them in business, and sells the excess on world markets. A 260-acre dairy farm in Northern Ireland receives aid under the EU’s Common Agricultural Policy (CAP) totaling $90,000 a year. In fact, farmers would make no money at all, and would need to shut down, without the big CAP subsidies.

But without the EU to buy all that excess milk and beef––and export markets closed––prices would plummet, forcing thousands of farmers to flee the land. Of course, the U.K. government is unlikely to let that happen. Instead, it will probably institute a subsidy system that resembles a British version of the CAP.

That’s good for farmers, but undercuts the supposed benefits of leaving the EU, for two reasons. First, instead of effectively shedding the ag subsidies required by the EU, and reviled by the “leave” supporters, the U.K. would spend hundreds of millions of pounds a year supporting farmers in Northern Ireland alone. Second, U.K. families would continue paying high, EU-level prices at the supermarkets.

Even if the U.K. were to negotiate a new trade deal with the EU, the EU farmers wouldn’t want milk from Britain flowing back to the continent at anything but high, and highly subsidized, prices. So at least in the case of Northern Ireland agriculture, Brexit would first cause near panic, and then do nothing to lower prices or reduce the money the U.K. already pays to support agriculture. All it would cause is lots of uncertainty for little potential benefit.

A Brexit for the southern Republic of Ireland, even though the country would get to stay in the EU, wouldn’t be pretty either.

No fewer than 230,000 Brits are now working in the Republic, and 400,000 Irish citizens labor in banks, stores, and plants in the U.K. If Britain exits, it’s highly possible that most of those migrants wouldn’t be able to obtain the visas necessary to keep their jobs. The return of hundreds of thousands of workers to Ireland would pressure wages. Irish workers have already suffered pay cuts in a campaign to keep their nation’s exports competitive, and it’s worked. But further declines could spark a political backlash. Ireland is a major exporter of food products and pharmaceuticals to the U.K. That trade is threatened not just by looming tariffs, but a big fall in the pound. “We’re predicting a decline in the pound against the Euro in the case of a Brexit, on the order of 20%-to-30%,” says O’Brien. “That will make exporting to the U.K. a lot harder.”

O’Brien notes that big Irish ag and food processing companies such as Glanbia, Kerry Group, and Greencore have major production facilities in the U.K., and depend on supply chains the shuttle materials between the two nations. Those links would be disrupted by new border controls and tariffs. And the pound’s decline would make ingredients sent from Ireland more expensive, raising the prices, and curbing sales, of Irish food products in their biggest market.

Britain and the two Irelands are two of the few success stories within the EU––Britain because it maintained its own currency and retained relatively flexible labor laws, and Ireland because, despite the strictures of the Euro, it courageously lowered pay, enhanced productivity, and left corporate taxes low to beat the high cost continental competition. A Brexit would undermine what’s now got both sides of the border smiling.