Brexit

Brexit stage left

Longform
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18 May 2016

In just over a month’s time, UK voters will decide whether it should remain a part of the EU or leave. The consequences of a leave vote, dubbed Brexit, have been exercising the minds of business leaders and politicians in Ireland for a number of months and their concerns are mounting as the vote looms ever closer.

Of course, this being the UK and the EU, nothing is quite as simple as a straight Yes or No. For example, it is quite possible that a majority of UK voters overall could vote to leave, but purely on the basis of deep-rooted English scepticism over the EU project, with those in Scotland and Wales voting to remain. If that were to be the case, it is conceivable leaving the EU could lead to the Scots voting to leave the UK.

Another scenario which could lead to the break-up of the UK is if the vote to leave is narrowly defeated on the basis of the pro-EU vote in Scotland. In any case, unless the leave side loses by 15% or more, it is unlikely to stop agitating for another vote in the future. With the genie out of the bottle, the UK, particularly England and the Conservative party, could be convulsed by arguments over leaving the EU for years to come.

If the vote on 23 June endorses the UK’s membership of the EU, things will remain pretty much as they are (for now, at least). But assuming the vote is in favour of leaving the EU, what would that mean for Ireland, Irish businesses and Irish people?

Industry disruption
IBEC issued a report in April, entitled The Impact of a Possible Brexit on Irish Business, which sought to highlight “the far-reaching impact on Ireland if our nearest neighbour, key trading partner and close ally in Europe votes to leave the EU”.

The organisation identified five areas where a UK withdrawal from the EU would have the greatest effect in Ireland. It argued Brexit would undermine the all-island economy, create investment and currency uncertainty, disrupt trade and affect energy and climate change strategies.

In terms of trade disruption, IBEC predicted Brexit would lead to “years of uncertainty as the UK negotiates a new agreement with the EU, involving higher costs for business, new customs procedures and regulatory divergence emerging over time”. In the worst case scenario, trade flows between Ireland and the UK could fall by 20%. It also claimed that “SMEs with a high proportion of trade with the UK, across a range of goods and services sectors, would be more severely impacted than larger multinationals, which would be better placed to cope”.

Linda Barry, assistant director of the Small Firms Association (SFA), amplified those concerns in a statement issued in March. “Small firms do not have the same degree of mobility, flexibility and diversification that may help larger businesses to navigate the risks posed by a UK exit from the EU,” she stated. “Small businesses may be dependent on a UK supplier, investor or market, which means that their very survival hangs in the balance.”

“Small firms do not have the same degree of mobility, flexibility and diversification that may help larger businesses to navigate the risks posed by a UK exit from the EU” – Linda Barry, Small Firms Association

From a channel perspective, it will be interesting to see how that affects the way vendors deal with Ireland. In many instances, technology companies have tended to lump Ireland in with their UK operation and service the market from the other side of the Irish Sea. While that makes sense if both countries are in the EU, it’s likely to be a lot more complex and bureaucratic if one of them isn’t. Also, distribution deals that allow distributors to service the UK and Irish markets will probably need to be split up and rewritten.

Potentially, that could be good news for indigenous distributors in Ireland because UK-based rivals might not want to take on the extra overheads and complexity involved in dealing with Ireland when it’s a comparatively small market for them. Also, if vendors that have supported the Irish market from their UK operations are forced to choose between the added expense of opening an office here or going through an Irish distributor, many of them could plump for the latter option.

Edel Creely, group managing director at Trilogy Technologies, says she’s noticed a lot of distributors have gone back to the UK in recent years and many large vendors are running the UK and Ireland as a single business. If the UK leaves the EU, “it will add complexity around pricing and access to products. Maybe vendors will reorganise some of their distribution models”.

Currency woes
On the topic of sterling devaluation, the IBEC report points out the UK is Ireland’s largest export and import market in the EU, with €33.9 billion in exports and €28.9 billion in imports, almost half what it imports and exports to the rest of the EU, and second only to the US. So any depreciation in sterling could have a serious effect. IBEC predicted the sterling/euro exchange rate could weaken by up to 15% in the event of Brexit, “moving close to parity and leaving Irish firms selling into the UK market much less competitively. An exit could also prompt a downgrade of the UK sovereign credit rating and capital outflow and a potential sell-off of UK assets, all of which would heap more pressure on the currency”.

Creely says currency “could have the biggest impact of all, It could go to parity. It could create uncertainty for some time and complexity for business”. According to Barry at the SFA, the referendum “is already having a significant impact on exchange rates. Uncertainty has pushed the value of sterling lower, increasing the competitive pressures on Irish exporters. If the UK votes to leave, this effect could intensify”.

“[Brexit] will add complexity around pricing and access to products. Maybe vendors will reorganise some of their distribution models” – Edel Creely, Trilogy Technologies

One area of particular concern to Ireland is the effect Brexit could have on foreign direct investment (FDI). IBEC believes the UK would seek to “aggressively improve” its FDI offering. It argues that while Dublin could benefit if corporate activity relocated from the UK to the EU, “on balance the risks outweigh any possible advantages. Ireland benefits if our nearest neighbour and close competitor has to abide by the same rules, within the EU”. The report also notes, however, that leaving the EU could “dramatically change the perception of the UK with 72% of investors citing access to the European single market as important in terms of attractiveness for FDI”.

It’s intriguing to note that in the breakdown of figures for exports to the UK, the IBEC report places Computer Services top of the list with €6 billion. Yet, in terms of consequences for Irish firms, the technology sector, unlike the food and drink market for example, barely gets a mention. This may be because large chunks of those computer services are from major FDI organisations using Ireland’s generous tax regime to channel goods and services to the UK and the rest of the EU.

The report does point out, however, that if the potential for growth in the UK is reduced as a consequence of Brexit, it could have negative consequences for Ireland’s economic growth in high-export areas such as computer services (and food and drink).

Language barrier
Michael Conway, director at Renaissance, agrees that the consequences of Brexit could be a concern for markets like food and drink but isn’t sure whether it will be good or bad for technology companies. In any case, he adds “It’s not like the British are going to vote that they don’t want Irish food. There are good supply chains built in there.”

It may well be that if the UK leaves the EU it can put in place more generous corporation tax arrangements that will make it more attractive for technology companies to base their operations there. But on the flip side, while the UK can make it cheaper to do business in the UK, it won’t have the power to control the cost of doing business with the EU if it’s not a member anymore. And as the only English-speaking country left in the EU, Ireland should prove even more attractive for US-based companies seeking a base for their European operations.

“[Companies] want to be in an English-speaking country because that’s the international business language. If Brexit happens, that narrows the options pretty quickly” – Michael Conway, Renaissance

 

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“A lot of people want to be in the EU because it’s a big market,” Conway notes. “They want to be in an English-speaking country because that’s the international business language. If Brexit happens, that narrows the options pretty quickly.”

Creely says there’s already a lot of competition between the UK and Ireland to attract FDI companies and that’s likely to increase but part of the reason they come to the two countries is that they’re part of the EU. “They may not want to go to a country where there is uncertainty,” she warns. “Ireland will give them the certainty of access to the EU that they’re looking for.”

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