Brexit: The UK referendum and its aftermath

IIEA24th June 20169min
On Thursday, 23 June 2016, the people of the United Kingdom voted to leave the European Union.

An abridged version of this blog, dealing specifically with the implications for Ireland, is available here

Brexit: The UK referendum and its aftermath

1.    Introduction

2.    The UK and the Immediate Aftermath

3.    The Member States

4.    Ireland

a.    An Asymmetric Shock

b.    The Irish Interest

c.     Prospects

5.    Final Thoughts

 

1. Introduction

On Thursday, 23 June 2016, the people of the United Kingdom voted to leave the European Union. While it is not yet accurate to say that the UK’s troubled four-decade relationship with the EU is at an end – there is still the matter of the UK’s withdrawal negotiation to be addressed – the relationship between the EU and its ‘awkward partner’ has now entered a new and uncertain phase.

 

2. The UK and the Immediate Aftermath

The precise nature of the new relationship between the UK and the EU will now have to be decided in the course of what may be a protracted negotiation. But it is already clear that the vote will have immediate, dramatic, and profound consequences for all parties.

Economically, the impact of the vote is already apparent. Within hours of the result, Sterling had hit its lowest level in three decades. The impact was also reflected in steep drops in the FTSE index and in stock markets across Europe, with Irish companies with UK interests, such as Ryanair and Bank of Ireland, seeing particularly steep falls.

Politically, Mr. Cameron has conceded that his position is untenable. Within months, there will be a new Prime Minister and a new cabinet with a new Chancellor, a new Foreign Secretary and many other new faces in key ministerial positions. Their first task will be to define the desired terms of the UK’s withdrawal under Article 50, swiftly followed by the terms of its future trading relationship – not only with the EU but with third countries with whom the EU has existing trade deals. This will be no small order for a country that has not negotiated a bilateral trade deal in 50 years.

 

There may also be a question over the future composition of the UK to be addressed. The UK’s debate over its European future, frequently framed as a question of British sovereignty, may now engender a debate over its internal integrity. This is particularly true in light of the sizeable Remain votes in Northern Ireland and Scotland. In Scotland, the result will surely lead to calls for a further referendum on independence. In Northern Ireland, meanwhile, Sinn Fein have already made it clear that they believe the result is grounds for a border poll on Irish unification, as provided for under the Good Friday Agreement (though such a poll would have to be called by the Northern Ireland Secretary, Theresa Villiers).

 

3. The Member States

The coming withdrawal negotiations, however, will be shaped by more than just the composition of the UK side. The dispositions of the other 27 Member States will be a significant factor. Whether the negotiations will be of a benign or antipathetic nature is difficult to predict.

On the one hand, the impending departure of the EU’s second largest economy and financial capital, and the economic consequences this might have for the EU, might engender a benign negotiating environment, in which the interests of all parties favour and facilitate a mutually beneficial deal. Such an outcome would certainly favour Irish interests, discussed later in this document, but it cannot be guaranteed with any certainty at this point.

The alternative would be less desirable. In this scenario, self-interest would outweigh enlightened self-interest, and the other Member States may not look with great sympathy on the UK’s self-inflicted position.

An important factor in this respect will be the fear of political contagion across the EU. A frequently expressed concern in the Brexit debate, these fears will be heightened now that the ‘unthinkable’ has happened. For many, the UK’s ‘Leave’ vote has ended the perception of EU membership being irrevocable, and could now form the ‘proof of concept’ of leaving the Union. For the growing number of EU governments confronted by Eurosceptic parties at home, this leads inevitably to a further fear: that a Brexit conducted on favourable terms might embolden these movements and force more Member States into popular votes on membership.

Whether this would result in further withdrawals is perhaps unlikely, based on recent polling data, but it would at the very least imply many more years of economic and political uncertainty – something the EU can scarcely afford.

 

4. Ireland

4.a An asymmetric shock

The shock of a Brexit is already being felt across the EU, in particular in the UK itself, whose economy is far more dependent on the EU and the Single Market than vice versa. It is likely to create an extended period of damaged market confidence, and a vastly reduced appetite for investment should be expected until the terms of the UK’s withdrawal are crystallised.

Brexit, however, will be an asymmetric shock, and Ireland will be disproportionately affected.

Ireland is the only Member State to share a land border with the UK and it remains the most deeply integrated in terms of trade, supply chains, migration, language and culture.

In short, it is the country most exposed to the risks of Brexit, and the UK’s decision presents this country with one of its greatest challenges since independence.

In the short-term, Ireland can expect to suffer some damage to trade and investment from currency fluctuations and market volatility – both of which are already evident.

In the longer term, the country could see damage to trade with the UK through restrictive tariffs on agricultural goods and other produce, as well as the return of a customs regime between Ireland and Northern Ireland, with the associated delays and potential for supply chain disruption.

Depending on the terms of the withdrawal there may also be an impact on mobility and migration, as a UK outside both the EU and the Single Market raises questions over the viability of the Common Travel Area we share with the UK, and introduces the possibility of passport controls at the Northern Irish border. If the UK’s withdrawal leads to the introduction of a hard border on the island of Ireland this may serve to heighten political tensions in the North.

4.b What is the Irish interest?

A number of key Irish interests for the upcoming negotiations can be identified:

Trade

–  Ireland and the UK conduct €1.2bn worth of trade every week, a relationship which will have to be protected

–  Any potential trade barriers, including tariffs and customs posts, would present a major risk to the economy and these costs must be minimised

Migration and the Common Travel Area

–  There is no precedent for the UK and Ireland’s Common Travel Area to exist half-in and half-out of the EU and its continued existence may now be in doubt (see this IIEA Policy Brief for more detail)

–  Any changes to current arrangements could have repercussions for migration, employment and social welfare

Northern Ireland

–  The status of the border will be a primary concern for the Irish side

–  The future of EU funding to the region, which has long-supported the peace process and regional development, must be clarified.

–  All sides will hope to avoid disruption to the Northern Irish settlement

Foreign Direct Investment

–  It has been suggested that FDI flows to the UK may now be diverted to elsewhere in the EU

–  This may be a positive, mitigating factor for Ireland in this debate and the country should now position itself to take advantage

Energy market

–  Security of energy supply and the integrity of the All-Island Electricity Market will be a concern

4.c Ireland: Prospects

As a committed European state and member of the Eurozone, Ireland is distinct from the UK, but there is still significant overlap between Irish and British policy priorities. Negative impacts on the UK economy will inevitably be felt here, and Ireland will no doubt favour a bespoke solution that mitigates the immediate shock damage of Brexit by preserving much of the current relationship.

In a European Council setting, however, the varying interests and dispositions of 26 other Member States – some of whom will have one eye on growing Eurosceptic movements at home – will have to be accounted for.

It will be hoped that, once the initial shockwave of discontent dissipates, there will be an opportunity for this to develop into a benign negotiation scenario, in which all parties seek a fruitful future relationship.

In the short term, the Irish interest is clearly favoured by this scenario. But like many Member States, Ireland must also be conscious of the long-term implications of such an arrangement, and ask whether an overly accommodating deal for the UK might undermine the European project from which Ireland has benefitted so immensely.

In either circumstance, it will be vital that Irish policy makers make their concerns known in the European context, in order that the disruptive effects of a Brexit on the British-Irish relationship be minimised to the greatest extent possible.

 

5. Final thoughts

The UK’s departure is a sea-change, not only for the current composition of the EU, but for the future of European integration.

The UK’s grievances have in the past been dismissed as idiosyncratic symptoms of British exceptionalism, but it is also clear that the sentiments of a large portion of the UK public are now reflected in the broader trend of Euroscepticism across the EU. This problem does not end with the withdrawal of the EU’s awkward partner: rather, it will be amplified.

Its departure will serve to underline the disenchantment of a large portion of EU citizens with the direction of Europe’s ‘ever closer union of peoples’. In the coming years, Europe may be faced with a new, increasingly divisive, brand of politics, pitching Eurosceptics, who demand more national sovereignty, against Eurocritics, seeking deeper and more socially relevant integration, and liberals, who are more satisfied with current policies. Ireland will inevitably be part of this new politicisation of EU affairs and political parties and interest groups here must prepare for that.

The Union’s difficulties in communicating to its citizens its objectives, goals and values are by now well-documented, but a common and coherent European idea in which its peoples can share – always an elusive goal – seems now more distant than ever.

The UK may have “lost an Empire and not yet found a role,” as Dean Acheson once put it, but perhaps the EU too, which was conceived as an antidote to war in Europe, must now learn to redefine itself for the modern era.