March 11, 2019 / 11:42 AM / 5 months ago

Breakingviews - Brexit tips Ireland into economic purgatory

LONDON (Reuters Breakingviews) - They’re counting the cranes over Dublin again. A decade after Ireland’s devastating property crash, the capital city’s skyline is once again a display of frantic construction activity. In January journalists at the Irish Times spotted more than 100 cranes from the newspaper’s offices, triple the number three years earlier.

Ireland's Taoiseach Leo Varadkar hosts a 'Getting Ireland Brexit Ready' workshop at the Convention Centre in Dublin, Ireland October 25, 2018. REUTERS/Clodagh Kilcoyne

The rush to erect new office buildings and shopping centres is evidence of the economic resurgence on the Emerald Isle. Dublin has become the number one destination for UK businesses seeking a post-Brexit location, luring 100 firms, according to data from New Financial, a UK think tank. Barclays and Bank of America, which are shifting business from the City of London, jostle for space with tech firms such as Google and Facebook. Despite a slowdown in the rest of the euro zone the country’s gross national product – a more accurate measure of activity given its open economy – grew by 5.6 percent last year.

Yet the revival is threatened by political turmoil across the Irish Sea. The risk that Britain will crash out of the European Union without a divorce deal later this month is weighing on consumer confidence and denting foreign investment. Some financiers and business leaders fret that the return of a hard border with Northern Ireland, which could accompany such a scenario, would revive past sectarian violence and even spread to the Irish capital.

Brexit has placed Ireland in a kind of economic purgatory. On the one hand, Dublin looks to be on its way to the Elysian Fields as it benefits from the need for London-based banks, insurers and fund managers to establish new bases in the European Union. Citibank and Bank of America have merged their UK-based subsidiaries into existing Irish units, creating sizeable local offshoots with more than $50 billion in assets. Barclays plans to transfer loans and other securities worth up to 250 billion euros to its new Irish division.

These entities are more than just brass plaques. Under pressure from regulators in Dublin and Frankfurt, the lenders have transferred senior staff to Dublin. Bank of America Vice Chairman Bruce Thompson, for example, is among those for whom the Irish capital is now home. These moves will not be quickly reversed, regardless of the outcome of the Brexit negotiations. Previously, any jobs at these banks were almost always based in London. Now Irish subsidiaries compete with the City for resources, alongside new trading hubs in Paris and Frankfurt. Dublin has also surged ahead in attracting asset managers, enticing 43 percent of UK companies seeking a post-Brexit perch, according to New Financial.

The mini-boom extends to the Central Bank of Ireland, which employs more than 1,900 staff. In a reminder of the painful past, the regulator occupies a striking building on the banks of the Liffey river originally intended for Anglo Irish Bank – the country’s most spectacular financial failure of 2008.

When it comes to creating jobs, however, banks are no match for the technology industry. That sector now employs 332,000 people, up 75 percent from a decade ago, according to the Central Statistics Office. Facebook, Apple, Amazon and Google combined have 18,500 workers in Ireland, according to figures compiled by the National Treasury Management Agency, defying Ireland’s international reputation as a haven for shell companies that perform no function other than enabling multinationals to avoid tax. Indeed, local economists say heightened tax scrutiny has actually prompted some companies to shift more of their operations to Dublin.

Brexit will be a brake on growth, though, and could even send Ireland’s economy to the underworld. Any increase in trade friction with the country that received 11 percent of Ireland’s exports of goods over the past year, and supplied more than a fifth of its imports, will slow Ireland’s expansion. Even an orderly withdrawal from the EU would reduce Irish GDP by 1.7 percent, the central bank estimates. A chaotic “no deal” Brexit would knock 4 percentage points off Ireland’s growth rate in the first year, effectively halting its economic rebound.

It’s true that Ireland is better placed to cope with an economic shock than a decade ago, when national output shrank by more than a tenth in two years. Unlike that debt-fuelled bust, the recent recovery has been largely free of leverage. Gross government debt was 69 percent of GDP in the third quarter of 2018, down from a peak of more than 125 percent, and households have been paying off their borrowings. Bank of Ireland and Allied Irish Banks last year reported the first increase in their overall loan books since the crisis.

Yet if the immediate economic consequences of a disorderly Brexit are bearable, the potential political fallout is not. Failure to secure a divorce would almost certainly lead to the reintroduction of a border between Ireland and the northern counties that are part of the United Kingdom. For decades the frontier was a focus for violence and criminality, which only faded after the 1998 Good Friday Agreement.

Business leaders in Dublin fear that a harder border could spark a revival of political violence that was a feature of daily life in Northern Ireland until two decades ago. This in turn would scare off the foreign investors on which the country’s economic revival depends. This helps explain the near-unanimous support among Irish politicians for Prime Minister Leo Varadkar, whose opposition to a hard border has so far also been backed up by the rest of the EU.

If Britain can deliver an orderly Brexit, Ireland should be able to attract investment which would help offset the consequences of slower UK growth. The country will be the only EU member whose official language is English, with a legal system that resembles that of its larger neighbour. As long as British politicians keep flirting with a chaotic Brexit, however, Ireland will remain in economic purgatory.

Breakingviews

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