‘Brexit’ Is Unspoken Economic Threat in Ireland's Election Race

  • No European Union country is more exposed to U.K. departure
  • Commerzbank says Irish growth could be slashed in half

In Ireland’s election campaign, the biggest threat to the economy is conspicuously absent.

QuickTake Will Britain Leave the EU?

As the race to Feb. 26 kicked off last week, Prime Minister Enda Kenny spent an hour with reporters laying out his plan to keep the nation’s revival going. Among key themes of jobs and tax, one topic never arose: whether Britain will remain in the European Union. A referendum across the Irish Sea is expected within months and polls suggest the result could be close.

“Brexit would be an absolute banana skin for the next government, and would have a huge impact on Ireland,” said Alan McQuaid, an economist at Merrion Capital in Dublin. “It’s not something that has captured the imagination here yet. Maybe people here really think it won’t happen.”

Almost 100 years after the rebellion that eventually led to Ireland’s breaking from the U.K. in 1922, the two countries remain intertwined and nowhere in the EU has more at stake from a British departure. 

Growth Risk

Commerzbank AG has estimated that in a worst case scenario it could cut Ireland’s economic growth rate in half, jeopardizing the recovery that has helped Ireland push government borrowing costs below the U.K.’s since emerging from its international bailout program two years ago. The Irish debt office will sell about 1 billion euros ($1.1 billion) of bonds on Thursday, with 10-year yields at 1.04 percent.

Ireland’s return to the top of the euro region’s economic growth table to an extent has been underpinned by the pound’s strength over the past five years, making Irish goods priced in euros cheaper. 

The U.K. is Ireland’s biggest trading partner, accounting for more than a fifth of incoming and outgoing goods. The British government, which stood firm on not getting involved in bailing out euro countries like Greece, contributed to Ireland’s rescue.

The shares of some of the largest Irish companies, including CRH Plc, DCC Plc and Greencore PlC, now trade mainly in London. Others like Ryanair Group Holdings Plc generate about a quarter of their revenue in the U.K. On Wednesday, Smurfit Kappa Group Plc said it will switch its primary listing to London.

Banks including ABN Amro Bank NV and Bank of America Corp. expect the pound to tumble regardless of whether it remains an EU currency. Sterling weakened in the run-up to Scotland’s vote on independence in September 2014 as polls narrowed.

Scots on Steroids

“When Scottish voters were consulted on their views on the Union, uncertainty put downward pressure on sterling,” according to Philip O’Sullivan, an economist at Investec Plc in Dublin. “Given the implications for the wider European project, this is likely to be viewed as ‘Scotland on steroids’ by the markets.”

Ireland is the only country that shares a land border with the U.K., between the Republic of Ireland and Northern Ireland, and Kenny’s government set up a unit within his office about a year ago to look at the consequences of what most analysts is the single biggest risk facing the economy.

Yet, his Fine Gael party devoted only one 70-word paragraph to the issue in its 34-page “long-term economic plan,” and no other party has said how it would handle “Brexit” as the sparring before the election focuses on who is best to manage the country rather than deep ideological divisions.

Even Sinn Fein, the former political wing of the Irish Republican Army that waged a three-decade campaign against British rule in Northern Ireland, is pro-EU and agrees Brexit is to be avoided as the party seeks its best-ever election result of modern times. Polls show there’s everything to play for and the vote is unlikely to produce a clear winner.

Like Britain, Ireland also faces a lack of detail about how the U.K. might leave the EU and what its relationship with the remaining members would look like. Until that’s clear, Finance Minister Michael Noonan has said, there’s little point in engaging in extensive contingency planning. That point is echoed by some executives.

“It’s like looking into a crystal ball,” said Larry Murrin, who runs Dawn Farm Foods, which employs about 1,000 people and exports about a third of its produce to the U.K. “The reality is that the U.K. is not self-sufficient in much of its food requirements so even if Brexit occurs, something will be worked out to facilitate trade.”

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