Why Ireland, Not Miliband, Might Lose Big in Cameron Win

The biggest loser from a Conservative Party victory in next month’s election might end up being Ireland.

Should Prime Minister David Cameron win a second term, he pledged to renegotiate Britain’s European Union membership and hold a vote by the end of 2017 on whether to remain in the common market of more than 500 million people. Britain is Ireland’s biggest trading partner, accounting for more than $44 billion in 2013, data compiled by Bloomberg show.

Irish Prime Minister Enda Kenny said last week that the U.K. quitting the EU is a serious concern for Ireland and he has already set up a unit within his government to examine the potential consequences. For Kenny, the concern is that politics across the Irish Sea might derail an economic recovery that has helped drive Ireland’s bond yields to a record low.

“The key risk to Ireland’s fortunes over the next 12 months or so may not be economic, but rather political,” said Alan McQuaid, an economist at Merrion Capital in Dublin. “A possible British exit from the EU would in our opinion cause the greatest uncertainty for the Irish economy in the short term.”

Polls show Cameron neck and neck with Labour leader Ed Miliband, who opposes a referendum, at least for now.

Bond Yields

After suffering its worst recession on record, Ireland’s economy was the fastest growing in the euro region last year.

The yield on 10-year Irish government bonds plunged to 0.7 percent, compared with 14.2 percent in July 2011 following the country’s international bailout. The premium Ireland pays compared with 10-year German bonds has fallen about 11 percentage points to 0.62 points.

Exports of everything from Irish butter to Allergan Inc.’s Botox are leading the revival of the economy, and could be at risk from the U.K. leaving the EU, the so-called “Brexit.”

“Given the geographic proximity and high levels of trade, our modeling suggests that Ireland would be hit the hardest by a Brexit,” Open Europe, a London-based researcher, said in a report published last week.

Some 39 percent of U.K. voters are in favor of leaving the EU against 40 percent wanting to stay, a Populus poll for the Financial Times showed last week. Labour supporters want to stay by a margin of 58 percent to 25 percent, while Tory backers prefer exit by 43 percent to 39 percent, the survey found.

Damage Assessment

Even in a scenario where the U.K. economy is better off after Brexit, Ireland could still lose out, according to Open Europe. The loss to Ireland could amount to between 1.1 percent and 3.1 percent of gross domestic product, it said.

“While there are still too many unknowns to definitely quantify the impact, Irish business sees more negatives than positives,” said Fergal O’Brien, head of policy at the IBEC, an employers’ organization in Dublin.

The main hit could be on trade. The U.K. accounts for about 16 percent of Irish exported goods and 34 percent of imports. Irish businesses sell about 40 percent of their products to the U.K., and these would face levies in the event of new tariffs should Cameron lead his country out of the EU.

Moreover, new border costs could come into play, and Ireland’s ability to attract and retain foreign investment might be vulnerable if the U.K. “significantly” deregulates and liberalizes after departing the EU, Open Europe said.

Much depends on the type of relationship the U.K. strikes with the EU in the wake of an exit, according to Davy, Ireland’s largest securities firm. Should the U.K. follow the example of countries such as Switzerland in signing agreements easing trade with the EU “implications would be small for Ireland,” according to a report this month by the company.

“However, if the new relationship between the U.K. and the EU changed dramatically and trade barriers and tariffs were erected, then the consequences for the Irish economy could be significant,” Davy said.

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