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TRANSCRIPT
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In this issue:
UK Cabinet
welcomes temporary
free movement
Is it lights out for
the Integrated Single
Electricity Market?
Headlines of Dublin
“streets ahead” in
relocation game
could be misleading
Issue 7, 27th July 2017
Brexit Watch
Fortnightly briefing on Brexit developments
DKM Commentary: The second round of negotiations has shown areas in which progress could be made
and where work still needs to be done. Irish issues fell into the latter category. There
is goodwill on both sides, with both the EU and UK keen to find a deal that is
acceptable to the people of Northern Ireland. However, with no tangible progress on
the matter, statements declaring the need to prevent a hard border risk sounding
hollow.
The UK Government’s acceptance of a transition period in which free movement will
continue is good news. Such a deal would prevent a cliff-edge Brexit in March 2019,
in particular for UK businesses that rely on EU workers. The more time businesses
have to adjust their current business model, the better for the UK economy, and the
better for Irish businesses that rely on the UK as an export market.
Meanwhile, Bank of America choosing Ireland as its EU base and news that Barclays
are in talks with the Irish regulator bodes well for the capital. Yet, Dublin should be
wary of complacency and headlines purporting the Irish capital to be “streets ahead”
of EU rivals in attracting City firms. It is prudent to look at decisions taken rather than
firms who may have “considered” Dublin as a location.
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United Kingdom Second round of Brexit talks
On 20 July, the UK and the EU concluded the second round of
talks on Brexit. Speaking at the press conference that followed,
the Commission’s chief negotiator Michel Barnier indicated that
the UK still needed to clarify its position on a number of fronts,
including on the issue of financial obligations.
A detailed discussion on citizen rights took place, with the EU
and the UK identifying points of convergence and divergence and
areas where further discussion would be required. On the Irish
question, there appears to be broad agreement between the EU
and the UK: both are committed to common travel rights and the
maintenance of North-South co-operation as outlined in the
Good Friday Agreement.
Transition deal could maintain free movement
The Guardian reported comments from a senior source in the UK
government indicating that the British cabinet has accepted that
free movement will be part of a transition deal following the
UK’s exit from the EU. The source predicted that it would be
maintained for three years, but suggested free movement for up
to four years post-Brexit was a possibility. Businesses have put
pressure on politicians to agree to a transition deal lasting a
number of years.
Amber Rudd gives amber light to EU immigration
In a piece written for the FT, UK Home Secretary Amber Rudd
has sought to reassure UK businesses that the Government is
listening to their concerns and plans to construct a new
immigration policy based on an assessment that will be
conducted by the Migration Advisory Committee. She also
assured businesses and EU nationals that the government “will
ensure there is no “cliff edge” once [the UK leaves] the bloc”.
While emphasising the control of immigration the UK will obtain
upon exiting the EU, the Home Secretary did not reiterate
Theresa May’s promise to bring net immigration below 100,000
a year.
Norway model resurrected?
An interview with Welsh First Minister Carwyn Jones on 24 July
showed a division in Labour’s upper echelons on the form Brexit
might take. Contrary to Jeremy Corbyn and Theresa May’s claims
that Brexit must entail an exit from the single market, Mr Jones
argued that the ‘Norway option’ should be considered. Such a
model would involve access to the EU’s single market, yet would
leave the UK without a say in how the rules are made. On free
movement, Mr Jones suggested the UK could copy Norway in
tightening the enforcement of current rules: free movement for
those with a job and a three-month window to find a job.
Fantastic Mr Fox and the chlorine-washed chickens
UK Trade Secretary Liam Fox’s visit to Washington to boost US-
UK trade has led to calls for the Government to clarify its
position on the lowering of food standards. Media debate in the
UK has focused on the potential importation of US chlorine-
washed chicken suggested by Mr Fox – meat currently banned
under EU rules. Entering the debate, Environment Secretary
Michael Gove said the UK would not accord a deal requiring the
UK to accept lower food standards.
European Union France wants the “hardest Brexit” A leaked memo by the City’s special representative to the EU
following a meeting at the Banque de France stated that the
country is “seemingly happy” to see an outcome that may harm
London, even if this were not beneficial to France. In the memo,
Jeremy Browne called it the “worst meeting [he had] had
anywhere in Europe” and stated that France’s position of
favouring the “hardest Brexit” differed drastically to that of
other financial centres, such as Luxembourg, which seemed to
see their interests as complementary to those of Britain.
Ireland Brexit passport applications increases since January The number of passport applications from Northern Ireland and
Britain has increased by 50 per cent since January 2017,
according to the Irish Times. It quotes figures from the
Department of Foreign Affairs showing that nearly 100,000
people from the North and Britain have made Irish passport
applications this year. A spike of almost 20,000 applications was
recorded in March 2017, the month in which UK triggered Article
50. Any person with an Irish parent receives automatic
citizenship, regardless of where they were born, and
grandchildren of citizens qualify for citizenship if their births
have been recorded in Ireland’s foreign births register.
Facing Brexit: A Chatham House interview
In an interview at Chatham House, the international relations
think tank, Irish Minister for Foreign Affairs Simon Coveney
outlined Ireland’s approach to the border, the DUP/Conservative
deal and the ‘exit bill’. Mr Coveney stated that the Irish
Government wished to find a solution as close to the status quo
as possible and that this cannot be achieved by “simply using
technology on the border”. Mr Coveney stated that Ireland
cannot accept putting up checks – physical or otherwise – along
the border and believes the UK Government now recognises this.
He stressed that a unique political solution must be agreed
between Ireland, the UK and the EU that would allow the free
movement of goods and services and people across the border.
Time barriers to trade
A Politico article has highlghted the difficulties posed to Irish
trade by Brexit through the loss of the British transit route. It
notes that 80 percent of the Irish road freight that reaches
mainland Europe passes through the UK, and that Brexit could
lead to a tripling of journey times and customs delays. Their map
demonstrates that a trip from Dublin to Calais currently takes
10.5 hours through Britain – as opposed to a 20-hour ferry to
Cherbourg, France or a ferry to Zeebrugge, Belgium, taking at
least 38 hours. It notes that such long and uncertain journey
times would be particularly disruptive for the food industry.
Political Developments
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Sector Focus: Energy In 2014, Ireland had the fourth highest level of imported energy
dependence in the EU, importing 85 per cent of its energy. In
2016, almost 100 per cent of its natural gas imports were from
the UK and currently all of Ireland’s electricity imports come via
interconnector from the UK. This week’s sector focus provides an
overview of the findings from recent publications and articles on
the issue.
The future of the Single Electricity Market (SEM) An ESRI Research Note, Re-evaluating Irish energy policy in light
of Brexit, states that one of the main effects of Brexit on energy
policy would be an increase in uncertainty, particularly regarding
the future of energy market structures. The current all-island
Single Electricity Market (SEM), in place since 2007, is in the
process of being aligned with a common European Target Model
for cross-border electricity trading. The new integrated market,
I-SEM, will replace existing arrangements with multiple markets
or auctions, spanning different time frames and with separate
clearing and settlement mechanisms.
Status quo please
The UK Government has stated that it does not wish any
disruption to the island’s SEM when it exits the EU. According to
a white paper, it is considering “all options for the UK’s future
relationship with the EU on energy, in particular, to avoid
disruption to the all-Ireland single electricity market operating
across the island of Ireland”. The same white paper also
acknowledges that EU legislation underpins the coordinated
trading of electricity and gas between the UK and other EU
Member States through existing interconnectors.
Risks for Irish electricity integration
There is consensus that Brexit will not disrupt the current SEM,
which is based on UK and Irish legislation and policy.
Nevertheless, were the UK to cease to be a full participant of the
EU energy market, there could be implications for the ease with
which the all-island SEM participates within the EU electricity
market. Insight-E, an energy think tank, notes that a loss of
common rules between the UK and the EU for the trading of
electricity over interconnectors could lead to “wrong way flows”
where electricity flows from the expensive region to the cheaper
one rather than the other way around.
Furthermore, a PWC commentator has stressed that the risk to
the Irish economy stems from delayed or abandoned
harmonisation of energy market arrangements due to Brexit.
Such delays may mean that Ireland loses out on the benefits of
increased competition. The UK ceasing to be a full participant is
certainly possible: having refused to accept EU free movement of
people requirements following a 2014 referendum, the
integration of Switzerland to the EU’s energy market has been
put on hold.
Although the imposition of tariffs on energy post-Brexit would
carry significant risks for the Irish economy, ESRI commentators
deem this unlikely: a number of EU countries trade in energy
with non-EU countries tariff-free (e.g. the Baltic countries with
Russia), demonstrating that the UK is unlikely to face tariffs on
exports to the EU.
Gas and energy security post-Brexit
A second effect relates to the security of Ireland’s energy supply
post-Brexit. The UK and Ireland have an established relationship
in relation to co-operation on gas security of supply issues, which
is unlikely to change in light of Brexit. Yet, Ireland could face
problems complying with EU standards when the UK leaves. In
2016, Ireland did not meet the EU gas security infrastructure
standard, i.e. after losing the single largest gas infrastructure the
technical capacity of the remaining infrastructure cannot meet
demand. This resulted in Ireland requesting the UK to adopt a
regional approach. Ireland would thus cease to meet the
infrastructure standard post-Brexit and may have difficulty
meeting new rules developing a stronger EU collective response
to future supply risks.
Potential solutions The ESRI Research Note suggests investing more in gas storage
to increase gas security and importing Liquefied Natural Gas
(LNG) to diversify supply. A recent article in the Financial Times
noted that the UK vote to leave the EU has given the previously
proposed Shannon LNG project fresh momentum and that
private investors behind the scheme are searching for a new
financial sponsor. Provisional EU support for the proposed LNG
terminal has been offered.
The EU has also decided to allocate €4m of funding towards the
“Celtic interconnector”, a joint venture between grid operators
EirGrid and RTÉ France, linking France and Ireland’s electricity
markets. The project is still in the early stages – the €4m is to
fund preparatory work, including a public consultation and
fleshing out the project’s finer details. If the €1bn interconnector
were to be completed, it would become Ireland’s only link to the
EU’s electricity market when the UK leaves.
Conclusions
The biggest energy-related risk to Ireland stemming from the
UK’s exit from the EU thus appears to be the prospect of delays
in remodelling the SEM to meet the EU Target Model. The other
risks (tariffs, less energy security, disruption of the current SEM)
currently appear quite low. Yet, whether large infrastructure
projects that directly connect Ireland to the EU market, such as
the Celtic interconnector, should proceed is a question that can
only be answered by weighing the benefits from the connection
against the costs to consumers of such endeavours.
Economic Insight
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City Relocations
Destination: Dublin Docklands
Bank of America has chosen Dublin as its European base post-
Brexit. It has not yet stated how many new jobs in Dublin this
would create, but Bank of America's CEO Brian Moynihan told
the Financial Times that the bank would definitely add to its
existing staff of 700. Bank of America plans to move investment
banking and market operations to Dublin, in addition to moving
a number of roles to other European destinations.
Barclays are in talks with Irish regulators about expanding its
operations in the country. According to a BBC report, the bank
said Ireland provided a “natural base” for Barclays as it had
operated there for 40 years.
Destination: Unknown
The results of EY’s Brexit Tracker attracted much media attention
in mid July, where Dublin appeared to be the destination of
choice for potential relocations for 19 of 59 large financial
services companies who have said they have started to move
staff or review domicile in the UK. However, the number
nineteen refers to companies that “have publicly stated they are
moving or considering moving staff and/or operations to
Dublin/Ireland” and includes firms that have indicated more
than one city for a potential relocation. Therefore it is not clear
that Dublin is in fact “streets ahead of EU rivals as City firms plan
for Brexit relocation”, as claimed by the Guardian, since many of
these potential moves may not come to fruition.
Furthermore, 18 firms have mentioned Germany and 11 have
identified Luxembourg as a possible location, with 15 indicating
plans to move without specifying a location. It is thus clear that if
Ireland is in the lead, (assuming the figures can be relied upon) it
is by no means a significant one.
End of year moves
The chief executive of the UK Financial Conduct Authority told
reporters he expected firms are waiting until the end of the year
before moving staff and business for reasons relating to Brexit. A
Reuters report stated that he acknowledged circumstanced
differed from firm to firm but saw no imminent implementation
of contingency plans.
Business & Finance
IMF downgrades UK growth forecasts
The International Monetary Fund (IMF) downgraded its 2017
growth predictions for the UK from 2% to 1.7% in its recently
published World Economic Outlook. US growth was also
downgraded while global forecasts remained the same. Speaking
to the BBC, IMF Chief Economist Maurice Obstfeld stated that
the revisions were a result of weaker than expected growth in
the first part of 2017. He added that IMF projections for long-
term UK growth were based on “a pretty optimistic assessment
of how the negotiations are likely to turn out”. This means that if
negotiations do not succeed or Britain concludes a poor deal
with respect to certain markets, further forecast revisions are on
the cards.
UK GDP quarterly growth at 0.3% On 26 July, the Office for National Statistics (ONS) released data
for UK quarterly GDP growth, showing a rise of 0.3%. This is up
from 0.2% last quarter. The Financial Times explained that the
bulk of growth in Q2 came from the services sector (growing
0.5%), with construction and manufacturing acting as the biggest
drags on the economy.
NOTE: This publication is for information purposes only. Any expression of opinion is subject to change without notice. DKM accepts no liability whatsoever for the outcome of any actions taken arising from the use of information contained in this report. © DKM Economic Consultants Ltd., Office 6 Grand Canal Wharf, South Dock Road, Ringsend, Dublin 4, Ireland. Telephone: +353 1 6670372; Fax: +353 1 6144499; Email: [email protected]; Website: www.dkm.ie
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