The shock of Brexit has not yet faded. It may take years to fully absorb the consequences of what has happened.

One thing is certain: Ireland’s fiscal future is more uncertain because of Brexit. Let’s look at some of the upsides and downsides.

At the National Economic Dialogue last week, ministers Paschal Donohoe and Michael Noonan stuck rigidly to the script that the Summer Statement, released only 48 hours before the Brexit vote, took much of the effects of Brexit into account in the short term. Both agreed the real changes to Ireland’s fortunes would come after 2018, when the actual Brexit occurred.

Last week, I wrote that Brexit, if it occurred at all, would take far, far longer than the two years mandated by Article 50 of the Lisbon Treaty. Think closer to ten years. The sheer complexity of a disengagement from the European Union would require an army of negotiators, lawyers, trade experts, a phalanx of other assorted parasites. Every person running for Tory Party leader has been very relaxed about invoking Article 50, with the front runner Theresa May saying it would not be invoked before January 2017.



Export-led growth

In the midst of this, the idea of a large positive change in Ireland’s fortunes hinges on increases in foreign direct investment, which is the fuel in the engine of export-led growth. Ireland is the Katie Taylor of export-led growth, and has been since the 1950s. The supposition is that Ireland can increase the amount of foreign direct investment by enough to offset any drop in exports and imports of goods and services, any change in the movement of people, and any change in investment.

The over-arching idea of export-led growth as articulated by Sean Lemass and TK Whitaker in the 1950s was to use foreign capital to improve Ireland’s productive capacity, give (mostly) Irish people more jobs on the back of increased foreign demand for the stuff these foreign companies would be selling. The carrot for the companies was an incredibly low rate of corporate tax and a compliant, if not downright supine, official approach to the needs of the owners of this foreign capital.

The Lemass/Whitaker strategy boils down to: foreign capital hiring (mostly) domestic workers.

Several large banks have thrown shapes at moving some of their operations from the City of London to places like Paris, Dublin or Frankfurt, but no major financial intermediaries have announced a movement. Like everyone else, they are caught in the amber of uncertainty the Leave result has caused.

But let’s say they do leave the City, and the Central Bank of Ireland licenses these girls and boys to do their thing in Ireland.

And let’s remember that these girls and boys don’t make and sell sandwiches: they repackage other people’s savings as financial products in exchange for fees predicated on their management of risk-taking behaviour. Essentially Ireland would add the risk they generate to the nation’s balance sheet.

If you think I’m being a bit dramatic, I’d like us all to remember way, way back, in the mists of time, a German bank called Depfa, which specialised in securitisation, the repackaging of different asset classes for risk management. Securitisation has a bit of a bad name at the moment, but it is a very useful tool when done properly. When done improperly, securitisation can cause major problems.

Much of the sub-prime mortgage crisis was caused by improper incentives to sell mortgages which came from financial intermediaries inadequate understanding of the risks associated with securitisation.

I digress. Back to Depfa in 2008.

Had the IFSC-based Depfa Bank not been bought by another German bank, Hypo Real Estate, just before its collapse at the beginning of the 2008 financial crisis, the bill for its bailout would have landed on the Irish taxpayer. That bill would have made AIB look like an appetiser. Hypo ended up being nationalised by the German taxpayer. To give you a sense of scale, at the height of the boom, Hypo was worth about €420 billion. The entire Irish banking system in 2008 was estimated to be €440 billion. It’s not part of our official history because it doesn’t fit the narrative of the bad and heartless Germans not letting us burn the bondholders, but the fact is our Teutonic cousins took the hit for risks run up by an Irish-domiciled and poorly regulated bank, essentially because of bad timing.

Brexit-booster strategy



Remember Lemass and Whitaker’s strategy: foreign capital hiring (mostly) domestic workers who improve Ireland’s capacity to sell things to the rest of the world.

The current Brexit-booster strategy boils down to foreign capital hiring foreign workers who don’t improve Ireland’s capacity to sell things to the rest of the world, because they sell contracts for financial products to rich people in exchange for sky-high fees, and when it all comes crashing down, as all banking systems eventually do, the Irish taxpayer will be on the hook.

There’s no line in the National Risk Assessment for the addition of such large contingent liabilities to the state’s balance sheet, but you can be sure the wise owls of the Central Bank led by professor Philip Lane are well aware of them. The likelihood of the Central Bank licensing their activities on the nod is vanishingly small, because they would need to be supervised heavily, and the Central Bank is not set up to do that yet.

So on the face of it, this importation of risky foreign capital is not a great deal for Ireland. But it’s not all bad, either. Let’s do a back of the envelope calculation. Let’s say we find enough commercial real estate space from somewhere for them to work in, and get 5,000 red suspender enthusiasts from the City of London. Say these financial migrants will take a pay cut and each earn €100,000 when they get here. They'll generate €500 million for the Irish State.

Let’s tax them all at 50 per cent, for the craic. The state will get €250 million in various income taxes, which is nothing to sniff at, and God knows we could use the cash to support investment in some of our infrastructure projects, and their spending of the other €250 million will help the economy grow by, say, €300 million as their spending enables other people’s spending.

To think the benefits of Brexit outweigh the costs, you have to believe the loss of trade income to the Irish state will be less than €550 million. We trade about €1.2 billion with Britain every week. Britain is forecast to go into recession next year, with sterling weakening against the euro. If this trade drops by 10 per cent, then after about 4 weeks, the value of trade lost wipes out that €550 million benefit.

Now those are figures generated in the same manner as former Anglo executive John Bowe, and are just for illustrative purposes, but you get the idea.

There will be micro-economic effects, too. The migrants will also sell their two-bed hovel in darkest London for €1 million and cause ructions in the south Dublin property market by pushing the price of houses in these areas to ludicrous valuations. Tullamore house prices will be relatively unaffected as Blackrock gets renamed Little Chelsea.

Don’t get me wrong: the benefits may outweigh the costs for Ireland, but I think it’s unlikely unless 10,000 financial professionals abandon Perfidious Albion for Ireland, and the risk they bring with them may be much greater than any benefit to the state.