Brexit Negotiations Move on but Hard Brexit Still a Possibility - Society of Chartered Surveyors ...
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BREXIT BRIEFING
MAY 2018
Brexit Negotiations Move on
but Hard Brexit Still a Possibility
Phase Two negotiations on the transition arrangement are coming to a conclusion, with the focus
now shifting to the framework for the future relationship and the potential outcome, as yet unclear.
The ongoing ambiguity regarding the future relationship between the UK and EU post-Brexit may
have adverse impacts on the construction and property sectors due to market uncertainty.
Brexit negotiations have moved from Phase Two to are growing warning sounds emanating from a number
talks on the ‘Framework for the Future Relationship’. of sources, worried about the level of Brexit-proofing
Agreements reached in “this March” on the 21-month undertaken by Irish businesses to date. To fully prepare
transition phase which is to come into effect from for Brexit, firms must firstly assess their operations
March 2019. However, the question of the Irish border across various functions including procurement,
arrangement remains unresolved, and is a significant finance, HR, sales and the supply chain. Once this
threat to the possibility of achieving a Treaty Agreement, has been done, a full appraisal must then be carried
which could potentially result in a ‘Hard Brexit’ in March out in relation to the level of exposure of each of
2019 – and which would be a cliff-edge scenario for these functions to a change in trading and regulatory
many unprepared Irish businesses. conditions, to inform any strategy for mitigating against
potential risk factors.
Between now and the next meeting of the European
Council in June, we will see Brexit negotiations It is clear that given the high level of reliance on UK
continuing on a fortnightly basis, along with continued imports in Ireland, supply chain costs will increase,
meetings of members of the EU Brexit taskforce. regardless of whether a hard border is imposed, due
Foreign Affairs Minister Simon Coveney has drawn to an increase in administrative costs. Hidden costs
a red line at June, indicating that Ireland could halt the such as VAT, customs duties and tariffs will significantly
talks on the withdrawal agreement if sufficient progress impact on the cost of supply. Furthermore, supply
has not been made on the legal basis of the “backstop” chains are likely to become less efficient, with increased
deal relating to the Irish border. As one of the EU 27, delays owing to customs checks and border crossings
Ireland also holds a veto power, and so can disrupt having to be factored in.
talks, should insufficient progress be made on issues
vital to the national interest. Further pressure has Former Taoiseach John Bruton said this week:
been put on the UK in recent weeks with Donald Tusk,
Michel Barnier and Guy Verhofstadt each reasserting
that a lack of resolution on the Irish border undermines “Goods coming to the port of Dover from outside
the integrity of the EU, and means a ‘no deal’ Brexit is the EU take 45 minutes to process, goods coming
becoming increasingly possible. from the EU take 3 minutes to process - it won’t be
until this realisation settles in that Brexiteers will
With a Hard Brexit looking ever more plausible, there realise their mistake”
SOCIETY OF CHARTERED SURVEYORS IRELAND
BREXIT BRIEFING MAY 2018
IMPACT €300 million fund, to help SMEs with fewer than 500
As a nation, we are highly reliant on the UK export market, employees prepare for Brexit.
with 44% of exports by Irish owned firms ending up
in the UK, according to recent Department of Finance In the face of so much uncertainty, it is incumbent on
figures. As a result, reduced competitiveness in the face Irish businesses to Brexit-proof their operations far in
of a weakened sterling will severely reduce the demand advance of the UK leaving the EU. One of the first steps in
for Irish goods, and Irish firms will need to adapt, and doing this is to understand the major risks and to consider
to diversify into new markets in search of opportunities. how they may impact either directly or indirectly upon
In preparation for this, the Irish Government has made a the business and the sectoral environment in which it
provision under the Ireland 2040 Plan to establish a operates.
Dec 13 Jan 29 March June Oct 2018 Feb 2019 March 29 March - Dec
2017 2018 2018 2018 At the At the 2019 Nov 2019 2020
latest latest
European Negotiating Adoption of European Agreement EP + UK Negotiations Transition
Council Mandate/ additional Council Proposal by Parliament & Agreement period ends
Guidelines Directives guidelines in Meeting Barnier to Consent on EU - UK Future
March, and Council Future
Agreed by Adopted by Progress Conclusion Relationship
additional Relationship
consensus - Council to be of the Starts
negotiating
Phase Two directives demonstrated Withdrawal UK exits
can start Agreement by the EU
Commission the Council
Transition
Recommendation Phase Two Phase Two
Discussion on begins
Negotiations
on Transition Framework
Arrangements for Future
Relationship
End of Jan 2018 End of March 2018
- March 2018 - Oct 2018 at the latest
A MESSAGE FROM assurances on the border, but
the detail is far from clear.
THE SCSI PRESIDENT It is during Phase Two, due to
conclude by October 2018,
Each of our members in the construction, land and that much of the controversial
property sectors is affected by Brexit in many ways as detail will be discussed. The
professionals, employers and consumers. We are highly UK will be hoping to achieve a
exposed to Britain leaving the EU, with shocks across form of Free Trade Agreement
trade, labour and capital flows posing just some of the with the EU and avoid reverting to the imposition of
potential dangers. WTO tariffs on goods. It remains to be seen what the
future relationship will look like and what the exact
To help understand and hopefully mitigate against impact on Ireland will be, but there is no doubt that
some of these threats we are providing our members the avoidance of a hard Brexit will only be in Ireland’s
with an update on some of the issues that may be of interest.
relevance.
We must work together to mitigate these risks with
Ireland has been expending significant political members and Hume Brophy where possible.
capital in a rapidly-changing European Council, which
significantly weakens the country’s bargaining position Please email your findings and experiences to
moving forward. An agreement has now been reached brexit@scsi.ie
to give legal imperative to December’s ‘backstop’
solution to the Northern Ireland border issue. The
backstop agreement goes some way towards giving COLIN BRAY, SCSI PRESIDENT
SOCIETY OF CHARTERED SURVEYORS IRELAND
BREXIT BRIEFING MAY 2018
Irish firms less exposed
on exports than imports;
concern for construction
products
The Department of Finance has “Miscellaneous manufactured articles” and 30.8% were
imported from the UK. These figures demonstrate the
produced a new report on Ireland’s
possible exposure of the construction sector to shocks,
potential exposure to changes in import including increased trade restrictions and tariffs, or
and export arrangements, and has falling demand.
found that Ireland faces greater risk in Currency fluctuations will also continue to have a
relation to imports than on exports, as significant impact on both Irish the Irish-UK trading
previously thought. relationship and firms repatriating profits between the
UK and Ireland. Despite recent rebounds of the pound
This demonstrates the significant Brexit threat that sterling following Theresa May’s roll-back on key EU
exists to Irish supply chains. The report suggests that institutions on her Road to Brexit series of addresses,
Ireland’s import exposure stems from our location the Central Bank of Ireland has recently conducted
on the periphery of Europe. It adds that the removal research which indicates that a further 10% decline in
of the natural landbridge of the UK between Ireland the value of the sterling would result in a 0.2% decline
and continental Europe, and the proportionate size of in Irish economic growth. According to the findings,
the Irish market, may render it uneconomic for other Irish exporters would be most severely impacted,
countries to export to. despite recent trade statistics which show that in spite
of a 12% devaluation in the past 18 months, exports to
Whilst the UK itself is not a major manufacturing the UK had held up remarkably well with growth of 8%
economy, many countries manufacture goods in 2017.
elsewhere and export them to be ‘warehoused’ in the
UK, prior to being exported to Ireland.
Irish firms reliant on goods imports for construction
Ireland is also the most exposed country of the EU27 purposes, are particularly exposed, with lack of
in terms of the import of machinery and transport supply likely to signal higher acquisition costs, if they
equipment, according to the report. are required to source from markets further afield.
Alternatively, importing from the UK may necessitate
Using CSO figures from 2016, the report estimates payment of substantial tariffs.
that large Irish firms in the manufacturing and
construction sectors import more than €6bn worth
of goods per annum.
In addition to this, firms repatriating profits from the UK
In the manufacturing and agri-food sectors, micro to Ireland would suffer in balance sheet terms, should
and small enterprises comprised the vast majority of sterling continue to depreciate. Given the ongoing
importers. CSO figures show “Machinery and transport political uncertainty regarding Brexit, as well as Donald
equipment” accounted for 39.8% of all imports in 2015 Tusk’s most recent warning to Ms May on the Northern
and 10.9% of all goods in this category were imported Irish border, further fluctuations appear likely. Therefore
from the UK. Nearly 12% of total imports in 2015 were it will be important for firms to plan accordingly and to
innovate and adapt where possible.
SOCIETY OF CHARTERED SURVEYORS IRELAND
BREXIT BRIEFING MAY 2018
Britain’s labour market is currently tight, and industry has
Risks from Potential expressed concern that reductions in EEA immigration
Divergent Standards & post-Brexit will merely make it harder for Irish employers
to find suitable candidates to fill vacancies.
Regulations For financial services firms for example, the retention
of the ‘passporting’ option has been a concern.
Fears around regulatory divergence exist across many
Passporting is a provision of EU membership which
sectors in Europe. Concerns centre around potential
permits firms with operations located in any EU country
deviation on standards and criteria which apply
to conduct business in other EU countries without the
to professional qualifications, as well as concerns
requirement for additional regulation. The EU’s Chief
regarding the continuation of the Construction Products
Brexit Negotiator Michel Barnier ruled out the retention
Regulation (CPR).
of passporting rights for UK financial services firms
At present it is unclear whether the UK will seek to last year, effectively heralding tighter restrictions to
remain harmonised with the EU on issues relating to labour. However, there are growing indications that this
the marketing of construction products post-Brexit. situation may be resolved.
Should the UK look to diverge from the CPR, there
could be significant increases in the cost of products
imported into the UK market, given that materials will Brexit will merely make it
need to be manufactured bespoke for the jurisdiction. harder for Irish employers
In addition to this, there is real concern regarding
fire safety testing post-Brexit, with the European
to find suitable candidates
Commission recently announcing that testing conducted
in the UK will no longer be valid. As a result of such The potential impact of the ultimate Brexit agreement
developments, the BRE Global has announced that it upon Irish business is uncertain but fears remain of a
will be opening an operation in Dublin, but this will resultant lack of access to skilled professionals, further
doubtlessly lead to increased delays to sign-off on fire resulting in a skills shortage. The skills lag born of
safety testing, given the concentration of testing rigs in the lack of sectoral graduates during the economic
the UK. downturn, and rising demand from the growing
construction and property sector in Ireland, could cause
At present the EU’s Professional Services Directive
pressure on the firms in the sector to fill posts.
(PSD) exists to govern and permit mobility of certain
A recent Migration Advisory Committee interim report
classifications of skilled professionals throughout the
examining the impact of Brexit upon the labour market
EU. The Directive itself is an EU regulation governing
voiced concerns from the UK’s perspective, though
regulated professions which enables “free movement”
it is important to note that the report was written on
of professionals including doctors and architects,
the assumption that the Common Travel Area would
amongst other professions, between EU countries.
continue to operate between the Ireland and the UK.
There are emergent fears of regulatory drift resulting
That the rights conferred by the CTA would continue
in a deviation of standards and a loss of equivalence
has been a stated intention of both the Irish and British
and joint UK/Ireland recognition of professional
parties in the negotiations to date, although there has
qualifications across many sectors. This could restrict
been little in the way of clear definition as to the precise
mobility of professionals between jurisdictions over
nature of the changes, if there be any.
time. There are understandable levels of unease and
worry among stakeholders in the Brexit process as to It will be critical to continue monitoring the negotiations
the potential impact of Brexit on the free movement of closely in the coming months as the nature of the post-
labour. In Ireland, skills shortages in the construction Brexit landscape begins to become clear. However,
sector have already been flagged by many sources, as potential positive dimensions to changes to labour flows
the economy expands and with planned expansion in may include displacement of skilled non-professional
capital investment under the Ireland 2040 Plan and EU migrant workers, who may shift from the UK to
Rebuilding Ireland adding to private sector activity. Ireland, seeking employment opportunities.
SOCIETY OF CHARTERED SURVEYORS IRELAND
BREXIT BRIEFING MAY 2018
CAP Reform: Budget cuts agricultural land prices in the short to medium term,
pending the outcome of difficult CAP reform discussions.
Could Potentially Impact
In the last round of multi-annual financial framework
Land Prices (MFF) negotiations, CAP was not cut significantly. The
next round of negotiations however are set to result in
The Common Agricultural Policy stands to undergo a
a substantial reduction, with the Parliament estimating
difficult transition to a post-Brexit world, as the departure
that a cut of 20% in CAP could be required to fill the
of the UK fron the EU will result in a gaping 12% deficit
gap left by Britain’s departure.
in the EU budget.
As it pertains to Ireland, land prices have been rising
A European Parliament report has spelt out in clear
slightly, though industry figures have suggested that
terms what the EU should expect. Britain’s net
worries around Brexit and longer-term reform of
contributions to the CAP amount to €3 billion per year,
the CAP, may put a dampener on any inflation. It is
money which will need to be generated from new
expected that under a soft Brexit scenario, the UK
sources once Britain leaves the Union.
would retain a Free Trade Agreement arrangement,
“There is no pain-free way of adjusting CAP spending maintaining market access for a fee, and losing any
to the Brexit gap”, the report states. CAP, although not voting rights. This would go some way towards bridging
as singular an element of the EU budget as it once was, the economic gap.
still takes up almost 40% of EU spending, so the ultimate
As the agri-food sector remains one of the most highly
end-state of the Brexit negotiations will inevitably exert a
exposed sectors to Brexit shocks in relation to the product
heavy influence on the Policy.
life cycle and reliance on the UK market, the outcome
In a hard Brexit scenario, with the imposition of WTO could see downward pressure on agricultural land prices
rules levying tariffs of up to 78% on produce, the in the short to medium-term. A recent joint SCSI/
effect on the Irish agri-food and farming sectors would Teagasc report shows that average land values for 2017
be significant. This would likely result in depressed remain unchanged compared to 12 months previously.
EU Council Indicates political cooperation would be unacceptable from a
UK perspective. A key tenet of the EU27’s approach to
Preference for a Free the discussion will be an ambition to oblige the UK to
maintain its current standards, most notably from an
Trade Agreement SCSI perspective to environmental and labour standards.
with UK The 27-state bloc will also seek to ensure that the UK
either remains within or aligned to existing arbitration
Following on from months of informal talks between the mechanisms, aimed at issues including state aid and
European Union and United Kingdom, as well as internal corporate taxation rates.
deliberations among members of the UK’s Conservative
Party and the wider political class, it remains unclear as Naturally the UK leaving both the Single Market and
to whether the UK will leave both the Single Market and/ Customs Union will pose significant issues for SCSI
or Customs Union. and our members post-Brexit. The degree of difficulty
will be heavily based on the nature of the eventual FTA,
As such, both sides agree that the relationship between and what existing agencies the UK Government either
the two jurisdictions will be very different from the UK’s decides - or is allowed to remain within. The avoidance
current membership, and is most likely to consist of a of a tariff-free trade agreement for the Republic of
Free Trade Agreement (FTA), save for a dramatic turn- Ireland cannot be underestimated. At present Ireland
of-face by the UK in the coming months. This is certainly exports some 34% of its goods and services to the EU, of
the opinion of the EU27, based on the UK government’s which almost half goes to Great Britain. This represents
publicly-stated red lines, and based on the working the highest single reliance upon the UK import market of
assumption that any model which included continued any European country.
SOCIETY OF CHARTERED SURVEYORS IRELAND
BREXIT BRIEFING MAY 2018
According to analysis commissioned by the Department to the EU, of which almost half goes to Great Britain.
of Business, Enterprise & Innovation, Ireland’s GDP This represents the highest single reliance upon the UK
would decline by 7% by 2030 in the event of a hard import market of any European country.
Brexit and the onset of trade tariffs.
According to analysis commissioned by the Department
The importance of a tariff-free trade agreement for the of Business, Enterprise & Innovation, Ireland’s GDP
Republic of Ireland cannot be underestimated. At present, would decline by 7% by 2030 in the event of a Hard
Ireland exports some 34% of its goods and services Brexit and the onset of trade tariffs.
Northern Irish Border Recently, British Prime Minister Theresa May saw her
proposals in relation to the Irish border receive what has
Remains Central Brexit been termed as “systematic and forensic annihilation” by
EU negotiators, according to reports. The UK position at
Contradiction present is that its preference is to remain in a “customs
partnership” with the EU, which the EU has forcefully
The European Commission has published its draft rejected. A vote took place in the UK parliament in recent
Withdrawal Agreement, which will give legal definition to days, calling for the UK to remain in the customs union
the agreement reached between the EU and UK during in order to avoid a hard border with Northern Ireland.
negotiations on the transition period. The motion was called by a cross party grouping of
10 chairmen of select committees and its passing will
Despite the inclusion of a clause on the Northern Irish
increase the pressure on the British Government to
border, concern among Irish officials persists, given the
maintain the option of the customs union arrangement.
text was marked in ‘white’ and will therefore be subject
to further deliberation and discussion. From an Irish
On the issue of Prime Minister May’s Northern Irish
perspective the concern here is two-fold. Firstly, given
dilemma, the situation has been given added complexity
the structure of negotiations, Ireland had increased
by the Confidence & Supply Agreement reached between
leverage during Phase Two, with the Northern Irish
the Conservative Party and the Democratic Unionist
border acting as the central issue therein.
Party (DUP), who are vociferously against the idea
of a border across the Irish sea. DUP leader Arlene
As we move into Phase One of negotiations however,
Foster has rejected a proposal to keep Northern Ireland
which will deal with the future trading relationship
within the Customs Union and is therefore unlikely to
between the two blocs, the Northern Irish border
give support to her party’s backing for the Withdrawal
is likely to be given less priority, and thus Ireland’s
Agreement when it is presented to Parliament later this
leverage decreases. With a deadline on agreeing the
year.
final Withdrawal Agreement set for October by the
European Commission, and recent demands by the Irish
IMPACT
government that it wants to see substantive progress on
Should the Brexit backstop be included in the final
border proposals by the June European Council meeting,
Withdrawal Agreement, this will ensure that free trade
time is running short on finalising a text on the future
continues on the island of Ireland, given that the Northern
functioning of the Northern Irish border.
Ireland will remain within both the Single Market and
Ireland exports some 34% of its goods and services Customs Union.
to the EU, of which almost half goes to Great Britain.
This represents the highest single reliance upon the UK For Northern Irish companies however, the prospect of
import market of any European country. a border existing in the Irish Sea would be anathema to
continued positive growth, given the asymmetrical trade
IMPACT flow between Northern Ireland, the UK and the Republic.
According to analysis commissioned by the Department According to a European Parliament report on the impact
of Business, Enterprise & Innovation, Ireland’s GDP of Brexit on Northern Ireland, it appears the chances of
would decline by 7% by 2030 in the event of a hard a bespoke deal benefiting only the UK and Ireland and at
Brexit and the onset of trade tariffs. odds with core EU principles may be remote.
SOCIETY OF CHARTERED SURVEYORS IRELAND
BREXIT BRIEFING MAY 2018
Financial Services a final trade deal could lead to an exodus of firms
from the European Union as a whole, to the benefit of
Trade Deal? jurisdictions including Singapore and New York.
Despite concerns expressed by the City of London
IMPACT
representative organisation, the current trade deal
The impact on SCSI and its members can be seen
proposed by the European Commission does not include
through two distinct lenses. Firstly, in the event that
financial services.
financial services are not included in the final trade
deal, this would necessarily result in a significant
According to Commission officials, given the UK’s
disruption to the flow of capital between the UK and
red line on leaving the Single Market, its rejection the
Ireland.
jurisdiction of the European Court of Justice and its
desire to develop a new regulatory framework for
As a result, funding for construction projects would
financial services, the EU will not agree to any deal
decrease, UK investment in Ireland may be significantly
that would allow finance companies to operate without
reduced, with land and property prices dropping as a
barriers in each other’s markets.
consequence.
The City of London lobby group proposed that Britain
There may however also be a small net benefit from
and the EU allow cross-border trade in financial
the exclusion of the City of London from the final trade
services based on the provision that the UK would
agreement. Following on from the UK’s decision to
retain regulatory standards in line with extant
leave the EU, and due to the Prudential Regulatory
regulations. These regulatory standards would then be
Authority’s (PRA) demand for post-Brexit contingency
augmented by close cooperation between EU regulators
planning, several financial services companies have
and financial policymakers.
announced intentions to either relocate or significantly
expand their operations in Ireland.
The proposals have been endorsed by the UK’s Brexit
Secretary David Davis, while the Chancellor of the
As such, this may result in an increase in the demand
Exchequer Philip Hammond has warned that the
and therefore price of urban commercial and thus
exclusion of the City’s financial services sector from
residential property.
Ireland: Macroeconomic Central Bank continue to warn of the economic
implications of a hard Brexit, including the potential of a
Impact of Brexit 3% contraction in GDP over a ten-year period and the
permanent loss of up to 40,000 jobs.
According to almost all analyses, the impact of Brexit on
the Irish economy will be both substantial and negative. More recent research commissioned by the Department
As a result of these forecasts, the Irish government of Business, Enterprise & Innovation (DBEI) has
has embarked upon an extensive diplomatic campaign, concluded that in the event of a no-deal hard Brexit,
seeking to forge new trading relationships with Ireland’s economy could decline by as much as 7% by the
countries within and outside of the European Union. year 2030.
There appear to be signs of some dividend for The report models the different outcomes as a result of
Government. Despite Brexit-related fears, as well as varying post-Brexit trading relationships. These were
a volatile Euro-Sterling exchange rate, Ireland exports subdivided into short-term scenarios, hard or soft Brexit
reached €122 billion in 2017, a record level, with and long-term scenarios which include an EEA-like
exports to the UK also outstripping 2016 levels by 8%. outcome, a Customs Union-like scenario, an FTA like
scenario and a scenario under which WTO rules apply.
That said, both the Department of Finance and the Under these circumstances Ireland’s economy couldSOCIETY OF CHARTERED SURVEYORS IRELAND
BREXIT BRIEFING MAY 2018
reduce in size from between 2.1% by 2021 and 7% by Research Institute (ESRI), Irish households could lose
2030 depending on the nature of the eventual trading as much as €1,400 per annum in the event of a hard
relationship. This has caused some concern among Brexit. This would be as a direct resulted of inflated
political stakeholders, as the recovery from the serious food and household goods prices, and would therefore
contractions of the post-2008 financial crisis is in many impact low-income families adversely.
countries not complete. It is important to note however,
IMPACT
that this analysis does not take into account the
Should the size of Ireland’s economy gradually decline
possibility of long-term structural changes which may
over the coming years, the impact for SCSI members
occur should large parts of the financial sector move
would be significant and negative. This could lead
away from the City of London to continental Europe, or
to a drop in demand for commercial and residential
out of Europe entirely to other international financial
property, land prices across the country and may result
services centres.
in increased import prices of raw materials from non-
In addition to this, according to the Economic & Social EU jurisdictions, notably the UK.
TALKING HEADS: WHO’S SAYING WHAT?
Taoiseach Leo Varadkar,
on Brexit negotiations, Michel Barnier on the
28th March:“In light of the Northern Irish border: “It’s
progress made, we agreed important to tell the truth
a set of guidelines to enter the UK decision to leave the
into discussions with the single market and to leave the
UK on the framework customs union would make
for a future relationship. border checks unavoidable.”
These reflect our ambition
for a close partnership with Britain while ensuring a
level playing field, fair competition and the integrity of
the Single Market. I am pleased that they also leave EU Council President
open the possibility of us revisiting our position and Donald Tusk on
guidelines, should the UK approach evolve and its red commitment to Ireland:
line softens.” “We also expect the UK to
propose a realistic solution
Deputy Governor of the to avoid a hard border.
Central Bank of Ireland, As long as the UK doesn’t
Sharon Donnery, on the net propose such a solution, it
impact of Brexit on Ireland: is very difficult to imagine
“Yes, there may be some substantive progress in Brexit negotiations. If in London
employment benefits here in someone assumes that the negotiations will deal with
Ireland from firms that may other issues first… my response would be Ireland first.”
choose to establish here.
However, given the domestic
economy’s exposure to the UK, we expect the overall
Former Taoiseach,
effect to be negative and material.”
John Bruton says:
“Goods coming to the
port of Dover from
Tánaiste Simon Coveney outside the EU take 45
on the UK’s border minutes to process,
proposals: “I think the goods coming from the
EU task force will expect EU take 3 minutes to
significant progress on the process - it won’t be until
Irish Border issue by June this realisation settles in that Brexiteers will realise
and so do we.” their mistake”
The Society of Chartered, Surveyors Ireland, 38 Merrion Square,
Dublin 2, T: (01) 6445500 E: info@scsi.ie www.scsi.ieYou can also read
