Question

What are the likely economic effects of Brexit on both the UK and Ireland?

What are the welfare effects?

Answer 1

Economic effects of Brexit on Ireland:

• Trade – both imports and exports – is a major driver of economic growth and prosperity. The impacts of Brexit on the Irish economy will not only translate into negative impacts for Irish exporters in the UK market. Supplier industries to the export sectors will also be affected.
• Likewise, Brexit will reduce the preferential access of EU producers to the UK market and thereby reduce the cost advantages that e.g. Irish agricultural products have on the UK market relative to similar products, e.g. dairy products from New Zealand or beef from Australia. Irish imports from the UK will also be hampered and this can have important knockon effects in the value chains relying on UK imports.
• Furthermore, it will have consumer impacts in terms of higher prices of imported goods, but also indirectly lead to higher costs for domestic goods, since imported products and services feed in to domestic production of consumer goods and services. Consequently, the production of the Irish enterprise sector will suffer and the gross domestic product (GDP) will be at a lower level in 2030 than it would otherwise have been in the absence of Brexit. We predict Ireland’s GDP to be between 0.8 per cent and 2.8 per cent lower than the non-Brexit baseline level in 2030 in the EEA scenario depending on the degree of regulatory divergence following Brexit. Measured in terms of the current GDP level, a 2.8 per cent drop

would correspond to EUR 7 billion (2015-basis). The negative GDP impact could be worse in a customs union scenario or FTA scenario, where the GDP impact could be -4.3 per cent (corresponding to EUR 11 billion in 2015-level).

If a political agreement can be reached to avoid customs procedures in the customs union scenarios, the GDP impact could be reduced to 3.4% in this scenario. In the WTO scenario, GDP would be 1.0 per cent lower if no regulatory divergence occurs and 7.0 per cent lower than the non-Brexit baseline level of GDP in 2030 if UK regulation diverges to the full extent of non-FTA partners, cf. Figure 13. A 7.0 per cent drop in GDP corresponds to ¤18 billion on a 2015-basis

This impact via tariffs and customs could be larger in this scenario, if the EU and the UK does not continue to use TRQs on beef, as assumed. Brexit will not end economic growth in Ireland. All results presented above are reductions from the non-Brexit baseline, i.e. a reduction relative to the level of e.g. GDP that would have occurred in the absence of Brexit.

On the basis of an underlying long term growth rate of 2.2 per cent per year between 2017 and 2030, Ireland will still be more prosperous in 2030 than in 2017, even in the event of a WTO scenario. Our results predict that the level of Irish GDP could be 7.0 per cent lower in the WTO scenario with full regulatory divergence compared to what it would otherwise have been without Brexit in 2030. Translated into an average annual growth rate between 2017 and 2030 (and assuming a gradual adjustment) this means that Irish GDP would be growing at 1.7 per cent per year instead of 2.2 per cent per year on average (assumed baseline growth without Brexit). Under the EEA scenario, Irish GDP would be growing at 2.0 per cent per year.

The impact of Brexit in the WTO scenario is estimated to result in GDP being 7 per cent lower in 2030 than would be the case in the absence of Brexit. In the short-term scenarios, we estimate a -0.5 per cent impact on GDP in 2020 in ‘soft Brexit’ and -2.1 per cent in ‘hard Brexit’.

Labor market impacts of Brexit on Ireland :

• In the long run, the overall level of employment in the Irish economy will be determined by structural factors, mainly labor supply and the skills composition of the Irish workforce. Seen in this perspective, the future trade agreement with the UK will not in itself affect the overall level of employment in Ireland, but an agreement that reduces trade will without doubt affect the general wage levels in Ireland negatively.
• Brexit will have short term impacts on employment. These short-term impacts have not been quantified, as the impact will depend on where the Irish economy will be in the business cycle at the time of the biggest impact. Further, the impact of Brexit will not have played out at firm level in the short run. Brexit will also have long-term effects on employment at the sectoral level, as some sectors will contract and others will expand after Brexit.
• The change in labor demand across sectors will give rise to wage adjustments, which will lead to redistribution of workers across sectors with wages in each skills group adjusting across these sectors accordingly. To assess the isolated impact of a new trade relationship with the UK, we have assumed no change in the long run labor supply in Ireland as a result of different trade agreements. This means that we do not model changes in labor market participation rates due to migration or other factors.
• Under this assumption, any changes in labor demand will be captured through wage changes.28 In the WTO scenario, real wages will be 8.7 per cent below the non-Brexit baseline level in 2030 for low skilled workers and 6.5 per cent below the equivalent baseline level for high skilled workers. In the EEA scenario, impacts will be smaller, with real wages being 3.5 per cent below the non-Brexit baseline level in 2030 for low skilled and 2.6 per cent below for high skilled.

The economic implications of Brexit on both sides of the Irish border:

• Discussions regarding the potential impacts of Brexit on the island of Ireland have tended to focus, not surprisingly, on social, political and security-related issues regarding the border between the Republic of Ireland and Northern Ireland.
• As this report shows, how to manage customs-related issues on this border have recently become central to the whole question of the exact nature of the UK’s withdrawal from the EU.
• While these social, political and security-related issues are of utmost importance, there are also other economic issues which Brexit raises for the island of Ireland. Until now, they have received relatively less attention.
• The UK is the Republic of Ireland’s largest direct trading partner. In purely economic terms, the economy of Northern Ireland accounts for only 2.1% of UK Gross Domestic Product (GDP).
• So, from the perspective of the Republic of Ireland, it is the effect of the EU withdrawal of the whole of the UK which is critical.
• In addition, the UK is the country through which almost all the Republic of Ireland’s exports and imports travel. As such, any customs-related disruptions in transportation and logistics systems between the UK and the EU at the sea or air borders of Great Britain could inadvertently affect the Republic of Ireland’s economy, even if ways are found to keep the Irish land border completely open. For both parts of the island of Ireland the details surrounding Brexit are therefore of critical importance economically as well as politically.
• We know from the World Input-Output Database 2013 release that final demand in the UK accounts for 5.8% of the GDP of the Republic of Ireland and 6.1% of its employment. In relative terms, Ireland is therefore the country which is the most dependent on UK markets for its prosperity, followed by Malta (4.9% of its GDP), the Netherlands (3.7%) and Belgium (2.9%).
• Not surprisingly, the level of dependence on the UK economy is often commented on in the Irish media with genuine concern. However, to put this into perspective, the UK economy is much more dependent on the economy of the rest of the EU, with a two-thirds greater level of dependence, than the Irish economy has on the UK economy.
• Our analysis has calculated the level of trade-related risk exposure that European regions and nations face as a result of Brexit. This is done by considering the effects on all trade flows and global value-chains criss-crossing countries across the world, including the EU.
• Our results show that the Brexit trade-related risk exposure of the Republic of Ireland as a whole is 10.12% of its GDP. In terms of countries, the Republic Ireland’s trade-related exposure to Brexit is second only in size to that of the UK itself, at 12.2% of its GDP.
• The Brexit trade-related exposure of UK regions varies between 9.8% and 10.2% of local GDP in NorthEastern Scotland and London, up to 15.8% in East Riding and North Lincolnshire, and 16.3% in Cumbria.
• In contrast, the average for the EU as whole without the UK is only 2.64% of EU GDP. Exposure of different areas of the Republic of Ireland to Brexit sits at 10.12-10.13%, while that of Northern Ireland is 11.7% of its GDP.
• In other words, the UK is 4.6 times more exposed to Brexit than the rest of the EU; the Republic of Ireland is 3.8 times more exposed to Brexit than the EU as a whole excluding the UK; and Northern Ireland is 4.4 times more exposed than the rest of the EU.
• If we consider broad industrial sectors, we see that in the Republic of Ireland it is the primary industries which are the most exposed to Brexit – and in particular those sectors related to agriculture – whose exposure levels vary between 20% and 30% of the primary sector’s GDP.
• The Brexit trade-related exposure of manufacturing industries in the Republic of Ireland is approximately 18% of their GDP, while for the service and construction industries it is approximately 6% and 2%, respectively.
• For Northern Ireland, the Brexit trade-related exposure of primary industries – mainly agriculture – is 19% of primary industries’ GDP, for manufacturing it is 32% of manufacturing GDP, for services it is 8% of service industries’ GDP, and for construction it is 1% of Northern Ireland’s construction sector’s GDP.
• As such, although in aggregate the Brexit trade-related exposure of both parts of the island of Ireland are very similar, and also slightly lower than for the UK as whole, there are also marked sectoral differences in the Brexit trade-related risk exposure between Northern Ireland and the Republic of Ireland.
• Both manufacturing and service industries in Northern Ireland are relatively more exposed to Brexit than their counterparts in the Republic of Ireland, while primary industries in the Republic of Ireland are more exposed than their counterparts in Northern Ireland. In particular, the largest differences are between the relative levels of Brexit trade-related exposure for manufacturing industries north and south of the Irish border.
• What these observations imply is that whatever the final UK-EU post-Brexit deal agreed, unless exposure to trade disruption on both parts of the island of Ireland is limited by remaining in both the customs union and the single market, then the impacts of Brexit are likely to differ significantly between the north and south of the Irish border.

The Welfare Effects:

• The rise of social media has provoked both optimism about potential societal benefits and concern about harms such as addiction, depression, and political polarization. We present a randomized evaluation of the welfare effects of Facebook, focusing on US users in the run-up to the 2018 midterm election. We measured the willingness-to-accept of 2,743 Facebook users to deactivate their Facebook accounts for four weeks, then randomly assigned a subset to actually do so in a way that we verified.
• Using a suite of outcomes from both surveys and direct measurement, we show that Facebook deactivation (i) reduced online activity, including other social media, while increasing offline activities such as watching TV alone and socializing with family and friends; (ii) reduced both factual news knowledge and political polarization;(iii) increased subjective well-being; and (iv) caused a large persistent reduction in Facebook use after the experiment. Deactivation reduced post-experiment valuations of Facebook, but valuations still imply that Facebook generates substantial consumer surplus.