With 45 days until Brexit, anxiety is increasing among Irish firms

It takes three years for the whiskey produced at the Great Northern Distillery to mature. So when the company began work on the bottles that came on to the market late last year, the first it had produced, there was little concern over Brexit and no mention of a "backstop". Now it's difficult to think of anything else.

From a standing start in 2015, the €12 million distillery in the Border town of Dundalk has made rapid progress. Demand has outstripped forecasts and the business is on track to produce 10 million litres of the spirit this year, becoming a major supplier in the industry. Yet despite the optimism, the possibility of the UK tumbling out of the EU without a deal - and its likely impact on Ireland - is difficult to escape.

“Our whiskey is beginning to mature,” says Alan Martin, the company accountant. “[but] there’s an awful lot of uncertainty. We just don’t know what’s going to happen.”

Many businesses across Ireland are in a similar situation. Steep World Trade Organization tariffs on valuable UK trade; voluminous new customs paperwork; and the risk of long delays on goods shipments to and from the European mainland that usually transit via Britain mean that Ireland has as much, if not more, to lose from a no-deal Brexit than any other nation, bar the UK.

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The growth markets for Great Northern’s whiskey are in the US, China and South Africa, so its sights are set on places far away from the drama in Westminster and Brussels. But the distillery is located just 10 minutes from the Border with Northern Ireland - the single most divisive issue remaining in the fight over how the UK will leave the EU.

London, Dublin and Brussels have all resolved that Brexit should not create new checks or a hard border to replace what is now frictionless trade across an invisible frontier that divides Northern Ireland from its southern neighbour, but they cannot agree how. The schism has taken talks to the brink of collapse, with UK prime minister Theresa May forced by Eurosceptics in her own party and Northern Ireland’s Democratic Unionist party - on which her minority government depends at Westminster - to seek concessions that Leo Varadkar’s Government and his EU allies will not countenance.

Caught in the middle

Companies like Great Northern are caught in the middle of this political brinkmanship. The distillery is adjusting supply chains and stockpiling raw materials to avoid disruption. It also faces stiff new tariffs that will mean the price of some specialist ingredients from the UK will rise by more than 20 per cent if the country crashes out of the EU next month. “It’s a big wallop,” says Mr Martin.

Ireland is one of the most open economies in the world . . . We are one of the most indebted countries in the world"

The company’s investment in Dundalk was a vote of confidence in the booming market for premium Irish whiskey and the revival of an Irish economy that had been devastated by the financial crisis. The Government is now facing the prospect of that progress being slammed into reverse, with some economists suggesting Ireland could slide into recession within 18 months of Britain crashing out of the EU on March 29th.

The UK is Ireland’s biggest import partner and its second-largest export market after the US. The dispute over the “backstop” - effectively an insurance policy to keep open the Northern Irish Border, pending a new UK-EU trade deal - has also soured relations between London and Dublin that had warmed ever since the 1998 Belfast Agreement peace pact ended decades of sectarian violence in Northern Ireland. Tony Blair, the former UK premier who signed the 1998 deal, has warned that a no-deal Brexit could be “devastating” for the peace process if a hard border were to become a target for dissident republican paramilitaries opposed to the Belfast Agreement.

Mrs May is scheduled to address MPs on Tuesday to update them on her talks in Brussels and Dublin. But her abrupt decision two weeks ago to seek “alternative measures” to the backstop to win parliamentary support from the Eurosceptic wing of the Conservative party and the DUP has stirred anger in Mr Varadkar’s administration.

Like Mrs May, he leads a minority government that faces severe domestic constraints, limiting his room for manoeuvre in any talks. He rejects her demands for a time-limit on the backstop and risks a political backlash at home should he make any compromise.

Brussels, Berlin and Paris have been steadfast in their support for the Taoiseach. But escalating Brexit risks have sharpened Mr Varadkar’s dependence on senior European leaders like Jean-Claude Juncker, Donald Tusk, Angela Merkel and Michel Barnier, the EU’s lead Brexit negotiator. European officials insist they will stand by Mr Varadkar but there remains concern in Dublin that he could yet come under pressure to change tack at the last minute to avert a no-deal.

“He’s bolstering European support by going to Brussels,” says a senior Irish official. “But nobody’s being complacent.”

That attitude extends to many of the country’s largest companies that have set in train expensive contingency plans for a no-deal exit that they hope they will never have to use, instead praying for a late UK deal, or a deferral of the article 50 process.

Already Mr Varadkar and Ireland’s powerful farm lobby are seeking emergency aid from Brussels to compensate for the sudden loss of beef and dairy food sales in the UK market if tariffs are imposed. The Taoiseach also wants EU state aid waivers to enable his administration to rescue stricken companies. The uncertainty has already led business to pullback. AIB, Ireland’s largest bank, said on Monday that one-third of companies have cancelled or postponed investments due to Brexit.

Recovering from the crash

A decade after a devastating banking crash and a humiliating international bailout, strong growth has returned. Irish gross domestic product grew 5.2 per cent in 2016 and 7.2 per cent in 2017. Government forecasts point to 7.5 per cent growth in 2018.

But the country still bears the scars of the crisis that triggered years of gruelling austerity, rampant unemployment and huge taxpayer-funded bank bailouts, all of which have made Ireland more vulnerable to Brexit. Its national debt of €212.8 billion at the end of January, up from €43.7 billion before the crash, weighs heavily. At 255 per cent of Government revenue, it ranks among the largest in the eurozone.

Conor O’Kelly is responsible for managing that burden. The chief of the State debt office, the National Treasury Management Agency, insisted in a recent speech that he does not need a Brexit plan, because he has no choice but to work to a “permanent” contingency plan.

“Ireland is one of the most open economies in the world,” Mr O’Kelly told a business event. “We are one of the most indebted countries in the world. We rely on foreign capital for 80 to 90 per cent of our borrowing.” With a funding requirement this year of between €14 billion and €18 billion, the country’s ability to service its debts depends on maintaining market confidence in the economy.

We are back to a negative language that had been really eliminated in the past 20-plus years"

Dublin does, however, enter the Brexit endgame after recording its first budget surplus for a decade, albeit a small one. Yet dire warnings of a big economic hit in a no-deal scenario are coming with increasing regularity. The finance ministry is anxious about a “substantial” slowdown in growth and rising unemployment, saying the Irish economy could be 4.25 per cent smaller than the current projections over the medium term. The Central Bank worries about financial market turmoil, lower consumer spending and exports and transport disruption. Davy and Goodbody, the two biggest Dublin-based stockbrokers, have warned a no-deal exit could push Ireland into recession.

Séamus Coffey, chairman of the Irish Fiscal Advisory Council, a statutory budget watchdog, says it is too early to say whether recession is a foregone conclusion but he believes an economic slowdown is inevitable. “The Irish economy has performed so strongly over the past four or five years that it can’t be expected to continue to grow at the same rate,” he says.

But could a no-deal crash be as bad as the last crisis? “I don’t think the risks posed by Brexit are as large as that,” Mr Coffey says. “They are significant but the impact of what happened in 2008 [and] 2009 in the financial sector, the labour market and the public finances was of a scale that we’re unlikely to see in the event of a hard Brexit. That’s not to say it couldn’t go extraordinarily wrong. It could.”

‘Negative atmosphere’

For politicians and officials in Dublin, the schism with London over the backstop is a far cry from the relative harmony between Ireland and its former colonial power since the Belfast Agreement, itself the result of more than a decade of painstaking diplomacy.

The atmosphere now is much different, says Bertie Ahern, the former taoiseach who co-signed the 1998 agreement with Mr Blair. “I must have been in the place every six weeks,” he says, referring to Downing Street. “Tony Blair was over here [in Dublin] umpteen times.”

A similar close rapport between Mr Varadkar and Mrs May is unlikely. Their personal relationship lacks warmth, say political observers. And trust is in short supply. Ireland’s demand for the backstop has antagonised Mrs May but Dublin has long complained that London blithely ignored any impact of Brexit on the peace deal.

As a result, Mr Ahern says, Brexit has “made the atmosphere negative. It is portraying us as being unhelpful and hostile and if you’re here [in Ireland] people feel the Brits are being unhelpful. We are back to a negative language that had been really eliminated in the past 20-plus years.”

Eunan O’Halpin, professor of contemporary Irish history at Trinity College Dublin, says Brexit is a considerable setback that might never be reversed. The current tension contrasts with “absolute trust” between top British and Irish officials even in the darkest moments of the conflict that left more than 3,600 dead.

“In the early 1980s especially, key officials took almost personal initiatives on both sides to build up understanding of what on earth the other side was about, and what they wanted. That had very important long-term consequences and benefits.”

One Varadkar ally says he is “seized of the historical moment and the potential of trying to rekindle” the damaged Anglo-Irish process. But even if the Taoiseach was open to providing a small concession to Mrs May, the problem remains that no one knows whether she could deliver support for it in the House of Commons.

The honeymoon is well and truly over," says a Fine Gael party ally of the Taoiseach

As the clock ticks down, Mr Ahern, a veteran of late-night summits in Brussels, worries about a “doomsday” scenario in which European support for Ireland slips at the final moment. “I don’t think it would be Barnier and company publicly having a press conference in Brussels saying, ‘We’re leaving [or letting] down the Irish and we’re sorry we’ve changed our mind’.” Any such move would be behind the scenes as a no-deal exit for the UK loomed. “People would start saying, ‘Jesus, listen we can’t let this happen, we have to find some solution’,” he fears. “That’s the context.”

Endgame

Back in Dundalk, Mr Martin has similar anxieties. “There’s a lot of brinkmanship at the minute. The EU seem to be right behind us. When push comes to shove, will they still be behind us? It’s a big question.”

The endgame in Brexit talks comes just as Mr Varadkar’s political honeymoon runs out, 19 months after the 38-year-old became Ireland’s youngest ever premier.

Although his demand for the “backstop” is popular with voters, his minority government has come under fire in recent days over a health spending controversy centred on a new children’s hospital in Dublin, Mr Varadkar’s signature infrastructure project.

Costs have more than doubled to at least €1.4 billion from an estimated €636 million in 2017, prompting one opposition party, Sinn Féin, to table a confidence motion against the Minister for Health Simon Harris on Monday. Fianna Fáil, which props up the Government in parliament, has signalled their arrangement would not survive the health scandal were it not for Brexit.

The public disquiet over the hospital debacle and the political tension it has stirred underline the constraints on Mr Varadkar. It coincides with a series of nursing strikes that have crippled the health system as the government refuses their demand for more pay.

“The honeymoon is well and truly over,” says a Fine Gael party ally of the Taoiseach. “Fine Gael’s strength is its management of the economy and economic competence. That has taken a battering in the past week,” the ally adds, referring to the hospital.

With the threat of a no-deal Brexit escalating, Mr Varadkar has rallied virtually all parties behind his stance on the backstop. The stakes are all the greater because Mr Varadkar declared in December 2017 that the original agreement on the backstop was “politically bulletproof” and “cast iron”. Having refused to discuss a time-limit on the backstop or any reopening of Theresa May’s withdrawal treaty, he would be certain to come under attack from domestic rivals if he tried to compromise. – Copyright The Financial Times Limited 2019