Analysis of a Yes Vote
The economic consequences of a Yes vote would be entirely positive. Ratification of the Lisbon Treaty would be taken as a definitive statement by the electorate that they wished Ireland to remain a loyal and constructive member of the European Union.
This would remove any uncertainty in the financial markets and the business community about Ireland’s future.
Cost of Borrowing
The immediate effect would be to stabilise, or perhaps lower, the cost of government borrowing and the cost of money to Irish financial institutions on the international money markets.
For the taxpayer this would be good news as it would avoid unnecessary increases in interest repayments. It would also help avoid further unwanted cuts in state services.
For households, the direct effect would be to keep mortgage rates and interest charges on overdrafts and credit cards in line with present levels.
Pension Funds
Share prices would react favourably and provide the basis for a badly needed recovery in asset values. This would have a positive effect on the value of pensions at a time when many people on private pensions are experiencing major reductions in income.
ECB Support
The continued support of the European Central Bank in propping up the Irish financial system would be assured. This is crucial to the continued viability of the economy and the prospects for economic recovery.
Investment and Jobs
Domestic and foreign investors would gain confidence in the future of the economy and would give the go ahead with projects which have been put on hold due to uncertainty about the referendum result. The long term employment effect would be entirely positive and would constitute the potential for renewed job creation.
Platform for Recovery
In general, a Yes vote would provide the platform for recovery. In itself it would not guarantee recovery but it would provide the foundation for rebuilding the economy. Success would depend on the quality of Irish policy- making.
Consequences of a No Vote
The consequences of a No vote would be immediate, wholly negative and devastating.
Increased Cost of Borrowing
The cost of government borrowing would rise immediately. It would continue to increase over the medium term until such time as Ireland’s future relationship with the European Union was settled.
At present, Ireland is borrowing €25bn annually to bridge the deficit between state expenditure and tax revenues. Every additional 1% on the cost of borrowing would impose a self inflicted penalty of €250m annually on the Irish taxpayer.
This penalty would be equivalent to the annual salaries of 5000 primary school teachers or nurses.
At present the differential between German and Irish ten year bank rates is around 1.5%. That spread would widen further and could reach or exceed its previous level in excess of 2.5%.
The self imposed penalty of extra interest costs on the exchequer could only be offset by a combination of increases taxes and reduced expenditure. Neither would be welcome.
Increased Costs for Consumers
Wholesale money market rates would rise in sympathy with the cost of sovereign debt. As a result, householders would progressively have to pay increased mortgage repayments and higher charges on overdrafts and credit cards. This would result in a direct cut in the standard of living.
Threat to Borrowing Capacity
Over the medium term, the capacity of the Irish state to borrow the quantities required at affordable rates would become a cause for concern.
The solvency of Irish financial institutions would be endangered if the level of support from the ECB were to weaken.
Membership of the Euro
Membership of the euro has been indispensable for low interest rates and exchange rate certainty. More importantly, it has provided liquidity for the financial institutions. If Ireland’s future involvement in the euro were to be thrown into doubt then the consequences for Ireland’s credit rating would be wholly negative.
Loss of Investor Confidence
The impact on investor confidence would be devastating. Ireland’s strongest card as one of the most attractive investment locations would be destroyed. Foreign Direct Investment would dry up. Multi-nationals already established here would start preparing to re-locate. May Irish firms would abandon plans to invest in the domestic market.
Devastating Employment Effect
The medium to long term effect on employment would be devastating. Existing jobs would disappear and future jobs would be foregone. The Exchequer would lose revenue and simultaneously incur increased expenditure.
Loss of Pension Income
Share prices would fall in line with the collapse in investor confidence. The impact on the future value of pensions would compound the loss of value experienced in the current crisis.
Political Risk
The medium-term consequences of a No vote would depend on whatever new relationship Ireland could negotiate with the other countries comprising the European Union. If Ireland were left with no alternative but to withdraw from membership of the Union then the economic effect would be even more negative. And it would become permanent.
In the long run, Ireland would have to live in isolation from the rest of Europe, with the possible exception of Britain. It is quite feasible that Ireland would again become an economic province of Britain.
Withdrawal from the EU
Withdrawal from the European Union and recourse to membership of the European Economic Area as the most likely alternative would, of course, have far reaching consequences. It would certainly entail the end of our involvement in the Common Agricultural Policy and access to the Regional and Structural Funds and any involvement in framing legislation on the Single Market.
Transferring to the European Economic Area, to join Norway and Iceland, would most likely mean an end to Irish participation in the Euro. The long term consequences would be profoundly negative and would impose reverse the thrust of our long established economic policy.
Challenge
Faced with the scenarios, it would be in Ireland’s economic interests to secure a political deal with the other Member States that did not require a withdrawal from the Union but, instead, allowed Ireland to negotiate some half-way house between full membership and the European Economic Area.
In the last analysis, the economic consequences of a No vote will depend on the outcome of those negotiations. Various scenarios are separately analysed by Brigid Laffan in her paper on the Political Consequences of the Referendum Vote.
Brendan Halligan
