1

In this issue:

UK Cabinet

welcomes temporary

free movement

Is it lights out for

the Integrated Single

Electricity Market?

Headlines of Dublin

“streets ahead” in

relocation game

could be misleading

Issue 7, 27th July 2017

Brexit Watch

Fortnightly briefing on Brexit developments

DKM Commentary: The second round of negotiations has shown areas in which progress could be made

and where work still needs to be done. Irish issues fell into the latter category. There

is goodwill on both sides, with both the EU and UK keen to find a deal that is

acceptable to the people of Northern Ireland. However, with no tangible progress on

the matter, statements declaring the need to prevent a hard border risk sounding

hollow.

The UK Government’s acceptance of a transition period in which free movement will

continue is good news. Such a deal would prevent a cliff-edge Brexit in March 2019,

in particular for UK businesses that rely on EU workers. The more time businesses

have to adjust their current business model, the better for the UK economy, and the

better for Irish businesses that rely on the UK as an export market.

Meanwhile, Bank of America choosing Ireland as its EU base and news that Barclays

are in talks with the Irish regulator bodes well for the capital. Yet, Dublin should be

wary of complacency and headlines purporting the Irish capital to be “streets ahead”

of EU rivals in attracting City firms. It is prudent to look at decisions taken rather than

firms who may have “considered” Dublin as a location.

2

United Kingdom Second round of Brexit talks

On 20 July, the UK and the EU concluded the second round of

talks on Brexit. Speaking at the press conference that followed,

the Commission’s chief negotiator Michel Barnier indicated that

the UK still needed to clarify its position on a number of fronts,

including on the issue of financial obligations.

A detailed discussion on citizen rights took place, with the EU

and the UK identifying points of convergence and divergence and

areas where further discussion would be required. On the Irish

question, there appears to be broad agreement between the EU

and the UK: both are committed to common travel rights and the

maintenance of North-South co-operation as outlined in the

Good Friday Agreement.

Transition deal could maintain free movement

The Guardian reported comments from a senior source in the UK

government indicating that the British cabinet has accepted that

free movement will be part of a transition deal following the

UK’s exit from the EU. The source predicted that it would be

maintained for three years, but suggested free movement for up

to four years post-Brexit was a possibility. Businesses have put

pressure on politicians to agree to a transition deal lasting a

number of years.

Amber Rudd gives amber light to EU immigration

In a piece written for the FT, UK Home Secretary Amber Rudd

has sought to reassure UK businesses that the Government is

listening to their concerns and plans to construct a new

immigration policy based on an assessment that will be

conducted by the Migration Advisory Committee. She also

assured businesses and EU nationals that the government “will

ensure there is no “cliff edge” once [the UK leaves] the bloc”.

While emphasising the control of immigration the UK will obtain

upon exiting the EU, the Home Secretary did not reiterate

Theresa May’s promise to bring net immigration below 100,000

a year.

Norway model resurrected?

An interview with Welsh First Minister Carwyn Jones on 24 July

showed a division in Labour’s upper echelons on the form Brexit

might take. Contrary to Jeremy Corbyn and Theresa May’s claims

that Brexit must entail an exit from the single market, Mr Jones

argued that the ‘Norway option’ should be considered. Such a

model would involve access to the EU’s single market, yet would

leave the UK without a say in how the rules are made. On free

movement, Mr Jones suggested the UK could copy Norway in

tightening the enforcement of current rules: free movement for

those with a job and a three-month window to find a job.

Fantastic Mr Fox and the chlorine-washed chickens

UK Trade Secretary Liam Fox’s visit to Washington to boost US-

UK trade has led to calls for the Government to clarify its

position on the lowering of food standards. Media debate in the

UK has focused on the potential importation of US chlorine-

washed chicken suggested by Mr Fox – meat currently banned

under EU rules. Entering the debate, Environment Secretary

Michael Gove said the UK would not accord a deal requiring the

UK to accept lower food standards.

European Union France wants the “hardest Brexit” A leaked memo by the City’s special representative to the EU

following a meeting at the Banque de France stated that the

country is “seemingly happy” to see an outcome that may harm

London, even if this were not beneficial to France. In the memo,

Jeremy Browne called it the “worst meeting [he had] had

anywhere in Europe” and stated that France’s position of

favouring the “hardest Brexit” differed drastically to that of

other financial centres, such as Luxembourg, which seemed to

see their interests as complementary to those of Britain.

Ireland Brexit passport applications increases since January The number of passport applications from Northern Ireland and

Britain has increased by 50 per cent since January 2017,

according to the Irish Times. It quotes figures from the

Department of Foreign Affairs showing that nearly 100,000

people from the North and Britain have made Irish passport

applications this year. A spike of almost 20,000 applications was

recorded in March 2017, the month in which UK triggered Article

50. Any person with an Irish parent receives automatic

citizenship, regardless of where they were born, and

grandchildren of citizens qualify for citizenship if their births

have been recorded in Ireland’s foreign births register.

Facing Brexit: A Chatham House interview

In an interview at Chatham House, the international relations

think tank, Irish Minister for Foreign Affairs Simon Coveney

outlined Ireland’s approach to the border, the DUP/Conservative

deal and the ‘exit bill’. Mr Coveney stated that the Irish

Government wished to find a solution as close to the status quo

as possible and that this cannot be achieved by “simply using

technology on the border”. Mr Coveney stated that Ireland

cannot accept putting up checks – physical or otherwise – along

the border and believes the UK Government now recognises this.

He stressed that a unique political solution must be agreed

between Ireland, the UK and the EU that would allow the free

movement of goods and services and people across the border.

Time barriers to trade

A Politico article has highlghted the difficulties posed to Irish

trade by Brexit through the loss of the British transit route. It

notes that 80 percent of the Irish road freight that reaches

mainland Europe passes through the UK, and that Brexit could

lead to a tripling of journey times and customs delays. Their map

demonstrates that a trip from Dublin to Calais currently takes

10.5 hours through Britain – as opposed to a 20-hour ferry to

Cherbourg, France or a ferry to Zeebrugge, Belgium, taking at

least 38 hours. It notes that such long and uncertain journey

times would be particularly disruptive for the food industry.

Political Developments

3

Sector Focus: Energy In 2014, Ireland had the fourth highest level of imported energy

dependence in the EU, importing 85 per cent of its energy. In

2016, almost 100 per cent of its natural gas imports were from

the UK and currently all of Ireland’s electricity imports come via

interconnector from the UK. This week’s sector focus provides an

overview of the findings from recent publications and articles on

the issue.

The future of the Single Electricity Market (SEM) An ESRI Research Note, Re-evaluating Irish energy policy in light

of Brexit, states that one of the main effects of Brexit on energy

policy would be an increase in uncertainty, particularly regarding

the future of energy market structures. The current all-island

Single Electricity Market (SEM), in place since 2007, is in the

process of being aligned with a common European Target Model

for cross-border electricity trading. The new integrated market,

I-SEM, will replace existing arrangements with multiple markets

or auctions, spanning different time frames and with separate

clearing and settlement mechanisms.

Status quo please

The UK Government has stated that it does not wish any

disruption to the island’s SEM when it exits the EU. According to

a white paper, it is considering “all options for the UK’s future

relationship with the EU on energy, in particular, to avoid

disruption to the all-Ireland single electricity market operating

across the island of Ireland”. The same white paper also

acknowledges that EU legislation underpins the coordinated

trading of electricity and gas between the UK and other EU

Member States through existing interconnectors.

Risks for Irish electricity integration

There is consensus that Brexit will not disrupt the current SEM,

which is based on UK and Irish legislation and policy.

Nevertheless, were the UK to cease to be a full participant of the

EU energy market, there could be implications for the ease with

which the all-island SEM participates within the EU electricity

market. Insight-E, an energy think tank, notes that a loss of

common rules between the UK and the EU for the trading of

electricity over interconnectors could lead to “wrong way flows”

where electricity flows from the expensive region to the cheaper

one rather than the other way around.

Furthermore, a PWC commentator has stressed that the risk to

the Irish economy stems from delayed or abandoned

harmonisation of energy market arrangements due to Brexit.

Such delays may mean that Ireland loses out on the benefits of

increased competition. The UK ceasing to be a full participant is

certainly possible: having refused to accept EU free movement of

people requirements following a 2014 referendum, the

integration of Switzerland to the EU’s energy market has been

put on hold.

Although the imposition of tariffs on energy post-Brexit would

carry significant risks for the Irish economy, ESRI commentators

deem this unlikely: a number of EU countries trade in energy

with non-EU countries tariff-free (e.g. the Baltic countries with

Russia), demonstrating that the UK is unlikely to face tariffs on

exports to the EU.

Gas and energy security post-Brexit

A second effect relates to the security of Ireland’s energy supply

post-Brexit. The UK and Ireland have an established relationship

in relation to co-operation on gas security of supply issues, which

is unlikely to change in light of Brexit. Yet, Ireland could face

problems complying with EU standards when the UK leaves. In

2016, Ireland did not meet the EU gas security infrastructure

standard, i.e. after losing the single largest gas infrastructure the

technical capacity of the remaining infrastructure cannot meet

demand. This resulted in Ireland requesting the UK to adopt a

regional approach. Ireland would thus cease to meet the

infrastructure standard post-Brexit and may have difficulty

meeting new rules developing a stronger EU collective response

to future supply risks.

Potential solutions The ESRI Research Note suggests investing more in gas storage

to increase gas security and importing Liquefied Natural Gas

(LNG) to diversify supply. A recent article in the Financial Times

noted that the UK vote to leave the EU has given the previously

proposed Shannon LNG project fresh momentum and that

private investors behind the scheme are searching for a new

financial sponsor. Provisional EU support for the proposed LNG

terminal has been offered.

The EU has also decided to allocate €4m of funding towards the

“Celtic interconnector”, a joint venture between grid operators

EirGrid and RTÉ France, linking France and Ireland’s electricity

markets. The project is still in the early stages – the €4m is to

fund preparatory work, including a public consultation and

fleshing out the project’s finer details. If the €1bn interconnector

were to be completed, it would become Ireland’s only link to the

EU’s electricity market when the UK leaves.

Conclusions

The biggest energy-related risk to Ireland stemming from the

UK’s exit from the EU thus appears to be the prospect of delays

in remodelling the SEM to meet the EU Target Model. The other

risks (tariffs, less energy security, disruption of the current SEM)

currently appear quite low. Yet, whether large infrastructure

projects that directly connect Ireland to the EU market, such as

the Celtic interconnector, should proceed is a question that can

only be answered by weighing the benefits from the connection

against the costs to consumers of such endeavours.

Economic Insight

4

City Relocations

Destination: Dublin Docklands

Bank of America has chosen Dublin as its European base post-

Brexit. It has not yet stated how many new jobs in Dublin this

would create, but Bank of America's CEO Brian Moynihan told

the Financial Times that the bank would definitely add to its

existing staff of 700. Bank of America plans to move investment

banking and market operations to Dublin, in addition to moving

a number of roles to other European destinations.

Barclays are in talks with Irish regulators about expanding its

operations in the country. According to a BBC report, the bank

said Ireland provided a “natural base” for Barclays as it had

operated there for 40 years.

Destination: Unknown

The results of EY’s Brexit Tracker attracted much media attention

in mid July, where Dublin appeared to be the destination of

choice for potential relocations for 19 of 59 large financial

services companies who have said they have started to move

staff or review domicile in the UK. However, the number

nineteen refers to companies that “have publicly stated they are

moving or considering moving staff and/or operations to

Dublin/Ireland” and includes firms that have indicated more

than one city for a potential relocation. Therefore it is not clear

that Dublin is in fact “streets ahead of EU rivals as City firms plan

for Brexit relocation”, as claimed by the Guardian, since many of

these potential moves may not come to fruition.

Furthermore, 18 firms have mentioned Germany and 11 have

identified Luxembourg as a possible location, with 15 indicating

plans to move without specifying a location. It is thus clear that if

Ireland is in the lead, (assuming the figures can be relied upon) it

is by no means a significant one.

End of year moves

The chief executive of the UK Financial Conduct Authority told

reporters he expected firms are waiting until the end of the year

before moving staff and business for reasons relating to Brexit. A

Reuters report stated that he acknowledged circumstanced

differed from firm to firm but saw no imminent implementation

of contingency plans.

Business & Finance

IMF downgrades UK growth forecasts

The International Monetary Fund (IMF) downgraded its 2017

growth predictions for the UK from 2% to 1.7% in its recently

published World Economic Outlook. US growth was also

downgraded while global forecasts remained the same. Speaking

to the BBC, IMF Chief Economist Maurice Obstfeld stated that

the revisions were a result of weaker than expected growth in

the first part of 2017. He added that IMF projections for long-

term UK growth were based on “a pretty optimistic assessment

of how the negotiations are likely to turn out”. This means that if

negotiations do not succeed or Britain concludes a poor deal

with respect to certain markets, further forecast revisions are on

the cards.

UK GDP quarterly growth at 0.3% On 26 July, the Office for National Statistics (ONS) released data

for UK quarterly GDP growth, showing a rise of 0.3%. This is up

from 0.2% last quarter. The Financial Times explained that the

bulk of growth in Q2 came from the services sector (growing

0.5%), with construction and manufacturing acting as the biggest

drags on the economy.

NOTE: This publication is for information purposes only. Any expression of opinion is subject to change without notice. DKM accepts no liability whatsoever for the outcome of any actions taken arising from the use of information contained in this report. © DKM Economic Consultants Ltd., Office 6 Grand Canal Wharf, South Dock Road, Ringsend, Dublin 4, Ireland. Telephone: +353 1 6670372; Fax: +353 1 6144499; Email: info@dkm.ie; Website: www.dkm.ie

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