British EU exit risk to Ireland

The biggest loser from a Conservative Party victory in next month’s election might end up being Ireland.

Prime minister David Cameron has pledged to renegotiate Britain’s EU membership should he win a second term, and hold a vote by the end of 2017 on whether to remain in the common market of more than 500m people.

Britain is Ireland’s biggest trading partner, accounting for more than $44bn (€41bn) in 2013, data compiled by Bloomberg show.

Taoiseach Enda Kenny said last week that the UK quitting the EU is a serious concern for Ireland, and he has already set up a unit to examine the potential consequences.

For Mr Kenny, the concern is that politics across the Irish Sea might derail an economic recovery that has helped Ireland’s bond yields to a record low.

“The key risk to Ireland’s fortunes over the next 12 months or so may not be economic, but rather political,” said Alan McQuaid of Merrion Capital in Dublin.

“A possible British exit from the EU would, in our opinion, cause the greatest uncertainty for the Irish economy in the short-term.”

Polls show Cameron neck and neck with Labour leader Ed Miliband, who opposes a referendum, at least for now.

After suffering its worst recession on record, Ireland’s economy was the fastest growing in the eurozone last year. The yield on 10-year Irish government bonds has plunged to 0.7%, compared with 14.2% in July 2011 following the country’s international bailout.

The premium Ireland pays compared with 10-year German bonds has fallen about 11 percentage points to 0.62%.

Exports of everything from Irish butter to Allergan’s Botox are leading the revival of the economy, and could be at risk from the UK leaving the EU.

“Given the geographic proximity and high levels of trade, our modelling suggests Ireland would be hit hardest by a British exit”, Open Europe, a London-based researcher, said in a report published last week.

Some 39% UK voters are in favour of leaving the EU against 40% wanting to stay, a Populus poll for the Financial Times showed last week.

Even in a scenario where the UK economy is better off after a British exit, Ireland could still lose out, according to Open Europe. The loss to Ireland could be 1.1% to 3.1% of GDP, it said.

The main hit could be on trade. Irish businesses sell about 40% of their products to the UK, and these would face levies in the event of new tariffs should Cameron lead his country out of the EU.

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