Oireachtas Joint and Select Committees
Tuesday, 25 October 2016
Joint Oireachtas Committee on Jobs, Enterprise and Innovation
Economic Impact of Brexit: Discussion (Resumed)
Apologies have been received from Deputy Stephen Donnelly. I remind members, visitors and those in the Gallery that mobile phones must be switched off, or in flight mode, for the duration of the meeting as they interfere with the broadcasting equipment, even when on silent mode.
I welcome Ms Ruth Taillon, director, and Dr. Anthony Soares, deputy director, from the Centre for Cross Border Studies; Mr. Dan O'Brien, chief economist, Institute of International and European Affairs and Mr. John McGrane, independent member of the Institute of International and European Affairs' UK working group and Dr. Martina Lawless and Dr. Edgar Morgenroth, associate research professors from the Economic and Social Research Institute, to this meeting at which we will discuss the likely economic impact of Brexit, with particular emphasis on jobs and enterprise, and the steps being taken to mitigate any risks that may arise.
Before we commence, I advise the witnesses that, by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of a long-standing parliamentary practice to the effect that Members should not comment on, criticise or make charges against a person outside the House, or any official by name or in such a way as to make him or her identifiable.
I remind our guests that their presentations should be of no more than five minutes duration if possible. Members have been circulated with the presentations that were submitted by today's attendees. I now ask Ms Ruth Taillonto make her presentation to the committee.
Ms Ruth Taillon:
We are pleased to be here to discuss the economic impact of Brexit on jobs and enterprise. The committee will be aware that the Centre for Cross Border Studies was established in 1999 to support and promote cross-Border co-operation on the island in the context of the imperative for cross-border co-operation embedded in the Good Friday Agreement. One of the areas where such co-operation can lead to positive outcomes for the two jurisdictions on the island is economic development. This is also an area that will face significant challenges in light of the outcome of the UK's membership of the European Union, in regard to which we may not have too many solutions today but some issues to raise.
The magnitude of the challenges will depend on the nature of the UK's post-Brexit relations with the EU and the extent to which Ireland's specific needs can be accommodated by the Commission and the other 26 member states, as well as the Irish economy's capacity to reorientate its exports focus from the UK market. The importance of the British market specifically to the economies of both parts of this island is such that any significant downturn in consumer confidence in that market arising from Brexit will have negative impacts North and South, including job losses. We have already witnessed the closure of several agrifood businesses this side of the Border due to the steep fall in the value of sterling in the wake of the referendum result. It is to be welcomed, therefore, that the Irish Government has identified the risks posed by Brexit to the economy, trade and investment and that its contingency planning includes the proposed introduction of measures to develop market diversification and strategies to tackle variations in the value of sterling.
Given our organisational focus, the centre notes in particular the Irish Government's inclusion of the need to monitor closely the impact of the UK's decision to leave on enterprise and trade in the Border counties, that how Border counties may be affected by a prolonged sterling devaluation will receive special consideration and that the relevant regional action plans for jobs will be revised accordingly.
Whereas Brexit will have consequences for the wider economies in both jurisdictions, it will perhaps be in the counties immediately North and South of the Border where we will witness the true nature of the post-Brexit environment in which businesses and those involved in economic development will have to operate.
In view of our particular focus, I would like to simply identify three challenges that the post-Brexit environment is likely to pose specifically for cross-Border economic activity and collaboration. These challenges, which we can discuss in further detail if members wish, assume that the UK does not opt to retain access to the EU's internal market and, therefore, will no longer be bound to accept the principle of freedom of movement of EU citizens. Currently, both the public and private sectors have the ability to widen their pool of labour and skills to include both jurisdictions on the island of Ireland. While there is no definitive data on the number of commuters who cross the Ireland-Northern Ireland Border to work, based on the available estimates, we think somewhere between 23,000 and 30,000 people are cross-Border workers. The UK's exit from the EU, particularly if the UK does not retain access to the Single Market, could have significant impacts on the situation of these cross-Border workers and on the continuing ability of businesses to employ workers from across the Border. We run an information services for cross-Border commuters and the number of hits on that website on 24 June was double its daily average for the previous month. There are a lot of worried cross-Border workers and commuters. It could have a real impact on employers' ability to employ workers from the other side of the Border. The current body of cross-Border workers also includes quite a significant minority of people who are EU citizens but not citizens of the UK or Ireland. This raises all sorts of issues, whatever the result of the negotiations, around some version of a common travel area might be.
The imposition of customs controls will not only have obvious consequences for businesses involved in cross-Border trade but will also reduce the effectiveness and even viability of all-island supply chains. This is something about which many businesses would be concerned, particularly those within the agrifood sector. All-island supply chains may also have to face the possibility of policy divergences between the two jurisdictions in areas such as animal health, plant health, food labelling, state aids, competitiveness and veterinary restrictions. The risk these challenges pose is that in some cases, supply chains will be shortened to within the confines of one jurisdiction with the consequent loss of economic activity to the other jurisdiction and the island.
Policy divergences and the loss of access to relevant EU funds for businesses and research institutions in Northern Ireland will also create additional difficulties in the area of innovation. This would also apply to universities, which I know are very concerned. A 2013 OECD study on cross-Border collaboration in innovation noted that the all-island dimension would be the most profitable way for both jurisdictions to support innovation and enterprise. However, Brexit could disrupt the potential for all-island co-operation in innovation and thereby undermine the ability of businesses to increase their competitiveness and bring new products to market. These are just some of the challenges that Brexit presents us with and they are certainly ones that apply to this committee. A collective failure to rise to those challenges risks an insularity that is fatal to economic development and that is particularly detrimental to a Border region that is already peripheral in the pre-Brexit context
Mr. Dan O'Brien:
I thank the committee for the invitation to appear here. It is a privilege for the institute and for me personally to address the committee. As a small country, strong rules-based arrangements with our neighbours are an eternal Irish interest. For more than four decades, the EU has provided such an arrangement with our closest neighbours. The departure of the UK from the Continent's most important political and economic institutions will bring to an end to a period in which the external environment has been as close to ideal for this State as could ever realistically be imagined in international affairs. Brexit will result in Ireland being pulled between the State's closest neighbour and the continent which is vital for our prosperity. The consequences are multiple, almost all of which are negative, not least for employment. Even if the opportunities are maximised, they will only partially offset the damage caused by the others.
I will focus on three issues in these opening remarks: currency, trade and investment. Irish exporters, and in particular indigenous Irish exporters, watch the euro-sterling exchange rate very closely because an adverse movement can wipe out their profits and threaten their businesses, as has happened to some companies already. Many things determine exchange rates but over the longer term, the economic outlook of an economy is among the most important factors. As there is overwhelming agreement among economists that Brexit will be bad for the British economy, the fall in sterling since the June referendum is unlikely to be reversed over the foreseeable future. This will make Irish made goods and services more expensive in the UK and require even more effort by businesses here to cut costs and remain competitive. This will negatively effect Irish employment levels and the only real question is by how much.
Brexit will reduce Ireland-UK bilateral trade over the longer term. Again, the only real question is by how much. Economists are almost universal in their agreement that the more barriers that exist to doing business, the less business that ends up being done. The UK's departure from the EU will mean new barriers to cross-Border commerce between the EU and the UK. If, as is increasingly likely, the UK leaves the single market when it leaves the EU, these new barriers will be considerable. This will impact much more on Ireland more than the other remaining 27 EU member countries, something illustrated by the relative importance of Irish trade with the UK. In 2014, before a very significant revision of Irish GDP, the value of Irish goods and services exports to the UK amounted to 17% of Irish GDP. This was the second highest among the EU-27 in respect of exports to the UK. For most other EU countries, exports to the UK are in low single digits relative to GDP. If Brexit was to result in a one-quarter decline in Irish exports to the UK, it would cause a very sharp slowdown in the economy here. If the economy was already growing slowly when the impact is felt, a recession would be all but inevitable.
Brexit will cause companies to change their investment decisions. This will result in both Irish jobs moving to the UK and British jobs moving to Ireland. Among the most traditional motivations for foreign direct investment is to jump over trade barriers that exist between countries. Rather than exporting from, for example, the US to Europe and paying tariffs, US companies over the decades have set up subsidiaries on this side of the Atlantic. This has allowed them to service European markets while avoiding costly tariffs. The higher the new barriers to trade between the UK and Ireland are after Brexit, the more likely it is that companies based in Ireland that service the UK market will have reason to relocate at least part of their operations into the UK. Such barrier jumping will lead to job losses in Ireland. Yet again, the only real question is how many.
However, jumping trade barriers works both ways. While Ireland stands to lose some jobs, it also stands to gain jobs from the UK as a result of Brexit. This is the only real upside for Ireland from the UK departing the EU. There are two broad potential sources of jobs. They are British companies that service the EU market and foreign companies in the UK that service the same market. As the UK has the second highest stock foreign direct investment in the world and much of that investment is EU-focused, there are considerable opportunities for Ireland. Both types of companies are likely to look to Ireland as an EU location into which investment and jobs can moved to secure Single Market access.
There are many other dimensions to Brexit that will be damaging to Irish economic interests. For instance, it is likely to make the EU less open to the world, something of particular concern to Ireland given its unique place in the transatlantic economy. It is also very likely to make the EU less liberal internally. The loss of a large partner with similar interests and perspectives on many economic policy matters will make the EU a less comfortable place for Ireland.
In conclusion, despite the opportunity to attract jobs from the UK, the other foreseeable changes flowing from Brexit are negative for the Irish economy and employment. The net costs, if indeed the UK does leave, will be large and felt over the very long term.
Dr. Martina Lawless:
We thank the committee for its invitation to us to come here today to discuss some of the potential issues for the Irish economy of the Brexit decision. Even before the referendum on UK exit from the EU took place in June, the impact on Ireland of a possible "Out" vote was being analysed at the ESRI with an initial scoping study published in November of last year as part of a joint research programme with the Department of Finance. This covered the areas where the most significant economic implications would be expected - trade, foreign direct investment, energy markets and labour movement - and pointed to the important issues to be assessed in more detail.
In the aftermath of the result, these topics are being investigated in greater depth reflecting the very considerable risks that Brexit brings to the Irish economy. Given the focus of this committee on jobs and enterprise, I will concentrate my comments on the trade and foreign direct investment, FDI, effects.
It is important to emphasise before discussing any particular issues that there is considerable uncertainty about the path that a UK exit from the EU might take and the nature of the relationship between the UK and EU that will replace full membership. Projections about the impact on Ireland can have quite wide ranges depending on the assumptions made about the exit negotiations and subsequent agreements on trade and migration. Already, before negotiations have even begun, we are seeing a negative impact on Irish exporters to the UK due to exchange rate movements. Whether these are short-term reactions to the uncertainty generated by Brexit or a more permanent adjustment in currency levels is too early to call.
Access to the EU market for non-members can take a number of forms ranging from free trade deals like European Free Trade Association, EFTA, to an individually negotiated deal such as the one currently being finalised between the EU and Canada to a more complete form of exit resulting in the application of the tariff schedule that the EU applies to non-members without a specific trade agreement under the World Trade Organization, WTO, rules.
Of these three broad scenarios, the EFTA model, which exists between the EU and countries like Norway and Switzerland, would have the most modest effect on trade as it is the closest in form to full EU membership. However, as this comes with significant obligations in the form of contributions to the EU budget and freedom of movement, the political feasibility of this option in the UK is open to doubt. An individually negotiated Canadian-style deal may be the most likely in the longer run but will be extremely challenging to have completed by the exit date of March 2019. This leaves the fall-back position, at least temporarily, of WTO tariffs being implemented on EU-UK trade. These would have considerable negative impacts on EU-UK trade overall and this effect would be particularly large for Ireland.
On average, the WTO tariff rates may not appear particularly onerous but the variation is considerable and, as a result, a WTO arrangement would impact trade quite differently across the current EU member states and across different sectors within each country. More than 5,000 individual products are listed with the WTO and tariffs applied by the EU on non-members without a specific trade deal range from 0% to 80%. To give an example of particular relevance to Irish trade, the tariff on fresh or chilled boneless bovine meat is 12.8% of the value of the product plus €303 per 100 kg shipped.
Our estimates suggest that Brexit is likely to reduce bilateral trade flows between Ireland and the UK by 20% or more. A more detailed look at the differing WTO tariffs by product type shows how unevenly spread these negative effects would be. Given the current structure of trade between the UK and EU, an application of WTO tariff rates on exports from the EU to the UK would result in an average tariff of 5.7%. The tariff on Irish exports however would be almost double this at 11.7%. The reason for this is that the tariffs are consistently higher on agricultural and food exports, which account for a much higher share of Irish trade with the UK compared to the trade of other countries.
Sectors such as agriculture and food would be most severely affected, both because the tariff rates on these sectors are higher and because these sectors tend to be more reliant on the UK as a main export destination. To give another example, average tariffs on meat exports are close to 50% and this sector accounts for 8% of Irish trade with the UK compared to 1.6% of total EU trade with the UK. On the other hand, some sectors such as chemicals and pharmaceuticals, which make up a large share of Irish trade with the UK, would face relatively modest tariffs. This variation across sectors, and therefore EU member states, will be important in the negotiation of a new trade agreement as there will be significant divergence in the priority areas of the 27 remaining countries. Encouraging greater diversification across export markets will be critical in mitigating this risk to Irish exporters.
In addition to the impact on exports, there are important implications for imports. The share of merchandise imports to Ireland originating in the UK is greater than the share of Irish merchandise exports destined to the UK. This is due to the heavy reliance of Ireland on energy imports from the UK, mainly natural gas and fuels, and also retail products. Importantly, UK retailers have a very significant presence in the Irish market and many products in the Irish retail market are supplied through UK based wholesalers, as the Irish market is relatively small. Trade barriers could result in higher prices and thus have an inflationary impact.
On a somewhat more positive note, there is an opportunity for Ireland to build further on its favourable reputation as a location for FDI in the wake of Brexit. The UK is likely to be less attractive to FDI because of the uncertainty of the Brexit process and reduced access to the EU Single Market once the exit is complete. The activities of the financial sector have been raised as a major issue for post-Brexit negotiations with the EU as current passporting arrangements to give financial firms in any member state the right to do business in any other member state would be in question. The loss of, or restrictions on, these rights could result in some firms deciding to move operations out of the UK. Some of this FDI may be attracted to locate in Ireland if access to the EU market is an important consideration. This upside should not be overstated however. The size of the UK’s domestic market will still make it an attractive location for some FDI projects and, for those that do decide to go to a different European destination, Ireland will have to compete with a number of other potential locations. Continuing the Government's strategy of low corporate tax rates and the cultivation of a business friendly environment will be key to maximising this potential positive dimension of Brexit, as would addressing any infrastructural deficits that might constrain firms interested in locating or expanding in Ireland.
One final important issue to which to draw attention regarding comparing the negative trade effects of Brexit with the potential FDI gain is that, even in the fairly unlikely scenario that the aggregate effects of these two impacts balance out, the timing and distribution of the effects are likely to be very different. The trade fall will have an immediate impact with potentially large negative employment effects disproportionately affecting Irish-owned small and medium enterprise exporters. Given that food exports are particularly vulnerable, the impact is likely to be hardest felt in more rural areas. On the other hand, the benefits of an increase in FDI are likely to take much longer to become apparent - firms may start to divert some new investments but not to reduce their current UK plants or to wind them down only gradually. There is also the possibility that if a large share of the diverted FDI is in financial services, it will be drawn to locate in larger urban centres leading to increases in regional disparity.
I thank the members for their attention and we are happy to take any questions.
I thank the witnesses for joining us today. Their presentations have been informative. I am not sure which of the witnesses would like to answer this question but what advice would they give us on implementing a contingency plan to minimise the negative effects Brexit and what would be their top two or three priorities? I attended the symposium that was mentioned and Mr. O'Brien said at the end of his speech that the UK may not leave the EU given the challenge that is ahead. I would like him to tease out his rationale for that.
Mr. Dan O'Brien:
I thank the Deputy for his questions. One of the reasons I did not mention mitigation is that it is very difficult to do much to mitigate this. We are a small country. It will be extremely difficult for us to do anything about whatever changes come about. As my colleague said before we came in, the best mitigation is to have no Brexit. That brings me to the Deputy's second question. I think everyone agrees, even the pro-Brexit people in UK, that this would be an enormously complex operation; to take a country out of the EU and unscramble all of the eggs that have been scrambled over the past 40 years and have a completely new arrangement with the EU is an unprecedented thing to do. The falling back on the WTO position is also uncertain because of the nature of the WTO and the uncertainty and unprecedented nature of an EU member state which is a member of the WTO but whose membership has only been in the context of EU membership for so long. It is even unclear how that option would play out for Britain, given the complexity of that and the economic costs, which will become more apparent as the months passed and as the Article 50 process takes place over the next few years. We can also take a reading of UK domestic politics in terms of interest groups, which did not run a very good remain campaign.
As happened here after the referenda on the Lisbon and Nice treaties, the second time around interest groups ran much better information campaigns when they realised just how big the consequences would be. There are also the regional constitutional dynamics within the UK. It would be easy to foresee, two years down the line, a situation whereby, due to their sheer complexity, the negotiations run into the ground, the costs of leaving become much more apparent to British public opinion and momentum grows for a second referendum either to reverse the result of the first or to have a vote on the actual exit options that are agreed, namely, either to stay in or to accept the options. There is quite a high probability that it will not happen at all.
Mr. John McGrane:
On how we should plan and what our contingency is, certain things are possible including how well we work together. For example, the conversation at national level needs to involve the public sector, Government officials, the private sector and civic society. The structures to run the conversation will be quite important. As has been alluded to and as everybody knows, this is a massively complex series of matters for us all to consider in the weeks, months and years ahead. It is not like anything else that has been done in recent times and, therefore, thinking about how we will have the conversations necessary to source information, to inform negotiators, to feed back, to test scenarios, to get impact analyses, etc. will be very important. Now would be a good time to think about the structures for those conversations.
As an example of one of the myriad line items that will come forward, in the education sector there is a significant opportunity now for Ireland to think about the loss of EU-funded research currently done through UK universities - including universities in Northern Ireland - which are at risk of losing significant funding straightaway rather than in time as a result of what has been determined in the referendum. Those universities have an opportunity to partner with other universities so that the opportunities are not totally lost. There is a strategic opportunity for Ireland to think how Irish universities might pick up some of that very valuable work. That is not without many operational issues and concerns, but now is a good time to run the scenario planning over what it might entail, how it might work and who would need to work with whom both in the sector itself and in other areas surrounding the sector. The Cassels report on how the university sector is funded in the long term suddenly takes on a new importance because there is no point in us telling the world we are open for new research business in universities whose future funding base is not yet assured.
All of that speaks to a national strategic approach to dealing with the short-term, immediate great burdens on exporters, for instance, but also beginning to think in the medium and long term about a change of regime for this country that is as big as when we joined the EU or indeed when we gained independence. This is a massive project and we need massive project management to deal with it very well.
Dr. Edgar Morgenroth:
I would like to pick up on those points as well. On the issue of the UK not leaving, Mr. O'Brien is right in pointing out that this is a very complex area and when the implications are clear to people, they may change their minds. However, there is also a danger that the negotiations when they start, because they are so wound up in detail, could be quite acrimonious. In fact, we could by accident end up with no agreement and default to a WTO situation. There is considerable scope for things to go one way or the other.
The scope for mitigation is limited but there are opportunities, as we have already pointed out, for example in the area of FDI. There are also opportunities in the area of education as Mr. McGrane has pointed out. There is scope for Ireland to attract additional students, on which the UK seems to be changing its mind. In the past it has been very strong at attracting highly talented students from around the world. Those could potentially be attracted to Ireland, which would be an obvious benefit to us.
We know from the data that SMEs are much more exposed to the UK market, with a greater share of their exports going there. They tend to operate in sectors that are likely to be more affected. There is some scope for policy to help them diversify their markets to help reduce that effect. There is a little bit of time to play at this point. We do not have a Brexit yet; it will be two years and a bit if it is going to happen. There is scope for policymakers to get involved there.
Dr. Anthony Soares:
I am delighted with the points already made such as, for example, on the opportunity represented by FDI. We need to be careful with that opportunity because, as has been mentioned, Ireland will also be competing with other EU member states to try to attract FDI that is either being invested in the UK already or that is planned to invest in the UK. In competing with other EU states, we need to be careful that it is not a race to the bottom in trying to attract that FDI. I agree that this is an opportunity for investing in higher education to increase universities' capacity to drive innovation in the economy. There are opportunities to draw down EU funds precisely for the purpose of innovation within universities, and also for universities linked with SMEs in particular, on which the EU is extremely keen. There may be opportunities there.
I totally agree with having a national, cross-sectoral conversation involving business and civic society as well as the public sector and Government. That cross-sectoral conversation is needed in order to avoid the possibility of a race to the bottom or seizing opportunities which end up affecting certain sectors thereby increasing economic disparities. It is particularly important that this cross-sectoral conversation happens.
On the urban-rural dimension, a recent Department of Finance report indicated a large proportion of jobs in four of the five sectors most exposed by the consequences of the UK's decision to leave the EU are in the Border region and in rural areas more generally. As we seize any possible opportunities, we need to look address those disparities.
Dr. Martina Lawless:
I wish to supplement some of the very good points made. We can take mitigation action on two different levels. At the level of the negotiation with the UK, obviously Ireland will be represented as part of the EU. A strong priority there should be to have the relationship remain as close as possible and try to avoid any acrimonious disputes. It would be better for Ireland to maintain the maximum level of integration of the UK with the EU. I agree with Mr. O'Brien that Brexit may not be 100% guaranteed but that it is most likely. We certainly need to avoid the hard Brexit scenario and the WTO default by conducting the negotiations in the closest way possible.
There is exposure for Irish-owned SMEs and, in particular, those in food and smaller products. There is still a role for policy to encourage greater diversification of these firms to a wider range of export markets and to do the latter at as early a stage as possible in order to make big firms aware of a wider range of export opportunities.
Wider export diversification is probably a positive thing for these SMEs in any event because over-reliance on a single market, particularly one with a different currency is always going to be slightly risky. This is a general policy objective that would be valuable for Irish SME exporters, even if the Brexit negotiations did get overturned.
Ms Ruth Taillon:
I have to make a plea to think of how integrated the economy in the North is, particularly in respect of agriculture but also in respect of the universities which will be very much out in the cold. On the assumption that we will have some version of Brexit, hopefully we will not but it looks increasingly likely, one thing the Irish Government could do in the diplomatic discussions is consider the particular impact of the loss of EU funding, not just in economic terms but in terms of the isolation factor, of having our links to our European neighbours cut off. We were considering some of the possibilities for potential replacement funding streams or ways to go about this. It depends very much on the UK Government's attitude to putting money into the budgets. The European neighbourhood partnership initiative has been shaped very much like a Brexit for external borders. That could have great potential if the UK and Ireland came together and set up a programme which not only allowed us to co-operate with Wales, as the southern side of the Border has done with an EU initiative for inter-regional co-operation, INTERREG, programme. We have been able to bring Scotland in to work with the rest of the island. Given the new circumstances and the political upheaval we would like to have some version of a programme that allowed us to reach out to other sectors of the UK. INTERREG in particular has been innovative and allowed the universities get in. There has also been the peace programme. If there was some way of keeping the Horizon 2020 and the financial instrument supporting environmental, nature conservation and climate action projects throughout the EU, the LIFE programmes going between these islands could be very important for us, whichever way Brexit goes. We are considering it from the point of view of the social impact, on jobs and so on, and of the relationships we will lose through being cut off from EU civic society networks. People not involved in them do not know about them but they have had valuable impacts on everybody on this island.
We heard from the witnesses today and those who were here last week about two main ways we can help business and small businesses, diversification was one. The second was in respect of buffering the effects of foreign exchange fluctuations and hedging. What exactly can the Government or the State do to help business, bearing in mind that it will be a real money issue, a demand on the Exchequer and there might be state aid implications? How do we prepare to help business face the challenges of the exchange rate problem?
Mr. John McGrane:
The State cannot magic away the reality of what has happened as a consequence of a democratic act by a neighbouring state. As a result the markets have regarded the value of sterling as significantly weaker than it was before. The State can do some of the things already discussed, support to help diversify for companies which can consider reducing their dependency on sterling trade into other markets and give qualitative supports rather than handouts, in terms of market development. Enterprise Ireland and others do very good work in this area.
A total of 40% of the exports of our indigenous exporting firms goes to the UK. That is significantly more than the exports of our international foreign direct investor friends who export only 16% to the UK. Those indigenous firms are in many cases family businesses, not only in the urban metropolitan areas but all around the country. Those indigenous firms create more new jobs in the economy annually than foreign direct investment firms. They are very important at every level. Encouraging them to diversify their markets, to open up new lines of sales into France, Germany or China, for example, is good advice but it is extremely difficult for the firms involved to put into effect at any kind of reasonable pace. That takes a long time to do. Ireland exports less to the UK now than it did 20 years ago as a proportion of our total exports but that is because we have been very good at developing other lines of business more globally, including with the help of our EU membership. It is not realistic to think that many Irish firms can simply switch to other markets. In the short term the solutions are hard work for some of those firms, they have to concentrate on being more innovative to find other ways to reduce their costs. Some will need to respond by thinking about moving some of their cost base to a sterling cost base. In the simplest terms, a call centre in Dundalk has the operational choice to unplug the phones in Dundalk and move them to Newry. That is not a facile example because a call centre works on margins of less than 15%, which are pretty good margins but the currency has slipped by 17% so those call centres are losing money and they need to think about their options to save the business and such jobs in Ireland as they can save by diversifying into the sterling area.
Some of the firms that rely on exports to the UK can be helped to stomach the reduction in the unit value of their sales to the UK because of sterling collapse by opening up additional sales into the UK. That is slightly counterintuitive but they may be able to compensate for reduced unit margins by increasing overall volume, depending on other factors in their cost formula. It is definitely worth keeping on the list to think about firms which know how to do business in the UK but could get more customers in the UK and might be helped by Enterprise Ireland and others.
Dr. Edgar Morgenroth:
I agree with everything Mr. McGrane has said. It is not so long since the exchange rate was last at the current level, it was 2010. Many businesses have had to live with these kind of fluctuations for a long time. For some, particularly those on low margins, that tends to be a struggle. Others work through it and the exchange rate tends to move again and in the long run it is not a problem for those firms. They have also benefited in recent years when the exchange rate was favourable. It is very difficult for a government to buffer the exchange risk because the risk is potentially infinite. If the exchange rate continued to move and firms traded more it would be difficult to fund that. The state aid rules, which the Deputy mentioned, would come into play. That is going to be a tricky thing and for some firms it is potentially a terminal issue, if their margins are very small exchange rate movements can wipe out their profits and businesses can fold. That does happen and it could have happened under other circumstances not to do with Brexit where the exchange rate moves.
I would like to be as upbeat as some in thinking it might not be a hard Brexit or that we will have some other version of it but it is hard to see that at present. I am concerned that we seem to be disjointed, though not politically because all the parties are pulling together.
It is more a question of our general approach. We have so many different Ministers. Brexit is being discussed at this committee and it was a hot topic at the agriculture committee last week as well. The Taoiseach has been leading on this, which is great, because he is the leader of the country. I am keen to hear the opinion of the deputation on the possibility of a dedicated Minister to deal with Brexit. I believe the idea has merit, even if it was by way of a dedicated Minister of State. It would show the seriousness of the situation and how seriously we are taking it. I fear that among different sections of responsibility, things could fall between the cracks. I am curious to hear the opinions of the deputation. What if we had a particular Minister focused on Brexit? The British side has a senior and junior Minister dealing with the matter. What if we had one point of contact instead of various Ministers dealing with their portfolios with perhaps some elements falling between the cracks?
Dr. Anthony Soares:
I completely understand the point. Scotland has a Brexit Minister as does the UK Government. Senator Davitt referred to the approach being perhaps disjointed, with various Ministers and Departments each looking at what they can do.
We should bear in mind the UK Government approach to Brexit. We can describe it as disjointed too. It is difficult for another government that is trying to look at what it can do to mitigate the UK departure from the EU when the UK Government either has no wish to show its hand in terms of its plan for Brexit, or, if one were to be more cynical, perhaps, one might take the view that it does not have a plan. It is difficult for other governments to have a strategic or joined-up approach when we do not know the approach from the departing member state.
Perhaps there is some benefit to having a dedicated Brexit Minister, but at least there should be a strategic joined-up approach on the part of the Government, all political parties and all sectors in business and civic society in Ireland. As representatives of the Centre for Cross Border Studies, we advocate a North-South approach in dealing with this issue. A strategic approach would be good, but it is difficult to be strategic when we do not actually know what the departing member state is thinking or what its plans are in terms of the type of Brexit it wants.
Mr. Dan O'Brien:
I fully agree with that. When the people who are deciding what they want do not know what they want, it is very difficult for us to know what we want. I will use slightly different language. It is rather difficult to be strategic when we cannot see the overall picture. Therefore, it is a question of tactical flexibility after the invocation of Article 50 at diplomatic and Government levels. It will be about looking at specific issues and prioritising issues. Ireland will have a limited role and input into the overall picture because there will be 26 other member states as well as the UK on the other side of the table. It will be a question of being flexible and choosing the issues where most influence can be exercised.
It is important to point out that Article 50 works under qualified majority voting. People have said that we will have considerable clout because we could veto it, but there is no veto on Article 50. There will be a veto when the EU-UK comprehensive trade arrangements are negotiated, but there is no veto on Article 50. That limits the options further.
Dr. Edgar Morgenroth:
The point about being disjointed is interesting. Having engaged with various colleagues throughout Europe on the issue, I reckon Ireland is perhaps the best set up for Brexit. We have done far more research on the question than almost any place else, other than in the UK, perhaps. Indeed, as Dr. Soares has noted, it is not actually clear where those responsible in the UK want to go. We are clearer here about where we do not want to go, more so than anywhere else in Europe, and that is a good thing. That is not to say we cannot improve or bring more of our analysis and views together. We can probably do better in that regard.
I thank the witnesses for their presentations. They have been very good. Dr. Soares made a particular comment. I watched the news following the meeting with Theresa May. The comments of Nicola Sturgeon will stick with all of us. She said that after a two-hour meeting she had learned nothing and had nothing new. We are all in a situation whereby we do not know what Brexit is or where it is going.
As part of her contribution, Dr. Lawless referred to opportunities for foreign direct investment in the light of Brexit. She highlighted the need for us to increase and develop our infrastructure throughout the country. Can Dr. Lawless elaborate on what she had in mind specifically on the question of developing infrastructure in the light of Brexit to make us more attractive to foreign direct investment?
Dr. Martina Lawless:
One issue that has come up is the potential positive impact of movement of some foreign direct investment from the UK to Ireland to maintain access to the EU market. A number of issues could arise. IDA Ireland has always had a regional balance objective as part of its work in attracting FDI and in its negotiation with FDI companies. Given that we see the trade impact falling heavily on rural areas, perhaps these efforts need to be redoubled. Perhaps IDA Ireland needs to ensure that any additional FDI is reasonably balanced and to try to compensate areas that are hard-hit by the negative trade effects.
More generally, there are issues of capacity. Even in Dublin, there are issues with office space, residential space and broadband structure. If we were to go after a large increase in once-off FDI that might be relocating from the UK to Ireland, then it is important that the capacity is in place in terms of physical infrastructure and links with the university sector, a point to which Mr. McGrane has adverted. Other relevant factors include human capital or labour availability for FDI companies to maximise whatever potential gains exist for Ireland.
This applies to financial companies in particular but also to FDI companies more generally looking to move from the UK and perhaps those no longer considering the UK as a location. Some companies may be deciding to move somewhere else in Europe. We need to have Ireland at the forefront of alternative locations.
FDI companies coming from the United States may have been looking at the UK or Ireland as a location because of language, education and cultural similarities. Ireland is well placed to get a share of any relocated FDI, but it is important to continue all the Government policies that make Ireland an attractive location. Ireland has always had a disproportionate amount of FDI facilities relative to other European countries because of our business environment, language, education facilities and so on. It is important that we are not held back from taking the greatest possible advantage of the opportunities by not having the capacity in place in the areas where companies are considering relocation.
I have a follow-up question. What is the view of Dr. Lawless on the potential for chaos or whatever after Brexit in the context of the regional plans we have in operation? Are these plans fit for purpose or do they need to be revisited?
Dr. Martina Lawless:
In the case of FDI that might be looking to move from the United Kingdom, it is important to keep regional balance in place. That is an important focus at FDI level and in the context of support for small and medium-sized enterprises and diversification, a point that has been raised several times.
Any job lost is a major concern, but my concern is that losses are more likely in regional or rural areas. This is somewhat different to additional foreign direct investment that comes back into larger urban areas. We have a problem with spatial strategy and delivering jobs to regions. I am deeply concerned about that.
Mr. John McGrane:
I am keen to expand on that point. I am just back from working in London in recent days. I would not underestimate the degree to which representatives of other European cities and nations are pitching in the UK. They are making the case for their locations as preferable over Ireland, Dublin and the regions. They are claiming their locations as the best alternative locations for UK businesses and agencies that now have a business need and a franchise need to find an assured base inside the European Union.
Nationally, we were shy about this in the early weeks post referendum, but people now understand clearly that there is a need, not necessarily to exit, but to find additional bases inside the EU and that it is legitimate for Ireland to present itself as the best alternative or additional home for such businesses. Therefore, the Government's endorsement today of a bid for the European Medicines Agency and the European Banking Authority to migrate to Ireland in due course is welcome.
As has been noted, there are normal questions about the adequacy of our capacity in terms of offices, homes, schools and regulatory will to host additional business, not just in Dublin but, importantly, in the regions. A common strand in this discussion is that of a national strategic approach, even prior to knowing all of the detail. We should have a national strategic approach to this matter more widely to determine whether we are ready for the next phase of Irish national development. It would be applied to questions about, for example, what the Government has done to address housing capacity issues, ensure that office space comes on stream without delay, introduce baccalaureate programmes for international students and schools and, critically, ensure beyond any ambiguity that the financial services regulator is not in the marketing business, but the supporting business in respect of an industry that is set to expand significantly on the back of some of these developments.
It is important that we be ready for Brexit in Dublin and the regions. It is also important that we have a nationally joined-up receptiveness and presentation to those who might want to do business with us.
I thank the witnesses for their presentations, which have helped to stimulate a great deal of thought on our side of the table. I agree that there is probably a mixture of businesses that do not know precisely what they want or when they will do it and those that do not wish to reveal their hand. It is difficult for us to anticipate, but we know that certain things will happen even if they never leave, namely, the impact on our exchange rate and the effect of that on our exporters.
Will the witnesses expand on the question of job opportunities? I have in mind English-speaking schools. A few years ago, I spoke with the Indian ambassador. There were only 1,000 Indians in Ireland learning English whereas there were more than 100,000 Indians learning English in Britain. That presents an opportunity, especially with the somewhat difficult approach expressed by some people in the UK to immigrants.
Will there be export opportunities for Ireland if barriers are erected in the UK? Where the UK exports products to the rest of the EU, an opportunity will open for people within the EU.
I am not saying that any of the witnesses is an expert on another matter that I wish to touch on, but if the UK exits, the debate on fishing and quotas will reopen. We forwent opportunities many years ago in order to achieve a better outcome for our farmers. Interestingly, Australia is not prepared to do any trade deal with the UK until it has exited. This may be reflected elsewhere.
The 26 other nations were referenced. As we saw with the Comprehensive and Economic and Trade Agreement, CETA, regions within EU states can have an impact. The UK's exit will be a long and drawn-out process. We will have opportunities, but we will need to stay alert to the changing dynamic. Will the witnesses expand on the question of job opportunities and the implications of a default to a WTO arrangement?
Mr. Dan O'Brien:
I thank the Senator. I will address two issues. I will admit that I have not thought about the Common Fisheries Policy, so I cannot comment on it. Regarding jobs, something that does not get enough attention is the question of small and medium-sized British companies of 200 or 300 people that export into the EU. They are a potential target and may wish to move a part of their operations into the EU. There tends to be a major focus on finance and the large multinationals that we have traditionally got, but there is a considerable opportunity in respect of small to medium-sized export-focused British companies that depend on the EU market, in that they will be interested in jumping over barriers, avoiding customs problems and moving. A British company that is not a multinational already will not be used to working in another country, so coming to a common law jurisdiction where English is spoken would be particularly attractive to a 200-person British company. Even more than the Netherlands, Ireland is by far the most obvious place.
On a slightly less negative note, the WTO mechanism has a liberalisation bias. One can unilaterally cut tariffs, but one cannot unilaterally increase them. In the 1830s and the early days of the industrial revolution, Britain decided to opt for a cheap food policy. At the time, there was a large debate in Britain about what it should do with tariffs. It went down the cheap food route. Dr. Lawless discussed how high the tariffs could be, but it could also go the other way and Britain might decide to opt for a cheap food policy and cut tariffs for everyone. There would be many complexities involved in reaching that point, but if Britain leaves the customs union when it leaves the Single Market, which seems likely, it will be in a position to reduce tariffs on goods and services unilaterally. In particular, it could choose a cheap food policy as a way of mitigating the other costs of Brexit. The cost of New Zealand dairy and Latin American meat relative to the prices in Europe is much lower. That would pose an even greater, perhaps even existential - it is an overused word - challenge to the food industry in Ireland, given the importance to it of the UK market. It could present an even larger risk.
Dr. Edgar Morgenroth:
I mentioned the potential to attract students to the third level sector. Likewise, there is a potential to attract students to the second level residential sector. Mutterings around immigration might make people reconsider the UK as a potential location, so there is clearly an opportunity.
Picking up some of the UK's lost market share in Europe may be more difficult. Ireland exports a great deal of food product into the UK, but the UK does not export a great deal of food product into the rest of the EU. There will not be a large market to be gained. There will be considerable action in the negotiations around the car industry. The car industry is the top merchandise exporter in approximately 20 of the EU's 28 current member states and the supply chain linkages are extreme. Ireland does not have a significant presence in that market. There are some firms, but not many. There is probably little opportunity in that regard.
There may be scope in the engineering sector, in which respect the UK is still strong. Opportunities could be pursued and the enterprise agencies are well placed to identify and take proactive measures in that regard.
I must also admit that I do not know much about fisheries. Iceland did not join the EU because of concerns about fisheries. With the UK out, it may want more rather than less of Europe's fisheries. I do not know what will happen in that regard, but the UK might become more aggressive.
Mr. John McGrane:
To add to what has been said in response to the question on opportunities, there already are some Irish firms in professional services supplying services to UK companies where those UK businesses are now coming under pressure inside their own market for lack of business locally because some major projects have been cancelled or deferred. Business has a political element and it responds practically right away to the circumstances. I can give a characterised example around an Irish project management firm working with a UK construction firm. The UK construction firm is seeing a fall-off in local demand for major projects, including civil and other elements. Arising from that firm's scale in the UK, it also has the ability to perhaps contract for business in the Middle East. Both of those firms are now working together in the Middle East on contracts outside the EU. They already have a successful partnership and they both responded to uncertainty and reduced demand in the near market by travelling further afield together. I would not underestimate the inventiveness and skill level of many of our great businesses in that regard.
The UK gets 53% of its imports from the EU, which is a very substantial amount of product coming into the UK from EU countries, the greater part of which is not from Ireland by definition but from other EU countries. There will be very good opportunities for Irish businesses who establish a base inside the UK to replace some of that EU import business in areas where we have a competence.. There are many ripple effects from what has been happening already. For Irish businesses that are ambitious, reasonably funded and intent on building good relationships to extend their businesses, there are opportunities to work inside the still very large UK market of 60 million people to pick up the business the UK will still need to be provided for, to replaces others who may lose that business.
Dr. Anthony Soares:
This comment may be beyond the remit of the committee but as the Centre for Cross Border Studies, the nature of our organisation means we work on both sides of the Border, in both jurisdictions, and we also work within an east-west relationship. We are talking about opportunities for this side of the Border in terms of attracting lost market share from the UK and getting jobs into Ireland. Some of those jobs could perhaps go from North of the Border to South of the Border. There may be a couple the other way, such as a call centre moving from Dundalk going to Newry. It is part of this discussion we are having. Discomfort has been caused by the UK referendum and we are now talking about the two jurisdictions on the island of Ireland perhaps setting up to compete against each other, which puts paid to some of the talk around an all-island economy or all-island supply chains. Those will become more difficult to achieve. Exporting companies, small and medium enterprises etc. on this side of the Border saw some elements of their final product coming from the UK and, in many cases, North of the Border. This is just to voice that discomfort and sense of concern in terms of economic policy. As we are discussing this, we are talking about divergence in terms of economic policy and the directions being taken North and South of the Border.
I welcome Ms Bríd O'Brien, head of policy and media, Irish National Organisation of the Unemployed; Ms Patricia King, general secretary, Irish Congress of Trade Unions, ICTU; Dr. Tom Healy, director of Nevin Economic Research Institute, NERI. They will present as a joint ICTU-NERI delegation.
Before commencing, I wish to advise the witnesses that, by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that Members should not comment on, criticise or make charges against a person outside the House, or any official by name or in such a way as to make him or her identifiable.
I remind our guests that their presentations should be of no more than five minutes duration, if possible. The presentations submitted by today's witnesses have been circulated to members. I ask Ms O'Brien to make her presentation.
Ms Bríd O'Brien:
I am speaking on behalf of the Irish National Organisation of the Unemployed, INOU. The organisation has more than 210 affiliated organisations, which work on issues ranging from unemployment and community development to disability, Traveller and other issues, and over 2,000 individual members. They are people who are either unemployed, some in receipt of a payment and others not, or are on a variety of working age payments. The organisation works on providing training and welfare rights information services, analysis of Government policies and related advocacy work, and works with a range of other organisations on issues of common concern.
We are conscious that all the headline statistics are moving in the right direction. There is an increase in employment and a decrease in unemployment. However, we are keenly aware, from feedback from individual members and affiliated organisations and from our other work, that many people are not experiencing this improvement. Looking at the breakdown between full-time and part-time employment now and the pre-crisis period equivalent, when employment was at its highest level, it is striking to see that 82% of people were in full-time employment before the crisis while the current figure is 77%. The feedback we get from affiliates and individual members indicates that in their area or line of work, much of the work on offer or available to them is often part-time or piecemeal. That is an issue of concern. Given the debate and uncertainty around Brexit, people feel this could be exacerbated in the coming period.
One statistic one always wishes to bring to people's attention is the potential additional labour force. It captures the number of people who have not answered in the affirmative to the two questions one must answer in the affirmative to be classified as unemployed. One question is whether the person has been actively seeking work in the past four weeks and the second is whether the person is available to take up work in the next two weeks. If one has not been looking for work because one has lost heart, one will answer "No" to the first question. If there are child care, transport or other logistical issues to be resolved, one might not be able to take up work within a two-week timeframe so one might answer "No" to the second. A person might answer "No" to both questions. The potential additional labour force stands at approximately 40,000 people. It is a figure to bear in mind, because it often denotes people who are more distant from the labour market or have other challenges that must be addressed. Among the challenges, as the Oireachtas is keenly aware, are issues with child care and transport. They are considerable issues in rural areas but they are also issues in urban areas of disadvantage.
The striking aspect of the debate about Brexit and the reality of Ireland's trading position is the fact that Britain is still such a huge trading partner for Ireland. Even though the percentage is down, the income generated and the value of the exports still amount to considerable sums of money. The challenge facing Ireland is how to preserve that or, if that is not achievable depending on the nature of the Brexit, how to substitute for it. How do we plan for that and what must we do to ensure that happens? One of the striking features of some of the reports Enterprise Ireland has produced is that it is usually the firms that were more open to being innovative and co-operative that often had the better results and better employment results. We note that because many of the changes that have taken place in employment services, education and training services and in activation supports and policy do not lend themselves to innovation or co-operation across a range of providers. Being innovative and collaborative in the approach to public policy making and the roll-out of services will be critical to trying to address the challenges we currently face and are likely to face as Brexit is rolled out, if there is to be a positive result.
Most of our concerns are around the impacts on people who are unemployed or people who could be facing unemployment. For a long period of time this State has relied on emigration as a safety valve for unemployment. Even though Irish people travel to all parts of the planet, the main outlet for our people is often the country next door. That will be a consideration, depending on the nature of the Brexit we face. From our perspective, we would like to have a very good analysis of enterprises and jobs, the assessment of those that will survive, manage or thrive and, for those that will not, how to plan for their employees either creating their own jobs in a different enterprise or being able to seek employment elsewhere. How do we map out those journeys for all those people who could number many thousands? One exercise we must undertake as a nation is to examine how to address that. In the meantime, we must not lose sight of those who remain unemployed. Among the feedback we receive is feedback from people who are older and unemployed. They find that although many of them might have good skills and experience, getting back into work once one is beyond a certain age is very difficult. As one individual said to us, being unemployed, over 50 and living in rural Ireland is no joke. Many people living in urban disadvantaged areas would echo that sentiment.
As we plan for the potential negative impact of Brexit, and perhaps for the opportunities it will throw up, and try to ensure that those who are unemployed or become unemployed are not left behind as these developments take place, we must build services that have the capacity to ensure that we do not lose sight of the issues and inequalities currently in our labour market for those who might be facing structural unemployment, long-term unemployment or who come from families and communities where it has been a while since anybody has been in work. How to address that is among the challenges that face us. Also, when rolling out plans such as the Action Plan for Education and the Action Plan for Jobs, how do we ensure that those policies are truly equitable and inclusive and that we plan in a way that does not leave others behind? It should be borne in mind that even at the height of the Celtic tiger economy many people were left behind, with many people in jobless households. They were in particular communities and came from particular backgrounds. We must ensure that does not happen again.
We believe it is important that there is good planning and good cross-agency and cross-departmental co-operation and interaction. We must get a good handle on it and plan it out well, and ensure that the supports and services for unemployed people are meaningful, well informed, good and proactive whereby people can feel that they can make an informed choice and have a secure future in Ireland. One of our concerns about the recent budget is that in many respects no additional resources were put into some of the educational and other supports unemployed people access. Depending on the nature of the Brexit that takes place, ensuring that there are alternative education and training supports and that they have the capacity to engage with those who are unemployed or are likely to become unemployed will be critical.
Dr. Tom Healy:
I thank the committee for the invitation to present. My colleague, Mr. Paul McFlynn, who is Belfast-based, cannot be here today. I will speak briefly about the issues of jobs, employment and trade, which have been highlighted in the document presented jointly with the ICTU. This very much reflects our thinking and analysis at the moment of the risks, as well as the opportunities, in respect of economic matters.
The first key point is that we need to diagnose the scale of the problem and the scale of risks. Some analysis has been undertaken by the Department of Finance on sectors of manufacturing that are vulnerable. That includes agrifood and many other sectors. Perhaps surprisingly, the pharmaceutical industry, which is not generally Irish owned, is also vulnerable because of the extent of its trade links with the UK. There is also the issue of energy, as we are reliant on imports of oil and gas from the UK. In so far as the Government is in a position to begin to respond to some of these challenges, it is vital that we know the scale of risks and problems, and that we map the extent of exposure and risks across the sectors. There could very well be a role for many actors, including employers, unions and Government, to assess what needs to be done in the short term in particular, if there is a risk of redundancies and firm closures.
The second key point is the important of retraining and equipping workers at risk of redundancy. There is surely a role here for the European Globalisation Adjustment Fund, which has been successful to some degree in respect of transitions in the past. Brexit is potentially a major shock to the labour market, especially in particular regions. My sense is that the Republic may well gain in areas such as financial services but there is no automatic mechanism by which workers in the mushroom growing industry in County Monaghan, for example, can be transferred painlessly and seamlessly to the IFSC in Dublin. That would be generally recognised and, therefore, this represents a major challenge.
The third message is investment. In so far as we will need to equip firms to divert trade to non-UK markets and to develop new product and service lines, there is a need for strategic investment in new and existing enterprises. There ought to be an expanded role for the Strategic Banking Corporation of Ireland to interact directly with enterprises to equip them not only with finance, but with advice and strategic marketing support, where appropriate. Clearly, the work of Enterprise Ireland and the IDA are also crucial in this regard.
Fourth, the wider debate in the EU about fiscal rules needs to take into account the potential shock of Brexit for manufacturers and producers across the Union, especially the island of Ireland, which is most vulnerable. There is a cogent argument here for adapting the fiscal rules to accord some flexibility in capital investment.
The final point relates to energy. There is a role for the Northern Ireland Executive and the Government to ensure the single energy market for electricity is safeguarded and energy supplies in so far as is possible are secured into the future because we are very much dependent on fossil fuel imports, much of which come directly from the UK.
All this uncertainty and challenge throws up an opportunity to rethink our long-term enterprise strategy away gradually from one of over-dependence on foreign direct investment to a much stronger export-oriented indigenous economy. This challenge has been posed for countries such as Finland, which went through an enormous economic shock in the 1990s, not least associated with the collapse of the USSR, to a relatively successful economic performance following many years of difficult transition.
The final shape of Brexit will determine outcomes for the Republic of Ireland. By far the most preferable outcome would be some form of customs union for the UK and the EU. If that were possible, then it is not impossible that Northern Ireland could remain within the EU whatever the precise constitutional arrangements in the long term there. That would be hugely beneficial to people across the island of Ireland, in the absence of which the complications in respect of free movement of people and goods, services and rules of origin would be extremely challenging. It would not be at all in our interest if such were the outcome of Brexit.
I thank Dr. Healy for his presentation, which is one in a series of presentations to the committee. The trade union movement has a valuable role to play as a social partner in the Brexit discussion in terms of informing us and we welcome Dr. Healy in that context. It is an obvious statement but it is a worrying time for workers but, equally, it is a worrying time for workers in the UK because over the past 40 years, the EU has set a high bar in respect of employment standards and how they should be applied. There has been a significant contribution at that level. With the advent of Brexit, have ICTU and NERI discussed with their colleagues in the UK the threat it may pose and the implications for Ireland? Will it drive down costs in the UK? Will it exacerbate the potential threat to our industries? Dr. Healy instanced the mushroom industry. What are the views generally of union colleagues in the UK?
Ms Patricia King:
I will bring a number of things to the Deputy's attention on it. We are, of course, in contact with our colleagues in the TUC, STUC and WTUC because there are circumstances for the TUC that it never expected to be engaged in. The general secretary of the TUC had a meeting here with us and then the Minister for Foreign Affairs and Trade also met her. One of the key issues is how hard-won rights and protections, mainly derived from EU legislation and directives, will be maintained. There are worrying signs in this regard. First, the British Prime Minister has indicated the big repeal Bill. What happens when all the current legislation is repealed? What will it be replaced with? Clearly, there are issues and there is huge uncertainty but people are guessing.
Submissions are being made in Ireland, particularly related to the manufacturing industry, by IBEC. In its view, an average manufacturing worker - and it links itself to the National Competitiveness Council for these figures - earns £6 more than his or her counterpart in the UK. It is arguing that labour cost is one of the key pieces for it in terms of competitiveness and if its members are to continue to trade with the UK, as they wish, this issue will have to be dealt with.
IBEC reference labour and capital costs as the two major issues, however, in any submissions it majors on labour costs. IBEC relates it greatly to currency fluctuation. During recent weeks, there has been much fluctuation. While it may be settling a little during the past week, in the previous weeks it has been volatile. IBEC judges that if the currency went to a value of 90 cent, we would be talking about an hourly rate difference of approximately £7.50. We know where this is going. Workers will probably, in some cases, be involved in a race to the bottom. The only way companies will be able to continue to trade and do business will be at the lowest possible price. These arguments are being made.
Dr. Healy made a point about displacement. However, while the financial services may produce jobs, they are no use to those who are losing manufacturing jobs in one part of the country. All the statistics point to the fact that the jobs we are talking about, in many cases, are in indigenous industries and regionally based. Particularly in manufacturing, we could face a very strong shock, depending on how it pans out. It was very early in the day when we met the Minister for Foreign Affairs and Trade, Deputy Charles Flanagan, with the TUC general secretary. We made the point that we needed the Minister to say he would argue on behalf of Irish workers, that part of the deal is not to produce a race to the bottom, that EU directives will have to continue to apply here and that it will not be delivered on the backs of people who will either lose their jobs or have their incomes reduced as a result of it. From our perspective, it is very worrying.
Deputy Niall Collins said he felt the trade union movement had much to say on this and indicated that it was proper that we be involved. This is not necessarily the practice. There is a consultative stakeholder consultation committee in the Department of Agriculture, Food and the Marine. I have had to write to this committee. Everybody is involved in the consultation committee, except anybody who represents a worker. Thousands of unionised workers in the food and beverage industry, who are covered by collective agreements, are being talked about at the consultation committee. They have farmers, producers and representatives of small firms, but not a sign of a worker. We were not alerted that the consultation committee was being established. We found out in the usual way one does. I have contacted the Secretary General to ask the Department's intentions about inviting us.
As has often been the case in history, when companies get into severe difficulty, very often the trade union is the only group that goes in and tries to save the day. I have been involved in a number of them over the years. This is not an empty or vacuous claim. Only for the collective agreement which the trade union movement hammered out, Bausch and Lomb would have been gone, which would have been a major loss to the country in terms of jobs. I was involved in it and I know the details of it. Given that the people most likely to lose are the workers, I do not understand why the Department of Agriculture, Food and the Marine has taken this approach. We hope we have something positive to offer. Dr. Healy mentioned retraining. Manufacturing is strongly unionised, we have very good insight into this, and why people would not want to tap into our insight is beyond me.
I thank Ms King for her comments. I am shocked to hear the trade unions were not invited to the committee. It is a deep concern of mine, given that the jobs that have already been lost are in this sector. Small farmers and food producers are the ones under major pressure. IBEC's first statement after Brexit was that wages would have to be considered, which is a deep concern and I will appeal to the Minister for Agriculture, Food and the Marine to ensure all the unions are represented, not just in the consultation committee but in every group. Workers are the ones who will be most affected by it.
Dr. Healy spoke about strategic investments in infrastructure as a result of Brexit. I presume he referred to housing and schools, not just roads and buildings. He also referred to the fiscal rules and how they limit our ability to respond to Brexit. Could he elaborate on it? ICTU's briefing document, Brexit: The Key Issues, stressed the need for more investment, for the Government to work with our European partners and change our capital investment under the fiscal rules. Could he elaborate in it?
Dr. Tom Healy:
The key point about public capital investment is that there are areas that require a co-ordinated State intervention, in some cases in co-operation with private enterprise. We are vulnerable in renewable energy, given that EU climate change regulations will probably no longer apply in the UK in the long run, and this may affect our trade in renewables. We need to invest more in renewables and this will require a State-led investment initiative. The overall level of public capital investment probably needs to be doubled, as a percentage of GDP. We need to invest more than 4% of GDP instead of just under 2%. The EU fiscal rules in this regard are not helpful, given that they treat investment in exactly the same way as Government consumption. The inflexibility of the rules on the composition of investment needs to shift. For example, much construction activity in the health and education sectors must take account of new EU regulations on energy consumption. For example, the regulations on school construction are much more rigorous, and this is probably adding up to 20% on costs in addition to recent estimates. This is an example of where fiscal rules need to allow member states to operate on a much longer timeframe and take a view that this upfront expenditure will have an economic return in the long run.
Although my comments are very much focused on the economic and employment implications of our response to Brexit, I underline the importance of the challenge for all of Irish society and the need for a whole of Government approach. It crosses all Ministries and requires careful consideration from an economic, social, legal and constitutional point of view. It is probably the most significant challenge we have faced in many decades and, I am afraid, it will be with us for many more years. The upside is that we have an opportunity to question the existing economic and social model we have and this may be a very good opportunity - the best of times and the worst of times - to make a new departure and a real difference in the way we do business.
Dr. Tom Healy:
Particular sectors are very vulnerable, especially food and beverages and pharmaceuticals, but also other enterprises affected in their supply chains. While we know a certain amount about it, a forensic study needs to be done at sectoral enterprise level to identify the enterprises most at risk either through import linkages or export exposure.
In other words, the analysis needs to move down to a more micro level and it must also involve local expertise. Local employers and trade unions representatives often have excellent insight into and knowledge of the way companies operate at local level. The reason this is urgent and requires that scale of co-operation and input is that when redundancies are threatened, it is almost too late and we are then dealing with a liquidation situation. There is a role here for State agencies, perhaps not unlike the role of the Industrial Credit Corporation when it existed to anticipate trouble and to get out early and identify problems. It may not be possible to avoid closure in some cases but we can then prepare and make the necessary adaptations and training efforts. It might also be possible in some cases to keep companies open for a while with the agreement of all concerned. That approach was used in Germany successfully during the intiial period of the recession in 2009. It involved co-operation in terms of shorter hours but also government subsidies, in effect, to keep the firm open. That proved to be cheaper than having an increase in the number on the live register.
Ms Patricia King:
I would also add that it is important to underpin the fact that such a system would not only involve advocating to the Government that a fund be set up which employers can tap into, it is genuinely about having an early warning system and utilising the voice of the worker as well as the voice of the employer. The trade unions have much to offer under that heading for the simple reason, as Dr. Healy said, that we would be very engaged at a local level with the employer. The current scenario is very imbalanced. We have consultations, discussions and considerations of these matters but we do not want them to be devoid of positivity. People want to keep their jobs. They want to know what type of restructuring and retaining needs to happen. People who find themselves in that situation are very intelligent about those matters. They want to make the moves that will ensure they will retain their careers, continue in their jobs, have their incomes and that their company stays in business. It is not only about tapping into a fund of €25 million or €50 million; this is much more holistic and, therefore, it requires a holistic approach. We are glad of this opportunity this evening to share that with Oireachtas Members because not too many people have been that interested. I understand we are in the early stages of this but we are glad to have the opportunity to share it.
Dr. Tom Healy:
Such a strategy is crucial. Northern Ireland has suffered over a very long period from a run down of manufacturing industries. That is a long-term trend. They have been major cyclical shocks, some of it related to energy prices and to jobs losses in companies like Caterpillar and others. There is a concerted campaign now in Northern Ireland involving Manufacturing Northern Ireland which represents manufacturing enterprises and a number of unions, in particular, the Unite trade union. Underpinning that is an indepth analysis of the role and potential of manufacturing. I emphasise manufacturing, which while it accounts for only 10% of the workforce in Northern Ireland, is a crucial part of economic recovery there in whatever will be precise outcome of Brexit. Manufacturers and exporters in the food sector are very vulnerable. They are exporting to the Republic. It may be that currency volatility is working to their advantage at present but there are long-term downsides and risks.
An enterprise strategy for Northern Ireland needs a number of elements. It needs a strong emphasis on infrastructural development and investment. Northern Ireland is very behind in terms of key infrastructural investment. This is evident with respect to roads and public transport and also in other areas. A second aspect is energy costs which are quite high on both parts of the island, especially in Northern Ireland. They need to be tackled. A third aspect is workforce skills and training, and equipping companies and the workforce to perform at a much higher level. There is evidence that productivity shortfalls especially impact on more traditional manufacturing companies outside the food sector within Northern Ireland. All of that calls for a strategic input and co-operation, including from the Northern Ireland Executive, notwithstanding the limitation of powers, but there is a continuing role for an all-island perspective and co-operation. This is why it is crucial in this debate on Brexit that all the complexity is recognised and that there is not a falling back in terms of that particular importance.
Ms Patricia King:
We believe this is crucial in terms of the stream of funding that comes from the EU and the job it does in Northern Ireland. The Government would have a key role in making the argument that a stream of funding for Northern Ireland should be guaranteed based on the importance of the work that is done on foot of it. If we had the appalling vista that there was a cut-off in that funding into the communities where it is utilised, we can imagine the damage that would do. As to whether it is the UK Government that commits to that, that will be part of the negotiations. It is extremely important that the UK Government accepts that this funding is vital for Northern Ireland to maintain all the very good work that is being done, much of it which goes unnoticed but it is extremely important. The Irish Government could be very influential with the UK Government in making sure that this stream of funding continues.
Ms O'Brien in her presentation mentioned that the over 50s find it difficult to get back into the workforce. Has her organisation carried out any studies or is there evidence to show why that is the case?
Ms Bríd O'Brien:
We have received feedback from individual members and affiliates. When the Equality Authority existed it did considerable work on this area. To take the example of Springboard, it was one of the education initiatives introduced when the crisis hit and it examined, in particular, the role higher education could play around trying to address skills gaps. A striking feature of what it found was that once people pass the age of 45, progression into employment dramatically drops. The feedback we have received is that this very much depends on the sector. Some people feel that once they go past their mid-40s, depending on the sector, securing employment is difficult and, for others, they find that to be the case when they are older than that. When we have discussed this issue with employers and employer representatives many of them acknowledge this to be case. There are a range of factors at play. At times some employers may be reluctant to employ people who are older than them. Presumptions are made around people's skills being out of date or some employers may be reluctant to employ people they think might know more than them. It is an area that requires more work. It is an issue that requires cross-agency and interdepartmental work. Clearly, it is an issue that is facing the Department of Social Protection. We would be concerned that the answer the Department sometimes rolls out is to refer people onto employment programmes. I know from feedback we have received that the individuals concerned are not happy about that. If the issue of ageism is not addressed across the board, it will be very difficult to deal with.
Anything as potentially dramatic as Brexit will add to the issues facing people who are distanced or excluded from the labour market. Other issues relating to disability, class and ethnicity also arise but ageism is the issue we highlighted because it one on which we receive considerable feedback.
To clarify, there are no hard analytics on the reasons this issue is in the market. Ms O'Brien indicated that some people have been asked to take part in employment programmes. Have they been asked the reasons they do not like taking part in such programmes? Is there any research or hard data available on this issue, as opposed to anecdotal evidence?
Ms Bríd O'Brien:
There is research available on the issue of age, although it is not recent because the entity that carried out the work no longer exists, having been absorbed into another entity that is still finding its feet. Equality issues are one of the areas on which research has not been carried out at the level all of us would like it to be done. It was one of the areas for which funding was cut when the crisis hit. Trying to get many social issues researched properly is problematic at present. While there is research, it is out of date.
Some of the equality work that has been done is based on the Central Statistics Office's quarterly national household survey. Interestingly, the two issues that came out as the highest categories for discrimination were race and unemployment. Unemployment was captured even though we do not have a ground of socioeconomic status. It was captured because people are asked their principal economic status in the survey and this question includes whether they are employed or unemployed. This was the second highest category for discrimination that people face. There are also bodies that provide human resource supports that have done research on both of these islands. I can send the relevant references to the Deputy. The issue has been well documented over a fair number of years but we do not have recent research.
Ms Bríd O'Brien:
One of the unfortunate reasons people are often reluctant to take part in employment programmes is that progression from many of these schemes is not good, particularly for older participants. The long-term unemployed include people with a wide range of capabilities, experience and educational background. They are looking for a job and support for addressing the issue of ageism in the labour market.
Ms Bríd O'Brien:
We attended a meeting with officials from the Department of Social Protection earlier today. One of those in attendance noted that one particular hardware provider used older employers because it found that customers tended to trust older employees as they were more likely to know which piece of equipment customers might need for do-it-yourself jobs. Having said that, we are aware that access to employment for younger unemployed people is also a major issue. We face a range of challenges around the issue of unemployment.
Some of the other groups which made presentations to the committee stated that part of the response to Brexit will require market diversification, which is a concept we all understand. The various agencies will try to support small and medium enterprises in this regard. I was struck by one comment, which I noted, that it will require hard work, reduced costs and a move to a sterling cost base. I interpret this as meaning businesses moving outside the jurisdiction to the North or the United Kingdom if they are particularly reliant on access to the UK market. Do the witnesses have a view on that issue, particularly if some of the State agencies adopt this strategy and given that it would ultimately lead to job losses in this jurisdiction?
The document refers to the role of the trade union movement in Brexit negotiations. Do the trade unions believe they have not been involved? Ms King cited the case of the Department of Agriculture, Food and the Marine. What has been the response of the Government to date? Have the trade unions been sufficiently involved in the whole-of-Government response that is required?
Dr. Tom Healy:
The Deputy has asked a very important question. Perhaps we, in Ireland, have not yet fully realised the strategic implications of Brexit. I am not only referring to job risks and the immediate economic impact. We are likely to be in a 27 member European Union without the United Kingdom and in which severe pressure will be applied in areas across the spectrum of social and fiscal policy, not only on corporation tax. We will have to make a decision on which broad model we will pursue. If we try to proceed at two levels by approximating the sterling cost base - the Deputy referred to this crucial point - I am not convinced we will be able to do this in conjunction with moving towards a more European norm of taxation and enterprise policy and the way this will play out in the labour market. Our costs are below the average for the EU-15 countries, that is, the developed, traditional EU economies in the eurozone. In some cases, our costs are higher than in the UK. When I refer to labour costs I also mean employer social contributions, which are a big element in other European countries.
We have a very painful choice to make. In some cases, it may mean moving away from dependence on UK markets and moving towards higher scale and higher costs, albeit equilibrated by higher productivity, and, in the long run, taking a different strategic position in the market. This will require very careful planning. It is understandable that significant pressure will be applied by some sectors and producers to follow the UK downwards in terms of costs and taxation rates and the recent budget illustrated responses to that. However, this is strategically the wrong direction as we will end up in a place that is increasingly incompatible with the rest of the EU.
Ms Patricia King:
On the issue of market diversification, while a number of scenarios could arise, we could end up with companies taking the advice and perhaps being given subvention to help to diversify market-wise, with the result that they receive Government money to diversify and end up taking the jobs somewhere else. That would be just one of the consequences of this.
Our judgment as regards the whole-of-Government approach is that we would like this to take place in the round. Brexit is of such importance and will encompass so many areas of Irish life that a whole-of-Government approach must be taken. To date, we took part in meetings held in the Department of the Taoiseach to plan for Brexit, in other words, they were held before the date of the referendum outcome. Since then, I believe we have taken part in one meeting in the Department of the Taoiseach and we have not been engaged in any more in-depth discussions elsewhere, nor have we been invited to any such discussions. If I was asked whether such discussions are taking place, we suspect they are taking place and we probably even hope they are taking place. We do not know where or with whom, however. The trade union movement has a major role to play in this matter and it is a negative that the Government is not engaging with us on it.
I thank the witnesses for appearing before the joint committee for this very useful and informative session. To respond briefly to Ms King's final comments, the committee is trying to obtain the views of all organisations that play a role in the areas of jobs, enterprise and innovation.
Today, for example, we had the Centre for Cross Border Studies, the Institute of International and European Affairs, the ESRI, ICTU, NERI and the INOU. We feel as a committee that it is important that we invite representatives from every sector because that will be only way we can compile a report to see how we move forward on Brexit. We are dealing with the unknown and that is what is coming across in presentations. We do not know what is coming down the line but it is most important that we hear representations from every group. I thank the witnesses for coming in.