Oireachtas Joint and Select Committees
Tuesday, 16 May 2017
Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach
Brexit - Recent Developments and Future Negotiations: Discussion
We are dealing today with Brexit, recent developments and future negotiations. I welcome Mr. John Callinan and his colleagues. We look forward to our exchange with them on their work, particularly following the address of Mr. Barnier to the Houses of the Oireachtas.
I invite Mr. Callinan to make his opening statement.
I invite Mr. Callinan to make his opening statement.
Mr. John Callinan:
I thank the Chairman, Deputies and Senators for the invitation to appear before them today. I am second Secretary General at the Department of the Taoiseach, where I head the division dealing with international, EU and British-Northern Ireland affairs. Brexit represents a huge challenge right across Government, involving every Department to a greater or lesser extent. My role in the Department of the Taoiseach includes supporting the Taoiseach in his capacity as chair of the Cabinet Committee on Brexit and in his role as a member of the European Council. In this context, my main focus is on the EU negotiation process where I also serve as the Irish sherpa.
Given that Brexit raises policy issues for all Departments, I have asked colleagues to join me based primarily on the areas of interest highlighted in the letter inviting me to appear here today. I am accompanied by Mr. Liam Irwin of the Office of the Revenue Commissioners; Mr. James Martin from the Department of Justice and Equality; Mr. Ronan Gargan and Ms Sarah McGrath from the Department of Foreign Affairs and Trade; Mr. Brendan O’Connor and Mr. Oliver Gilvarry from the Department of Finance; and Ms Pauline Mulligan and Mr. Eugene Forde from the Department of Jobs, Enterprise and Innovation.
I propose to give a brief overview of the Government’s approach to and preparations for Brexit before we move on to questions. The Government has been preparing for Brexit for over two years, and certainly well in advance of the UK referendum on 23 June 2016. A detailed contingency framework was prepared in the run-up to the referendum. It had been hoped, of course, that the outcome of the referendum would be different but, as we know, the people voted for the UK to leave the EU. Early on, the Government identified four headline priorities arising from Brexit - protecting the Northern Ireland peace process, maintaining the common travel area, minimising the negative impact on trade and the economy, and contributing to the future direction of the EU.
In the period after the referendum, the Government intensified its preparations, building on the work already done. A new Cabinet committee dealing specifically with Brexit was established, chaired by the Taoiseach. A significant part of the EU division in the Department of the Taoiseach was moved back to the Department of Foreign Affairs and Trade, to ensure that the latter Department was adequately resourced to deal with the challenge of Brexit. The Department of the Taoiseach was restructured, bringing the remaining staff dealing with international, EU and British and Northern Ireland affairs together under a new second Secretary General post, to which I was appointed in August 2016. An interdepartmental group of senior officials was reinforced with a number of working groups set up to look at specific issues in more detail. Departments and agencies with significant Brexit issues allocated additional resources as needed.
The work on preparing for Brexit was organised under a number of streams. The analysis done under the contingency framework was deepened. Stakeholder engagement was intensified through a stakeholder group that had been set up before the referendum and, later, through the all-island civic dialogue process, which so far has seen two plenary sessions and 14 sectoral events. Departments and agencies also used existing forums or created new ones to ensure that they were engaging with their key stakeholders.
The Government set about a detailed process of engagement in four interrelated directions, namely Northern Ireland, Britain, each of the other EU member states and the EU institutions. In Northern Ireland, this consisted of engagement through the North-South Ministerial Council, with the individual parties, and with the Northern Ireland civil service. In London, existing channels of engagement were intensified, either through the mechanisms of the Good Friday Agreement or other bilateral channels. A campaign was put in place to ensure that each of the other 26 member states was aware of our particular challenges and understood the extent of Brexit's impact in Ireland, with every member state targeted for engagement at both political and official level. Similarly, detailed engagement took place with each of the EU institutions, including in particular the EU task force led by Mr. Michel Barnier. Finally, all this work was supported by a broad-based communication effort, to ensure that the scale of the Brexit challenge was recognised, that the Government’s priorities were clear, that stakeholders were being consulted and informed, and that the complicated process that would unfold was understood as broadly as possible.
The Government realised very early that Brexit was likely to impact Ireland more than any other member state, in terms of the economic and trading links between Ireland and the UK, and due to specific or unique factors arising from the history and geography of these islands. It became clear that a major campaign would be needed to ensure that each other member state appreciated these unique or specific factors and was prepared to support Ireland in addressing them, irrespective of how significant Brexit was for their own country. This involved explaining in clear terms the history of these islands, the evolution of the peace process, the specific features of the Good Friday and subsequent agreements, the history and rationale for the common travel area, the nature of the trading relations and patterns both on this island and between Ireland and Britain, and the sensitivities and risks associated with the Border on this island. In particular, it was necessary to establish the politically sensitive nature of these issues, and the need for political solutions ahead of any rush to an overly legalistic or technocratic approach.
It was also clear that the way in which these issues would be addressed would have to fit into the evolving overall approach of the remaining member states to the Brexit negotiations under Article 50. This meant there would be a united approach to the negotiations; there would be no separate or parallel negotiations with the UK; and issues specific to the withdrawal would have to be dealt with first while issues to do with economy and trade were likely to come later. In particular, a full trade agreement with the UK could only be concluded and implemented after the UK had left, and this, in turn, would almost certainly mean that transitional arrangements of some sort would be required. In the withdrawal phase, the focus would be on the financial settlement, the rights of citizens, relocation of EU agencies and specific border area challenges.
Against this backdrop, the Irish approach was to press for maximum recognition of our particular issues and challenges in the various documents being prepared, while also pushing for discussion on the future relationship to begin as soon as reasonably possible, including economic and trade issues and a smooth transition. The overall campaign involved over 400 separate meetings with the other member states and the EU institutions at political, diplomatic and official level. The approach has borne fruit. Prime Minister May’s letter triggering Article 50, dated 29 March, contained strong references to Ireland and to our particular challenges. The resolution of the European Parliament adopted in early April makes clear that the Irish challenges are high on the agenda of the Parliament, which under Article 50 must give its consent to any withdrawal agreement. The EU negotiation guidelines, adopted by the European Council on 29 April, set out clearly the objectives of supporting the peace process, protecting the Good Friday Agreement, working to avoid a hard border and retaining the common travel area. In addition, the minutes of that European Council will include an important statement by the 27 member states recognising the provisions of the Good Friday Agreement regarding Irish unity and confirming that EU membership is assured in such instance. The draft EU negotiation directives, which are due to be adopted by the General Affairs Council next week, build on the language in the guidelines regarding Irish issues. They also recognise the particular challenges for Ireland in terms of the proportion of goods to and from Ireland that transit via the UK. These are very important acknowledgements of our particular circumstances and challenges. Of course, this is just the beginning but it is a good start. In particular, it confirms that the approach of focusing primarily on the elements most relevant or appropriate at any given stage in the process is paying off.
There have been a number of recent milestones in the Government’s preparations and actions, apart from key events on the EU meeting calendar. On 15 February, the Taoiseach gave a keynote speech at an International Institute of European Affairs event in the Mansion House, setting out the Government’s overall approach which includes reaffirming Ireland’s commitment to the EU, protecting the peace process, and minimising the impact of Brexit on our economy and jobs. The second plenary meeting of the all-island civic dialogue was held in Dublin Castle on 17 February. In March, a booklet was published explaining the Government’s four headline priorities in an attractive, easy to read manner. Following the recent European Council meeting, the Government launched a document on 2 May setting out more detail on its approach to the upcoming negotiations.
While the initial focus of the negotiations is on the so-called exit issues, a greater emphasis on economy and trade issues will inevitably develop in respect of how the future trading relationship between the EU and UK evolves, and in light of the fact that even in the most benign Brexit scenario, a negative impact on our economy is anticipated. That impact is likely to be varied across the country. While there may be some economic opportunities from Brexit, they will not make up for the overall impact that is expected. Mitigation action will therefore be required. That is why, at the time of publication of its approach to the negotiations earlier this month, the Government also made clear that over the coming weeks it will publish a second document outlining its approach to mitigating the impact of Brexit on the economy, trade and jobs.
Work on those economic impacts and challenges will be complemented by efforts to take advantage of any economic opportunities. We are already seeing significant signals of jobs moving to Ireland in the financial services sector. Other sectors may follow. The Government is presenting Dublin as a strong candidate for the relocation of the two EU agencies currently in London, namely the European Medicines Agency and the European Banking Authority.
Returning to the forthcoming negotiations, which is the area with which I am primarily concerned, it is clear that they will be complex and challenging for us. We have made a good start and the extensive campaign of engagement is paying off but we will have to continue, and intensify, this effort in the weeks and months ahead in order to identify and deliver satisfactory solutions to our specific concerns. I thank members for their attention. I and my colleagues will now be happy to take questions.
Mr. John Callinan:
Not in any great detail. I am aware of it and it appears to point towards the Singapore agreement being a mixed agreement which therefore requires national member state ratification, but we will have to look at what that means then for other trade deals and potentially for any trade deal emerging in relation to the UK.
I welcome Mr. Callinan and his colleagues from four Departments and Mr. Irwin from Revenue. I will ask a few questions of Mr. Callinan, one of which is related to the issue raised by the Chairman, namely, trade. Mr. Barnier reiterated the approach of the EU last week, namely, that the priorities in the first phase for the EU relate to border issues, citizens' rights and the financial settlement, in other words, the terms of the exit, and it is only after the terms of the exit are agreed that the EU will engage on the question of the future and the future trading relationship between the UK and the European Union. Could I ask the Irish perspective on that? Given that there is a real risk that the negotiations will simply run out of time, and if the ECJ finding today does have relevance in relation to any transitional arrangement, for example, any future trade deal between the EU and the UK, and it has to be ratified by every single national parliament and regional parliament within the European Union, how concerned is Mr. Callinan that we will not be able to avoid the cliff effect of the UK falling out of the European Union and no transitional arrangements being in place to prevent the automatic default of WTO trade terms?
Mr. John Callinan:
The way the negotiations are structured and sequenced means it is correct to say they begin with the exit issues the Deputy mentioned, but it is not quite as clear cut as saying they must be fully agreed before we move on. The language in the guidelines talks about sufficient progress being made, so I think there is room there for the talks process to make a certain amount of progress. People talk about the tone and the goodwill factor as much as the detail of the talks. The expectation is that if reasonable or sufficient progress is made early on those issues the discussion on the future framework can get going reasonably early. Realistically, people are thinking in terms of maybe before the end of the year - probably not much earlier than that. Certainly, we have argued that it is absolutely important that we can get those discussions going as early as possible, but it is a matter of law that even if those discussions move on and make good progress, legally, a free trade agreement between the UK and the EU can only be finalised and implemented as and when the UK is a third country so there will inevitably be some moment between the UK's departure and the new free trade agreement coming into effect, and that of course argues on the need for transitional arrangements. While obviously the devil is in the detail and that remains to be seen, we have worked on the basis that it is most likely, and consistent I suppose with the ECJ judgment today, that the likely shape of a future free trade agreement would be what is known as a mixed agreement and would probably require national member state ratification in any event. We have been working on that assumption.
Is it the position of the Government that, in terms of trade post-Brexit, it is inevitable that a transitional arrangement will have to be agreed and, as Mr. Callinan said, we will not be able to go directly from the existing relationship to a new long-term trade arrangement but there must be some gap, albeit perhaps a very short one, and that realistically what we hope to achieve is a transitional trade deal which is as close to the status quoas possible? Is that the position of the Government?
I wish to ask Mr. Irwin about the role of Revenue and a customs border. If the UK leaves the customs union, which seems certain at this stage, there will be a customs border – there will be some form of interface, and how seamless and frictionless it will be is a matter for negotiation. Could he tell us about the work Revenue is doing with its counterparts in the UK to ensure the Border is as invisible as possible?
Mr. Liam Irwin:
We are doing work but we are not specifically doing any work with the UK at this stage. Clearly, any negotiation will be the between the European Union and the UK. We are not in any form of negotiation or even having any discussion with the UK at this point. What we are doing is scenario planning and looking at what the options may be. Much of that will clearly depend on what form of future arrangements will take place. It can be expected that the UK will be outside the Single Market and almost certainly outside the customs union. Assuming the UK is outside the customs union, it will be a third country for customs purposes. We are working on that likely assumption and within that there is a very broad spectrum of a very close trade arrangement with the European Union. Clearly, it could be much worse but we hope that will not be the case.
We are doing a lot of work. In the first instance, one thing we are examining in very close detail at present is our IT infrastructure. The number and the value of customs declarations – the number even more so than the value of customs - will clearly increase, possibly by a factor of ten. Therefore, our IT systems need to be examined for scalability, and we are doing that. As it happens, those systems are being reviewed in any event in the context of the UCC, the union customs code.
Mr. Liam Irwin:
The volume of customs declarations. Many of those would be cross-Border in Ireland of a small value but big in number. We are looking at our IT systems and what we need to do to scale those to deal with that eventuality, which is to some extent a likelihood assuming the UK is outside the customs union.
We are looking at border arrangements in various external borders of the EU, particularly in the context of the Irish Border and how small local trade is facilitated. Apart from looking at that, we have not seen anything that we would attach to and say that is the way to go, but we are studying what arrangements are there and what opportunities there might be in the customs code.
Generally, whatever happens it is clear that a border with the United Kingdom, including Northern Ireland, would not be what we saw in 1993 just because customs have moved on and become electronic. We are looking at what types of arrangement might be there and to what extent they can facilitate trade. The initial thinking is more or less on trade facilitation and making sure trade moves north, south, east and west and using the landbridge across Ireland the UK. That is the work we are doing at present - scenario planning, scaling, looking at what particular arrangements we may be able to do - but any negotiation on that clearly will be with the European Union and the UK.
Could Mr. Irwin take us through a scenario where the UK leaves the customs union and there is not any either temporary or permanent free trade deal in place and one has a customs border with a third country? In practice, what does that mean in a scenario where some tariffs apply, for example? What is the best case scenario in terms of maximum use of technology and so on? Are we looking at trucks not being stopped at all, at any point, in terms of crossing the Border, and what is the worst case scenario? What are we looking at in practice?
Mr. Liam Irwin:
We are not looking at a "not-at-all" scenario. The scenario I envisage is electronic declaration - electronic approval or non-approval. In terms of routing, what is in place already is green, which is go, orange, which is a documentary check, and red, which is usually a physical check. Currently, that is of the order of 6% to 8% of traffic. I cannot see that changing in any significant way. Goods that are routed need to make some form of presentation; it depends on the particular routing. That could be done at the Border, but it does not have to be done at the Border and possibly will not be done. The facilitation stations will be somewhere in the proximity of the Border. It depends hugely on the type of exit that happens and as Mr. Callinan said, we are almost certainly likely to need a transition. It is difficult to see this switching overnight on Brexit day.
I want to raise two further issues, one of which relates to the common transit area. What is the position of the Irish Government on the way in which the United Kingdom is used as a land bridge, as such, for Irish exporters accessing markets across the rest of the European Union? While tariffs may not apply, a very significant administrative burden could be placed on companies that are having to deal with that issue.
My final question relates to the application of state-aid rules within the UK post-Brexit. There is a concern within the business community here that if the UK will be free of the constraints of EU state-aid rules, in many respects it will be in a position to compete unfairly for businesses with Ireland and other EU countries because the State will be able to intervene and directly provide supports and subsidies to attract investment into the UK, which could have a very serious and direct knock-on consequence for Ireland. What is the Government's position on the common transit area and the application of state aid in the UK post-Brexit?
Mr. John Callinan:
To take the common transit area first, the Government is very concerned about the importance of transit through the UK for goods from Ireland to the rest of Europe and vice versa. Our concern is to have as little complication as possible in that regard. One of the things we have managed to do is that in the move from the negotiating guidelines agreed by the European Council to the next document currently being negotiated - the negotiation directives - we succeeded in getting into the draft a specific reference to the unique geographic issues in terms of transit for Ireland and that this would have to be recognised and addressed. In much the same way as many of the other points I was making earlier, while we have a good hook on which to build, we have managed to assert that as a critical unique factor for Ireland. It is something of which we are highly conscious.
In terms of the concerns relating to state aid that the Deputy mentioned, the negotiating guidelines provide for the possibility of a close trading agreement between the UK and the European Union but, to use the Deputy's phrase, they are very much conscious of need for a level playing field. They make clear that they will not be keen to facilitate an agreement that would have, for example, a much more lax approach under state aid, tax provisions or whatever it might be to give a competitive advantage to the UK. That is anticipated in the EU guidelines and is recognised as something that would have to be prevented, but that in turn becomes part of the negotiating process with the UK.
I thank Mr. Callinan for his contributions. On the issue of a veto, we have an unprecedented situation in British-Irish relations where all through history, through the good times and the bad, the relationship was always negotiated between Ireland and Britain. For the first time in history, the future of Ireland's relationship with the UK will be negotiated between the UK and a third party. We have one seat at a table of 27 and while we have some warm words, we are nonetheless one of 27, and it represents an unprecedented risk to us.
The Spanish got a veto on the future relationships with Gibraltar. I take the point that if the future relationship is a mixed agreement, it is possible that member states, including Ireland, will have a veto. However, the ECJ ruling today lays out, in its agreement with Singapore, that on practically every issue there would be no member state veto. The ECJ ruling is important because it lays out where Ireland would not have a veto, assuming the same legal opinion is used. That would include access to EU markets for goods and services including transport, procurement, energy generation, foreign direct investment, intellectual property rights, anti-competitive activity, sustainable development, exchange of information and so on. What the ECJ is saying is that in all of these areas, member states do not have competence. Following that, in all of those areas Ireland would not have a veto on any future relationship between the UK and the European Union.
The ECJ ruling goes on to state that only in two areas does the agreement with Singapore encroach into member state competence. One of them is portfolio investment, or non-direct investment, and the second is dispute resolution between investors and the states. That is reasonably technical bureaucratic stuff, but on the day-to-day issues that will affect Irish farmers, business people and citizens looking not just to travel to the UK but also to work and reside there, the ECJ ruling would suggest that we will not have a veto. This is an unprecedented situation where, essentially, Ireland is not a lead negotiator in its own future relationship with the UK. I am hearing from numerous sources who are talking to groups around Europe, that, at a minimum, France, Germany and some other member states have a fairly hostile view of these negotiations. They see it as an opportunity to teach the UK a lesson. Did the Irish Government seek a veto on any aspects of our future relationship with the UK?
Mr. John Callinan:
The point I would make is that, essentially, these arrangements are governed by the legal framework. I take the Deputy's points about the ECJ ruling. I have not had a chance to read it and other colleagues may have so I will respectfully reserve judgment on that as to what exactly it would mean. However, with regard to the Irish-UK issues and the Gibraltar one, the position is quite different in that the Irish Government approach in respect of the Northern Ireland situation essentially has been that the Good Friday Agreement governs the issue. There is no such framework governing the UK-Spanish situation on Gibraltar. That was the key difference between those two issues.
More generally, the Government did not seek specifically a veto in respect of it, but if we are talking about exercising a veto on the withdrawal, the net point is that we would end up with a worse situation because if we do not have a negotiated withdrawal, we have a hard exit. That is something to be avoided.
In terms of what the future trade negotiation would ultimately look like, the detail of that will determine the voting rules on it. Colleagues with more expertise on this might wish to add more detail, but that would be my sense of it.
There are two obvious issues in respect of which to seek a veto. One is a veto on the withdrawal only as it pertains to Northern Ireland. The second would be to seek a veto, which is what the Spanish have achieved, on the future relationship only in so far as it pertains to Anglo-Irish relations. I will give Mr. Callinan an example of where European law and existing Anglo-Irish agreements may bump against each other. The common travel area is widely supported. However, diplomats I have met from EU member states have explained that the common travel area is not about Irish people and UK citizens being able to visit each other's countries.
It is a full bilateral reciprocity of rights, including the right to vote. Therefore, when we talk about full ongoing implementation and recognition of the common travel area, CTA, what we mean is that every Irish citizen will enjoy the right to work, as UK citizens, in the UK regardless of whether that same right is afforded to any other EU member state. When one explains it like that, one gets a very different response. Now the response from foreign diplomats is, "Hang on a second. Are you suggesting that you should have the right to work in London, but my colleagues in Spain shouldn't?"
That is an obvious place to seek a veto because it is a unique agreement between Ireland and the UK. Was any veto and any additional leverage, other than being one of 27, sought on the future relationships specifically around issues like the common travel area and the right of Irish citizens to work in the UK?
Mr. John Callinan:
In all of our discussions on the common travel area we have been clear that we are not just talking about the right to move physically but also about all these extended benefits. Everything we have produced, both in our documentation and in discussions with our partners, has made that clear. For the reasons that Deputy Donnelly correctly illustrated, we have been unambiguous in this regard. I think that is understood and recognised, so the issue of seeking a veto in respect of it did not arise. However, the net point remains of what the effect would be of exercising such a veto.
Usually the point of a veto is not to exercise it. The point of a veto is that it gives one leverage. What concerns me is that the British have very little leverage in these negotiations and the Irish have even less. By far the most important economic, political and cultural relationship Ireland has ever had, or is ever likely to have, is with the UK. That, however, is now being largely negotiated beyond our control. Any leverage such as a veto would have been useful.
Mr. John Callinan:
Our approach to the common travel area and what we have sought, which the document recognises, is that this is primarily a bilateral issue between Ireland and Britain. However well-intended or otherwise, we do not want that to be torpedoed. We have approached it in that context and that is reflected and recognised in the work we have done and in the documentation that has been agreed.
A new survey on jobs and trade by the Department of Jobs, Enterprise and Innovation shows that 15 out of 20 Irish-owned companies surveyed believe that Brexit will damage them in some way. Despite that, only three in 20 companies have done anything about it and only five in 20 intend doing anything about it, which suggests a big skills gap. These are sophisticated businesses that live in the real world. If they know something is going to harm them yet most do not intend doing anything about it, it is not because they are stupid but because, I would imagine, they do not know what to do or do not have the resources or capability.
A report in the The Timespublished new European and UK data which show that 50% of EU companies using British supply chains are beginning to rewire their supply chains out of the UK. The report also shows that one in three UK firms with EU supply chains are rewiring their supply chains back into the UK. I know that both surveys cannot be compared perfectly, but they suggest that while Irish businesses are the most exposed to Brexit of the EU 27, they are certainly not ahead of the curve in preparing for it. We have two of the best State agencies in the world in the IDA and Enterprise Ireland, yet we are not seeing a response on the ground. I know that Enterprise Ireland is engaging with its clients. Based on conversations I have had, it would seem that some of the engagements are good but others are not.
While this is not a criticism of Enterprise Ireland, there has yet to be a national response on the ground. We will know there is a national response when we hear advertisements on the car radio saying, "If you've any exposure, come to your local office."
Mr. Callinan referred to a new strategy that he will be bringing out shortly. Will he give us a sense of the scale of the response the Government intends embarking on in having a direct engagement not just with the big 400 companies or EI clients, but also with every farmer and business that has any exposure to the UK and Brexit?
Mr. John Callinan:
As I said in my opening remarks, this is inevitably where the pivot of attention is moving to from the Government's point of view. It is not a one day moment. It is an ongoing process that is gradually building up. A number of measures have already been introduced in last year's budget, and it was made clear that would be the first of a sequence. The Government has said it will publish a comprehensive approach to this in the coming weeks. There are specific actions happening through the various agencies the Deputy mentioned and others, including An Bord Bia. It does not lend itself to a simple big bang on day one, but measures are being prepared right across the economic agencies and Departments. Some of them have already been rolled out.
I will ask my colleague, Ms Mulligan, from the Department of Jobs, Enterprise and Innovation, to say a little bit more about what is happening.
Ms Pauline Mulligan:
As Mr. Callinan said, from our perspective the Department has had a two-pronged approach to responding to Brexit. The first is about support for companies through the enterprise agencies. It is also about analysis and research to ensure we are doing what we need to do to support companies through the agencies. In addition, it is about preparing for the negotiations, so I might talk about that separately.
I will talk specifically about Enterprise Ireland, Science Foundation Ireland, IDA Ireland, and InterTradeIreland which deals with companies in the Border regions. The Minister, Deputy Mitchell O'Connor, secured additional funding in budget 2017. Enterprise Ireland has been working with 1,500 companies exporting to the UK but with specific attention to the 600 that are most exposed to the UK market. We saw the results from Enterprise Ireland yesterday. While some work has been done, there is a lot more to do in terms of helping companies to prepare for Brexit.
The scorecard introduced by Enterprise Ireland, which is not just for EI clients, has been a great innovation. It has been broadly welcomed as a diagnostic tool to help companies. They fill out the form online and the system helps them to identify areas where they have prepared but could do better compared with best practice. The scorecard is open to all companies and not just EI clients.
Enterprise Ireland continues to engage with companies. Its strategy is about diversification, innovation, product lines and diversifying markets outside the UK. The new eurozone strategy was announced yesterday along with the results. Enterprise Ireland is working closely with companies.
The impact of currency fluctuations was a particular concern for companies, so we engaged in qualitative and quantitative research analysis earlier this year. We interviewed more than 1,000 companies to see what their needs were in the context of Brexit, both in the short and medium term. That is the survey launched recently by the Minister, Deputy Mitchell O'Connor. The results of that survey showed that while the short-term impacts were not felt as much, companies are saying that more impact will be felt in the medium term.
In response to that, the Minister, Deputy Mitchell O'Connor, secured the agreement of the Cabinet committee on economy and jobs to do three things. The first is to develop proposals for a short-term working capital guarantee scheme for SMEs. My Department is working on that. The second thing is to scope out the development of a modern medium-term business development loan scheme. My colleagues are working on that with colleagues in other Departments, including the Department of Finance. Both schemes would be rolled out through the Strategic Banking Corporation of Ireland, SBCI. The third and final thing was to scope out this idea of a financial advisory hub for SMEs. All those are specific policy responses that we are putting in place based on the evidence we have gathered from companies we have spoken to.
As regards the next steps, we are involved in a range of other analysis and research. This includes looking at sectors which are most exposed and the impact on cross-Border trade. We funded InterTradeIreland to do a specific piece of research which is due to be published soon. It will examine the impact of a hard Brexit on cross-Border trade, with the UK being outside the Single Market and the customs union. It will also look at the impact on goods and trade.
We are also looking at the 18 sectors that are most exposed, based on their percentage of exports as a proportion of overall exports to the UK.
We are looking at the most exposed sectors by reference to the percentage of total exports and imports in each case. We are also profiling trade between the United Kingdom, Ireland and other member states and looking at all possible scenarios, from a hard Brexit to a comprehensive free trade agreement between the United Kingdom and the European Union. This will inform our deliberations on further supports for companies and positions in the negotiations to come.
The majority of Members of the Houses have adopted the position that the North is being dragged out of the European Union against its will and should receive special status within the Union. Does Mr. Callinan adopt that mandate in his work? Has the Taoiseach or another Minister told him that achieving special status for the North is part of his job?
Mr. John Callinan:
We have approached the challenge by recognising that there are special and unique circumstances on the island. "Special status" is just a phrase which means different things to different people. Some think it means keeping Northern Ireland in the Single Market, but it is not in the gift of the Dublin Government to decide that this should happen, if it is not the wish of the people of Northern Ireland. It would also have to be negotiated with the United Kingdom. There are different interpretations of what the special circumstances are, but we have secured a commitment from the European Union to look at them imaginatively and flexibly. The meaning of "special status" has not been universally agreed.
I am concerned that the political direction given to civil servants is at odds with the democratic position of the Houses and the will of the people. As the lead civil servant in dealing with this matter, has Mr. Callinan ever raised the need for special designated status for the North?
Mr. John Callinan:
As civil servants, our job is to work for the Government. It is not for me to comment on the relationship between the Government and the Oireachtas, to which the Senator referred. We have not specifically sought special designated status because it is not clear what we would mean by it. We have said we have to work collectively on the challenges for the island and Northern Ireland. We sought to have detailed discussions with the Northern Ireland Executive and the Northern Ireland parties to reach a consensus on how to deal with the particular challenges. That is the right way to do it as we will not be able to deliver a solution to which significant groups are opposed. We have to arrive at a format that will make sense for as many people as possible. We have to be more precise on what "special designated status" means.
The Irish Government has most direct influence at the European Council, but that institution arguably has the weakest stance on safeguarding Ireland's rights. I am really concerned about the earlier discussion in which it emerged that we had not even asked for a veto on certain aspects. This is a card we have to play. Without doing so, everything is just words, grand intentions. Mr. Callinan says we have been working on this issue for two years, but it worries me that we have not even asked for a veto, let alone asked for one and been turned down.
Mr. John Callinan:
It is not a question of looking for a veto. Article 50 is the legal framework which allows for the withdrawal process. If we do not arrive at a negotiating outcome, there will be a hard exit; therefore, the exercising of a veto would not safeguard the interests to which the Senator referred.
I beg to differ. The only mention of Ireland is in a restatement of support for the peace process which has always been there and is, of course, very welcome. There is a vague statement about flexible and imaginative solutions being needed to avoid a hard border, but there is nothing concrete. "Flexible and imaginative" is diplomatic-speak for "We have no idea". Mr. Barnier has been honest with us and told us that the United Kingdom's departure from the European Union will have consequences. He said he had a duty to tell the truth in this regard and that customs controls were part of EU border management. My Sinn Féin colleagues and I have made freedom of information requests on what the imaginative and flexible solutions might be, but we have hit a brick wall. We cannot accept that Border communities be kept in the dark about what Brexit might mean for them.
Mr. Irwin said there were ten times more declarations and paperwork for people trading across a border and that we were looking for better facilitation stations or IT solutions, but that provides no reassurance for companies trading across the Border. How many extra IT staff have been brought in for this purpose? I cannot get my head around how it might be approached without talking to the UK revenue authorities.
Mr. John Callinan:
If Britain is outside the customs union, trade between the European Union, including Ireland, and Britain will inevitably involve two customs regimes. The question is how we manage and control this and what arrangements can be put in place. That leads to the question of whether we will need border controls between Northern Ireland and this jurisdiction, but the broader issue is whether there will be two customs regimes. We have secured agreement on finding a creative and flexible way of dealing with the matter in order that we will not have the hard border we used to have on the island, with frontier and customs control posts.
Mr. John Callinan:
I do not think we should get hung up on words. We are all looking for the same thing and want to avoid a hard border. Whether it is with special designated status or by arriving at flexible and imaginative solutions, it amounts to the same thing. If the specific proposal is for Northern Ireland to effectively remain in the Eurpean Union or the Single Market, it is much more complicated because it is not in Dublin's gift to demand this. It relates to the terms of the Good Friday Agreement and the relationship between Dublin, Belfast and London, before one even starts to talk about the role of the European Union.
Mr. Liam Irwin:
On the tenfold increase in paperwork, assuming that the United Kingdom will be outside the customs union, the reality is that it will be a third country and that all trading transactions will be subject to customs declarations, although this would not necessarily mean customs duties.
That is normally facilitated through economic operators. There is a cost, clearly. We are already deeply engaged with trade. One of my colleagues, who is the assistant secretary in this area, was in Galway this morning talking to the Irish Exporters Association about the training and registration processes which might apply in the event of these things happening. So we are engaging.
The Senator asked about the additional resources we had in IT. At this stage we do not need them; our existing resource is examining and scaling the system with some consultancy assistance. We have a commitment from Government for whatever funding we will need to scale our IT systems. As I mentioned earlier, in the context of the Union customs code, we need to undertake significant investment between now and 2020 on that and the changes to what we call our AEP system would be included in that overall programme. Until we do the scaling we are not quite sure what the level of investment is. It may actually not be significant because the systems were built for scalability anyway. Details of exact costs and resource requirements will come when we conduct that study which is ongoing at present.
Mr. John Callinan:
We have indicated that, depending on the extent of the Brexit outcome and the impact, we may need special assistance and support from the EU. We have not said precisely what that form might be. We have not said specifically that we need a departure from the fiscal rules for that purpose.
Mr. John Callinan:
The longer we are in the realm of wanting to see the closest possible trading relationship and free trade continue between the United Kingdom and the EU, clearly the less the other negative impacts will be. There is a balancing act between pursuing our clear objectives in the negotiations on the one hand, and then recognising that there are still risks and downsides. Therefore there is a timing issue in how to deploy that. If it is deployed too soon, it looks like having more or less given up on what the overall negotiating outcome would be. There is a balancing act to be struck there. We are looking at the state aid rules and what further measures might be possible. My colleagues from the Department of Jobs, Enterprise and Innovation might want to add to that.
Mr. John Callinan:
We are looking at all kinds of options to improve the funding to support infrastructure, whether it is specifically Brexit related or more generally. We have a whole programme of work going on looking at that, maximising the use of EIB funds and other EU funds as well as our own resources to do that. It is part of the overall capital programme, if one likes, and then within that specific Brexit considerations, where they arise, will also be taken on board.
I believe we need considerably more openness and transparency. I listened to the British Secretary of State for Foreign and Commonwealth Affairs, Boris Johnson, say yesterday that nothing is agreed until everything is agreed. It almost seems as if Ireland will be used as a pawn in the relationship between Britain and the EU, which concerns me deeply.
Cuirim fáilte roimh na finnéithe. I want to tease out further some of the earlier questions. Deputy Michael McGrath asked about effect of border customs controls if the UK were outside the customs union. The witnesses talked about IT and other electronic systems. In Mr. Callinan's view is the best-case scenario no customs controls on the Border?
Is that realistic? When Commissioner Moscovici appeared before the committee and I asked him, he said it does not exist anywhere in Europe. There is no third country that has a border with the European Union without having controls of some sort. Are we in fantasy land? Is it realistic to suggest there would be no border controls?
Mr. John Callinan:
I think it is challenging, but I think it is realistic and it is the Government objective. Customs arrangements de facto arise once there are two different customs regimes, but whether they are reliant on actual border controls is a second-order issue and that is where we are saying we will need to have maximum creativity and flexibility.
We hear language here such as no hard border, customs controls and so forth. We also hear European language that is militarised - the language of hard customs controls in Europe where borders are actually armed, whereas soft borders are where there are just normal customs controls. What do we mean by minimising? What would have to happen in order to have no customs controls?
Mr. John Callinan:
I might reply before Mr. Irwin comes in on that. It is important to think of this in the broad sense. Obviously, if there are tariffs we will have a very particular situation to deal with. However, independent of the question of tariffs, there is a range of regulatory issues. It is important not to exclude the possibility that we could arrive at a satisfactory all-island approach to much of the regulatory stuff. Much of this depends on the UK's approach and the extent to which, for example, devolved powers to the regional assemblies would be part of the post-Brexit scenario. Across a range of areas, including animal health, energy and other areas, we are investigating ways in which we can arrive at an all-island solution that works and meets everyone's needs. It not easy, simple or obvious as to how that would be done. That is the kind of thing we are looking at. Solving those kinds of things would go a long way towards removing some of the other complications that inevitably arise in the way the Deputy is describing where we might have to look at a hard border.
Mr. Liam Irwin:
We are planning for trade facilitation, enabling goods to move. We have absolutely no plans for anything along the Border at this stage. We are examining what the various forms of declaration might be, primarily or almost exclusively electronic, with anything requiring inspection being signalled for inspection somewhere in general proximity to the Border, but if I were to hazard a guess, not on the Border.
Let us not split hairs here; we are not talking about that point in the middle of the bridge that separates the two sides. They were never on the Border; they were just off the Border on the Irish side or the British side or whatever side. That is how customs will operate; it will be on the territory. If it was Donegal, the customs control was in Lifford. The chief negotiator appeared before the committee. His speech was interesting, particularly the part where he said we need to speak the truth here.
We are all big boys and girls. We know Brexit is happening and we need to know what the possible outcomes will be. A hard Border is not inevitable. However, is it not the case that the Revenue Commissioners are preparing contingency plans for customs posts in close proximity to the Border?
I submitted a freedom of information request concerning records in regard to the establishment of possible customs posts along the Border. I received 31 documents containing that type of records in reply to that query . A number of them are from the Revenue Commissioners. They include presentations to several Departments and email exchanges. The Minister for Finance, Deputy Noonan, has said that the Revenue Commissioners are making contingency plans. In view of the fact that we cannot dictate the outcome of Brexit, why would it not do so? The Revenue Commissioners are, therefore, looking at all possibilities. That includes the establishment of possible customs posts along the Border, as indicated by the documents I received. Is that not the case?
I did not say that the Revenue Commissioners are planning. None of us is naive enough to think that it is planning before Brexit negotiations have begun. I asked if it is the case that Revenue has contingency plans in regard to customs posts along the Border. Until I referred to the freedom of information document I received which quotes 31 records, the witness said it was trade facilitation. That is not my main point. My main point is to ask why we cannot see the 31 records? What is so top secret that we cannot see what Revenue is thinking about if we do not get the type of agreement with our EU partners or Britain in regard to Brexit we would like? I cross the Border on the way to the Oireachtas. Businesses will have to cross it. We need to speak the truth here and tell people what is possible and what one of the likely outcomes is. We must then outline how we will counteract that or work towards a different outcome. Why does the Revenue not release its briefing documents to Members of the Oireachtas? Why are we being kept in the dark in regard to contingency planning? What is so secret about it? This issue is not part of negotiations but is preparing for a potential outcome of the negotiations. It has nothing to do with a negotiating strategy. I do not understand this. Why would this type of information not be provided to an Oireachtas committee on finance which is trying to deal with these issues and holding hearings over the next few days on this issue?
Mr. Liam Irwin:
Declarations would be electronic. Electronic facilitation could be done using anything from a big computer system to apps on a mobile device such as a tablet or a phone. Most transactions would be immediately approved and that would be the end of that. There would be free movement for those items thereafter. Perhaps 6% to 8% of items, mainly comprising container traffic-----
Mr. Liam Irwin:
----would be diverted. Based on current experience, most of those items would be diverted for a documentary check and a small number sent for physical inspection. There would not be customs stops on the Border such as applied until 1992 as described by the Deputy. That is not the process we envisage. Declarations will be electronic. The stations will be there mainly for trade facilitation to clarify issues. There would be some form of customs intervention but not at those stations. It would probably comprise mobile intervention of some consignments, either randomly or randomly with risk rating. The trade facilitation station will be very different from the customs stations the Deputy remembers.
I appreciate that. That is welcome information that this committee should have. It brings some clarity. Language is being used which is not getting to the substance of the issue. What is meant by the phrase, "no return to the borders of the past"? Is it that no British soldiers will be standing at a customs post as customs officers check if a person has two pounds of bacon in the back of the car? That is what people remember. However, the scenario outlined, which I acknowledge is contingency planning rather than an plan for certain implementation, in terms of Border patrols and spot checks and so on, including a facility which could lead to up to 8% of traffic being diverted to it, is a major worry for businesses, particularly in Donegal, the county from which I come. People and companies there such as haulage companies have to cross the Border. While we are preparing contingency plans on this side of the Border, a similar process may be taking place on the other side. Is that not the case? Travelling from Buncrana or Gweedore, a person might reach a trade facilitation post 8 km from Lifford and then have to pass another one 8 km from Strabane. By the time that person reached Aughnacloy, he or she could have been stopped twice more. That could be problematic, in particular if fresh product was being transported.
My colleague asked Mr. Callinan about special status for Northern Ireland within the European Union. I appreciate he said it does not matter what we call it. There is some truth in that. However, the Oireachtas has voted that the Government should seek special status for Northern Ireland with the European Union. I understand the witness's role and that he is responsible to the Taoiseach. However, in a democracy one must have regard to the will of the majority of the people. Mr. Callinan mentioned that it is not his place to demand special status. In reality, it is, and he has that authority. The Oireachtas has given him, or at least the Taoiseach, that authority. He is not able to ensure the special status is secured but neither can he ensure we do not have a hard Border or hard Brexit and so on. There is a requirement for special status for Northern Ireland within the European Union. As we are dealing with 26 other member states in addition to Britain, who obviously have their own opinion on this matter, the only way we can prevent what Mr. Irwin has spoken about, which could decimate industries across the Border community which must cross the Border daily, is by Northern Ireland being within the customs union. That would require it to be in the EU and special designated status is therefore required. Although Mr. Callinan works under direction, I ask him to bring that back. I make that point to him again.
The witnesses said that fiscal exceptions are being reviewed and that they will work within the fiscal rules. They are aware of the now widespread Sinn Féin position, which is that the fiscal rules do not work and need to be renegotiated. However, there is leeway to deviate from the fiscal rules in exceptional circumstances.
Are we going to argue or are we willing to make the argument that the outcome of Brexit should be deemed an exceptional circumstance under the fiscal rules? That could allow us to invest in areas where normally we would not be allowed to invest in the case of no exceptional circumstances. If Brexit is not an exceptional circumstance for this country, God knows what is.
I have two further small questions.
Mr. John Callinan:
I will repeat what I said earlier on that point. We have to be careful not to prejudge the outcome in a bad way at such an early point in the negotiations. That is important. The Government's clear stated preference is to have the closest possible trading relationship between the EU and the UK, which, in turn, minimises many of the problems and challenges we are talking about. We have to be careful not to take a position in some other area that gives the impression that we have already folded our tent on the issue. That is also important. It is not to say that we are not looking at all these issues but we have to be careful that we do not prejudge our negotiating position.
It would be remiss of me not to wish the officials from Departments well. I mean that because we need a positive outcome in the negotiations. The points we are putting forward will be published in a further document on Brexit dealing with some of the issues that I am raising. We will send it to the officials.
We wish the officials well, but no matter how good the outcome of the Brexit negotiations, I do not believe that there is not going to be a negative impact on this State. We are all familiar with the impact in terms of World Trade Organization tariffs. We are talking about unemployment levels going up 2%, €20 billion onto the national debt and GDP reduction of between 3% and 4%, depending on whether we take the figures of the Department of Finance, the ESRI or the Central Bank. Even if we do not get the type of hard exit or WTO tariffs, we are also looking at significant impacts in the country, and I do not believe any positive outcomes would offset those. Is the question of exceptional circumstances laid down within the fiscal rules something the officials are willing to look at?
Mr. John Callinan:
I will ask my colleague from the Department of Finance to say more on it. The point I would make is that it becomes part of a wider set of issues in terms of the overall fiscal management and investment strategy of the Government. Brexit will be an important factor, but by no means the only factor, influencing the decisions that have to be taken.
Mr. Brendan O'Connor:
If the question is specific to the exemptions, it very much depends on the outcome. The maintenance of the trading relationship to the greatest extent and the transitional arrangements that we would hope for would be close to the status quo. A hard Brexit is very different. It is difficult to make the case for exemptions from fiscal rules unless we have something to hang it on, at least at this point.
Deputy Doherty's comments are fair. Clearly, Deputy Doherty is familiar with the research we have put out on a hard Brexit. We have put out the research to inform and stimulate debate and the types of questions Deputy Doherty is asking. We probably need to know a little more about the negotiating outcome before we make those through the Council formations.
That is valid. I have one last question but I want to make another comment first. The outcome will determine whether there would be a trigger but I expect the normal process in negotiations would involve this being teased out. If that is the outcome, what would trigger the exceptional circumstances provision? Usually, we do not leave it until the end to find out the outcome. I am offering this as something that should be done during the negotiation process.
My last point relates to state aid. I welcome the comments of the deputation on state aid. We have already seen industries being severely impacted as a result of Brexit, for example, in terms of currency fluctuations. The mushroom sector is one case in point.
State aid rules do not require amendment. At this point, they require the flexibility to do certain things. They require the flexibility that is built within them to be utilised. I do not believe this is something that can be left to the end point. Article 107(3)(b) of the Treaty on the Functioning of the European Union relates to state aid rules and is clear. It allows aid to promote the execution of the important project of common European interests or to remedy a serious disturbance in the economy of a member state. I beg the deputation to make it clear as part of the negotiation strategy that Article 107(3)(b) needs to be initiated because of a serious disturbance in the economy of a member state. If that takes place, we would not have to spend six, nine or 12 months negotiating while we see employment in companies going to the wall or people joining dole queues or emigrating. The flexibility is in place.
We have all the research from the Department of Finance. We do not know the outcome of the negotiations, but it needs to be agreed that the provision can be switched on at any time. Brexit should be seen as a serious disturbance. If the Council does not believe that it is a serious disturbance, then what we are reading in the newspapers or what we are hearing in the media suggests something different. I appeal to the deputations to promote agreement in principle at negotiation level that the article can be triggered and that Brexit can be deemed as such.
Mr. John Callinan:
I thank Deputy Doherty. I have no wish to pre-empt the work that the Government has signalled it will be doing over the coming weeks in terms of the overall approach to the economy, but that is one of the sets of issues that is being actively looked at as part of the overall package. I take on board what Deputy Doherty has said.
I welcome the delegation. My questions relate to customs. The deputation has said that there will be an EU border. What input will the EU have into this border? Will the border be the same as the Border that is right around? Will the EU have specific input into setting up posts, if there are to be posts, or whatever set-up will operate?
Let us bear in mind that some countries will have no customs posts. People can go right through those countries. There will be considerable cost involved in putting a border in place along the Border with Northern Ireland and in the various ports around the country as well. Will there be there any aid towards that?
Mr. Liam Irwin:
We can in some cases, for example, the container scanners in Dublin and Rosslare. We were part-funded by OLAF, the European Anti-fraud Office, for those. There is opportunity, when there is significant capital investment, to apply for grant aid. That would be assessed on its merits by the Union.
My next question relates to open skies. Let us consider our airports and air routes. The Dublin to London route is the busiest route in Europe.
To take the example of Ireland West Airport Knock in my local area, a significant number of people use the airport weekly to commute to work in various parts of the United Kingdom. Ryanair has expressed concern about the open skies policy. On the basis that most airlines plan 12 months in advance, they believe a new agreement on aviation would have to be in place by next March. Has this issue been considered and how do the delegates anticipate it will work out?
Mr. John Callinan:
Aviation is one of the areas we have highlighted as being of critical importance. It is a good example, if not by any means the only one, of how complex this process will be. This is reinforced by the Senator's point that the nature of the aviation industry is such that a great deal of planning is done up to 12 months in advance in terms of capacity building, ticket selling and so on. It is one of the issues we have been impressing on the Commission task force. While it is not unique to Ireland, we have a particular interest in having the issue addressed early. We have been impressing on Mr. Barnier's task force that it cannot be left to be picked up in a future trade agreement. Aviation is not currently on the list of immediate withdrawal issues and we are pushing hard to ensure it will be addressed as early as possible in the negotiations for precisely the reasons the Senator raised.
Mr. John Callinan:
Yes. In terms of the overall approach, there are specific sectors, of which energy is another obvious example. We want to ensure we continue to have interconnection both on the island and between the United Kingdom and Ireland in terms of electricity and gas supplies. On aviation, we want to ensure clarity concerning the arrangements, whether with the United Kingdom as a third country, between the European Union and the United Kingdom or in respect of other third countries with flights to Europe, including the United Kingdom and onwards to other EU countries. There is a large set of issues in the aviation sector which will have to be addressed. The discussion will have to be broadened to address a number of individual sectors.
Mr. John Callinan:
Yes. In effect, what will be required, assuming that the United Kingdom presses ahead with the overall approach, is a new agreement negotiated between the United Kingdom and the European Union. From our point of view, we want the agreement to maintain arrangements that will be as close as possible to the current arrangements This will, however, require a different legal framework because this is currently all done under the EU open skies agreement.
It seems that the Central Bank of Ireland is taking a much harder line on measures it must be implement than central banks in other member states. This will have a negative effect in attracting financial service companies to relocate to Ireland rather than elsewhere, including Paris and Frankfurt. It has been brought to our attention a number of times that the Central Bank is taking a much harder line than other central banks which may be the result of the bailout and other countries having stronger financial balance sheets. It appears to be an issue. Has it been discussed with the Central Bank?
Mr. Oliver Gilvarry:
To respond to the Senator's question on the Central Bank, the Department is working closely with the Central Bank and IDA Ireland. The Central Bank does not have a competition mandate as this mandate was removed post-2010. On some of the comments made, the Minister and the Central Bank have made it clear that we want substance in relation to entities moving to this jurisdiction. The way the international financial services sector works is that some activities are outsourced, as it were. However, we want substance on the ground to ensure we will not see the creation of empty shells - the phrase used is "brass plates" - in this jurisdiction. We want entities to move here which would be creating substantive and continuous employment. The Central Bank is taking a pragmatic view of applications and we are engaging with entities that are considering moving to Ireland, among other jurisdictions. We are hearing positive reports. The role of the regulator is to challenge firms to put forward a case on how they will deal with concerns the Central Bank may have. In our experience, this has been a constructive process and the Central Bank is engaging proactively with the firms in question. The Department and IDA Ireland are working with the Central Bank to try to attract as much industry as possible. As I stated, this must be industry that puts substance on the ground here.
I am intrigued by the figures for the volume of exports to mainland Europe that transit the United Kingdom because they hide what is effectively a cluster bomb. I understand Mr. Barnier has indicated that 65% of Irish exports to mainland Europe transit the United Kingdom. Does this present opportunities in terms of a mechanism down the road? Goods are currently trucked through the United Kingdom free of tariffs and VAT. If businesses in the United Kingdom were to relocate here, would they be able to transport goods tariff free through the United Kingdom to mainland Europe rather than continuing to pay tariffs if they were to remain in the United Kingdom? Does this present an opportunity for Ireland? If that is the case, how would this mechanism work in practice? Having spoken to many individuals working for multinational companies, this is the number one issue for many of them. It is currently economic for companies to transport goods through the United Kingdom. If this is no longer an option, they may relocate to the United Kingdom or mainland Europe, which would present major difficulties for us. I have no doubt that this issue has appeared on the delegates' radar. I ask them to comment.
Mr. John Callinan:
Mr. Irwin may have more than me to say on this issue. The Department's overall approach is that for goods travelling through the United Kingdom - whatever the percentage, it is a substantial proportion - we want to continue with an arrangement that is as close as possible to the current one. If the United Kingdom will be a third country from a customs point of view, there are transit provisions that could be operated to minimise, albeit not entirely eliminate, disruption.
If I understood the Senator correctly, the second issue he raised is separate. He referred to a UK company selling into the European Union which would, post-Brexit, potentially face tariffs and might, therefore, choose to relocate some of its activity to Ireland or another EU country. We have a very successful story today of companies from the United State locating in Ireland. In that sense, as long as companies do this in full compliance with EU and Internal Market rules, the scenario presented by the Senator would be an option for a UK company that wished to trade into the European Union. However, it would not be possible to somehow move goods into Ireland and then move them using a transit procedure to avoid tariffs.
Mr. Liam Irwin:
It would be a matter for a business to decide to locate anywhere in the European Union, including Ireland.
There are standard arrangements for land bridge. About 80% of our goods trade going from Ireland to the UK is land bridge. The others are primarily Rosslare and the airports. Land bridge is also used for goods from Donegal transiting Northern Ireland, down to Dublin and other parts of the Republic. There is land bridge for quite a large volume of Northern Ireland goods coming down to Dublin Port to go the UK. There are different scenarios, but there are standard procedures, depending on the nature of the future relationship and how onerous or light they will be. It is something that will evolve.
The witness speaks about transitional measures and arrangements. How long will it be before they come into being? How long might they last for? To add a caveat to that question, is there a situation based on the witness's research where the UK could reverse their Brexit in time depending on the political climate that may evolve, and have we prepared for that?
Mr. John Callinan:
On the latter point it is a theoretical possibility. I am not sure that there is any strong reason to believe that it is a real political possibility at the moment, but if they were to reverse we would not be objecting to it given that our objective is to maintain the status quo.
In terms of transition, much depends on the nature of the exit and the nature of the future relationship, and no one is in a position to say at this stage how long that will take. There are many different estimates floating around about how long it might need to be. Different industry sectors are saying it might require two, three or five years. It is very difficult to estimate at this stage of the process. As the discussion moves on and we begin to get into the future framework it will become more apparent and clear what the nature and the time-----
I did not expect to be in the Chair but I will ask some questions from here, if that is okay.
The witness made reference to being the sherpa. Can he elaborate on what that means for those of us who are not sure, in this context, what it means?
Mr. John Callinan:
It probably sounds more exotic than it is. It usually means a fellow who carries big bags up a hill, but in an EU context it is essentially the lead adviser to the head of Government on EU matters. There is a network which meets in an ad hocway, often before the European Council, to prepare the discussion of the European Council. That is essentially what the role is.
The Department was reconfigured, and we know that Mr. Callinan is the second or additional Secretary General in the Department and that a chunk of the staff that were in the Department of the Taoiseach have moved to the Department of Foreign Affairs and Trade. Mr. Callinan obviously has other responsibilities, including Northern Ireland and the peace process, but how large is his Brexit team in terms of personnel?
Mr. John Callinan:
In my own Department we cover the areas of international, EU and British and Northern Ireland business. In total I believe there are 28 people in total. All of them, to some extent, have a Brexit function, whether it is our international or EU business or British-Northern Ireland. It is hard to say definitively how many are exclusively or full-time working on Brexit. The Britain and Northern Ireland team has a core of seven or eight people working on Brexit, and also on the EU side there is a small team to work specifically on Brexit issues as well.
We are a finance committee and I will have some particular questions on financial services, passporting and other issues in a moment.
There are many different issues and we have covered some of them, but has their been much kick-back from the other 26 member states? Deputy Donnelly alluded earlier to the idea that there are four or five of the 27 member states who will be very affected in terms of trade. The further away from the UK a member state is the less affected the member state will be. In Hungary, Romania or Bulgaria Brexit is not as big a deal as it is to Ireland or the Netherlands or France in terms of various products, exporting, trade and even tourism. Are there some people who are quite interested in punishing a member state which is trying to leave? Does the idea exist that Britain is on its way out of the EU and that we should not make it particularly easy for them to leave? We do not want to make it easy for other countries with elements of Euro-scepticism to leave, who might see that they can have their cake and eat it? Has there been experience of that kind of attitude? It is important that we understand that not everything is perfect and that not everyone understands everything about Brexit. I presume that people in countries like Greece, Romania, Bulgaria and Hungary are not all that bothered about Ireland and are worrying about themselves.
Mr. John Callinan:
It is a fair comment that each member state is first and foremost focussed on its own particular concerns, priorities and issues. There is no doubt but that Brexit has an uneven impact or resonance on the different member states. We have unapologetically said that we believe that we are the most affected, for a variety of reasons, and have engaged on an extensive diplomatic and political campaign to reinforce that. On the other hand, the key point is that the impact and priorities are different. They are uneven, but also different. The further east one travels the more the member states are concerned with the issues of citizen's rights. In some of the countries mentioned they are very concerned about the treatment of their citizens currently residing the UK and want to protect their position.
Certain countries have surprisingly deep trading relations with the UK for historical reasons that might not be immediately obvious at first glance. When we delve into it we discover that there are very deep trading relations between a couple of the countries. The countries that are geographically closest have, for more obvious reasons, strong trade concerns. As we move into discussions on the trade relationship we want to get away from saying that we have very unique issues and move towards saying that we have commonly shared issues, even if they might be of greater significance to us. The senator has hit the nail on the head by saying that each country first and foremost will focus on their own issues. Even when we talk to those countries it is a long, slow process to explain what our particular issues are and why they are important. We get understanding and sympathy at the first stage, but when we start to table potential solutions each member state has the natural reaction of asking whether there is a read-across for them and if there is a similar situation for them. It can throw up the most unexpected of complications that we then have to work through and manage and negotiate.
Is the witness happy with the size of his team? Does he feel he needs more people on board or is he finding it difficult to get sufficient expertise? This is a new experience and nobody wanted it to happen, but it is happening. Is the witness under the complement or does he have sufficient numbers for what he needs to do?
Mr. John Callinan:
In my own Department I am satisfied with the availability of resources I have . As we have scaled up that has not been an issue and no one has put a barrier in the way for me. More generally, across the entire civil service and the wider agencies, there has been recognition that there are certain areas that need to be resourced more strongly on Brexit, whether that is through a reallocation of resources within those Departments, or in some cases through additional resources. Across Government, and at a political level by Government, there is a recognition that this is one of the biggest challenges we have to face, and it will not lack the human resources needed to deliver it.
The effect of Brexit is not going to be evenly spread across the economy in terms of sectors or geographically. Some of the areas that need the most help are those which are going to be the worst affected. Some of those that might see some silver lining to the fairly dark cloud are the areas that are possibly overheating already, for example opportunities for jobs in finance which are likely to be in Dublin and urban areas. In terms of agriculture we have heard previously that tariffs might potentially be between 30% and 50% on items such as dairy and meat.
That affects rural areas far more than urban areas and affects agriculture more than finance. What preparation can we do to mitigate that in so far as we can? It is a broad question and I realise we have time limitations, but it is the areas that could do without this the most that will be the most affected. If we did get a huge amount of jobs here, we would have a difficulty housing all the people and finding office accommodation for them in the short term, if not the medium term.
Mr. John Callinan:
That is a fair comment. Independent of Brexit, the Government over the last number of years has been conscious that the economic recovery has been stronger in Dublin and other cities. It has been very conscious of that in its approach to enterprise support, job creation, job support and so forth. However, you are right - Brexit compounds that. That is uppermost in the mind of the Government in terms of its approach and the type of measures required, such as those I spoke about earlier in terms of the overall economic response. The Cabinet is seized with the fact that to the extent there are negative impacts they will hit harder in certain areas, regions and sectors. That will be reflected in the overall Government response. I will ask Pauline Mullingan to comment further from the jobs and enterprise perspective in terms of how that is being reflected in the Department's strategy.
Ms Pauline Mulligan:
I will reiterate some of the points I made earlier about the support from the enterprise agencies, in particular additional funding through the enterprise agencies. We secured a 10% increase in our capital budget for this year, as well as additional current funding for up to 50 staff between Enterprise Ireland and the IDA. It has been a mix of additional funding for the agencies and the development of the schemes I spoke about in reaction to the currency impacts companies are experiencing, such as the development of proposals around a working capital scheme. It is a short-term guarantee scheme similar to the agriculture scheme. You spoke earlier about the impacts on the agri sector, in particular. That scheme was rolled out last year by the Department of Agriculture, Food and the Marine through the Strategic Banking Corporation of Ireland, SBCI. We are now looking at the development of a scheme on a whole-of-economy basis for companies most impacted. It would be a short-term scheme rolled out through the SBCI. Work is under way in the Department on developing that.
The other matter we are working on is scoping out the need for a longer-term business development loan scheme, again for the companies most impacted.
They are the two issues. Finally, we are considering scoping the idea of a financial advisory hub for SMEs. That is in development. It is based on the research and analysis carried out on the companies most impacted in the short term and which will have the most impacts from Brexit in the medium term.
John Callinan spoke about the next phase in terms of detailing all of the mitigation actions that are under way and planned. That will be the next step.
Ireland is far less dependent on the UK now than it was when it joined the EEC, as it was then, but it is still significantly dependent on the UK market. Are further opportunities for diversification being pursued at a greater speed now than they would have been otherwise?
Ms Pauline Mulligan:
Absolutely. Yesterday, you might have seen that Enterprise Ireland launched its eurozone strategy. Enterprise Ireland has been working with the 1,500 clients that export to the UK but with a particular focus on the 600 companies that are most exposed to the UK market. It is driving home the diversification of product as well. It is about not moving out of the UK completely but diversifying into other markets. That is the bread and butter of the work Enterprise Ireland is doing with the addition of 39 extra staff, between at home and in offices abroad. It is to help that effort.
Thank you. Mr. Callinan, I could speak about the customs union all day but we have covered it relatively well. I happen to be a chartered accountant and we have received a large amount of material from Chartered Accountants Ireland, which I am sure you have seen, about the impact on small businesses. Many of them are not conscious of all that is involved. I do not wish to labour that point although I believe it is valid. We might invite them to appear before the committee on another occasion. Consider the issue of food control. The UK has typically had a cheap food policy. It is not as interested in the agriculture sector as in the end consumer. There is the possibility of a great deal of cheap, not as well regulated product coming into the UK once it is not subject to EU rules. If that food were to get into the UK food chain, how difficult or easy would it be to control it from getting across the landbridge between Scotland and Belfast or Liverpool and Belfast and ending up in the food chain here? For example, it could be South American beef or chicken from various other places that would not be subject to the same food controls. Has there been any thought about what we will do in that regard? We have a very long Border and we do not wish to have a hard Border, but how can we mitigate against that? We cannot control the UK's borders if it adopts a different policy and we are the most vulnerable to leakage.
Mr. John Callinan:
There are probably two parts to this. One is at the EU level and the anticipation of a potential future trading agreement. The EU has made it clear that one of its concerns will be to ensure that any arrangement respects the principle of a level playing field. In the guidelines adopted at the end of April the EU says that it must ensure a level playing field, notably in terms of competition and state aid, a point raised earlier, and in this regard encompass safeguards against unfair competitive advantages through, inter alia, tax, social, environmental and regulatory measures and practices. The EU is saying that it will not have some type of soft arrangement where the scenario you have mentioned would be a risk.
Equally, on this island we must look at how we enforce the standards and regulatory controls. That is one of the areas I mentioned where there might be much scope to do things on an all-island basis. Much will depend on the overall arrangement between the EU and the UK and much will depend on the devolved powers the Northern Ireland Executive will have. However, it is one of the areas which I would have thought, to refer back to imaginative and flexible solutions, would be an obvious example of where it is in everybody's interest to have an all-island approach to tighten food standards and controls.
Although this is the finance committee we have not dealt in detail with financial services. A number of French Senators came over to visit members of the finance committee. They had been to Hong Kong, Singapore and London and they were coming to Dublin and Frankfurt to examine what was happening and what opportunities they could seek. There appears to be a movement away from passporting arrangements to more equivalent regimes, certainly within the UK. What have been the indications in regard to regulation equivalence of standards and is it likely that any deal will be struck allowing for equivalence of standards between what we are doing and what the UK will do? Many people do not appreciate just how large the UK's capital markets are as a percentage of the total EU. In excess of 70% of the entire EU's capital transactions go through London, not Frankfurt, Paris or here. How will all of that be handled? In terms of relocation, we do not appear to be as forward as perhaps some other countries are in angling for the businesses that might wish to remain in an EU territory.
Mr. John Callinan:
I might ask my colleague from the Department of Finance to go into some of the detail. Again, I refer to the guidelines. They include a statement that any future framework must safeguard financial stability in the Union, which is a reference to the financial sector, and respect its regulatory and supervisory regime and standards and their application. Again, that is a principle the EU side has applied. In terms of the extent to which we are pitching for the business, as it were, it would be incorrect and unfair to the IDA, the Department of Finance and others to suggest that they are not aggressively pursuing the opportunities. They are not necessarily doing it in exactly the same way as other countries, but that is for a careful, considered reason. It is seeing a great deal of success. Of course, they are not going to win every project every time, but many projects have already been identified. It is fair to say as well that a number of companies involved do not necessarily wish to announce in a fanfare what changes they might be making. Some do and some do not, but I will ask Oliver Gilvarry to elaborate on it.
I have another question before Oliver Gilvarry intervenes. There is an enormous financial centre in the UK. Is it reasonable or likely to expect that the vast bulk of that will stay in London dealing with EU matters or is that unlikely to be possible?
Mr. Oliver Gilvarry:
London has always been a financial centre and it will remain one. A certain amount of business will be lost. From what we see, entities currently based in London are looking for jurisdictions within the EU 27 to relocate to. Dublin is one of those. We are always in the top numbers being considered. That is to ensure continuation, as Mr. Callinan highlighted. It is too early to say what the impact on London will be. It is too early to say what type of deal will be made. The concept of the equivalence assessment was mentioned. Will we or the UK have to rely on what regimes we currently have in place in certain European directives or regulations, or will they be rewritten? Firms are making the decision now to say that they cannot wait for that and will set up operations within the EU 27 to ensure continuation of service to their European clients. London is still London and always will be. It will be a centre of liquidity, similar to New York, Hong Kong and Singapore, but it will see a fall-off of some European business.
On the point about us being forward in attracting financial services, there are a number of other jurisdictions. The competent authorities would have competition mandates. They are very proactive. To reiterate what Mr. Callinan said, the IDA has been very proactive, having roadshows, and a number of Government Ministers and our officials have been at those as well. The sense we get is that Dublin and Ireland generally - it is not focused purely on Dublin, since there is also a focus on locations outside Dublin due to lower costs - are comparing very well. We find that many firms want the consistent approach of the certainty of the framework and the engagement with the regulator. They are not looking for light touch regulation. There is a single rule book, as we call it, for regulation in Europe. They want something that will give them a clear answer and certainty about how they will be treated. Dublin is very high up there and we compare very favourably with a number of larger member states on that basis.
The IMF report that came out recently talks about Brexit being negative and dangerous for the Irish economy. We all knew much of that anyway. Has there been any follow-up with the IMF about what it is saying? Do the witnesses concur with all of it? Do they have issues with it?
Mr. John Callinan:
My colleagues in the Department of Finance may want to speak specifically about engagement with the IMF. More broadly, much of what is said in the IMF report is consistent with the analysis that the Economic and Social Research Institute, ESRI, has produced for the Department of Finance itself which says, absent other policy changes, there could be a severe impact in a worst-case scenario. We would in turn anticipate policy responses to mitigate that impact. I will ask Mr. O'Connor to speak on the IMF and other issues.
Mr. Brendan O'Connor:
We had the IMF with us for two weeks until last Friday. I was in many meetings with it, including on this issue. We have representatives from the Commission with us this week as part of its post-programme surveillance, PPS, mission. Article 4 is part of post-programme monitoring as well. We have a meeting about Brexit in the Department of Finance tomorrow. There is one in the Central Bank tomorrow. I think most of what the IMF said was probably present in our own research. We took a view that we wanted to do much research. This dates back to late 2015, when the first volume came out, and then quite a bit last year. There were several publications. One was earlier this year. We have been very up-front in bringing our research to as many people as possible, including domestically, to the Low Pay Commission, for example, and others that have wanted to hear what we have to say. The institutions have had many questions.
We would agree with some of the IMF's comments, which would reflect things we have said publicly, not just privately. It is probably focusing on some of the harder Brexit scenario that we have put out. Our own macroeconomic forecasts from 2019 onwards embed those hard Brexit scenarios anyway. Therefore our labour market forecasts would already incorporate those scenarios. If one looks at our labour market forecasts, we will have a situation by the end of this decade where we expect more people in work in Ireland than ever before. Going back to what Mr. Callinan said, from a counterfactual perspective - that is to say relative to a situation where there is no Brexit whatsoever - this path is a little more muted in some scenarios.
The final point is to summarise, as Mr. Callinan said, that all of our modelling and analysis is very much on a no policy change scenario. We already saw policies introduced and announced in the budget last year. It was very clear at that time that that was the first in a number of budgets that would take Brexit into account. There was a single publication called "Getting Ireland Brexit Ready". It was very specific. Some policies were announced there. Some policies are sectoral. Some that were announced are fiscal as well. One would anticipate more as time projects.
Mr. John Callinan:
To park what has been spoken about, I mentioned the domestic Government policy focus on economic issues and how to deal with that earlier. On the negotiation process, the detailed negotiating directives that are currently being discussed are due to be finalised at the General Affairs Council next week. That would then be the ending of the first phase of documentation, capturing how the EU is going at the negotiation process. The working assumption had been that formal negotiations would then begin almost immediately, but the calling of the British election has effectively put that on hold from all sides for a few weeks. The hypothesis now is that, as soon as the British election is over and the line-up is clear on the other side, negotiations between the Barnier team and the British representatives will begin, and that what we would hope, as mentioned earlier, is that this moment of sufficient progress on the early issues would be reached reasonably earlier and that the discussions would then widen to include the framework for that future trading relationship, potentially before the end of the year.
I think that about 200,000 tonnes of New Zealand lamb goes into the UK every year on a quota basis. More than 50 countries have negotiated trade deals with regard to quotas. How will those quotas be designated? Will they be EU quotas, or will they be left with the UK after it is done? How do the witnesses see it working out?
Mr. John Callinan:
I will not pretend to be an expert on the specifics of it, but my understanding is that that is one of the issues that is going to have to be worked out in the negotiation process, particularly where there is an EU quota, of which different member states have different shares. How that will be dealt with when the UK leaves has to be taken into account in negotiations. Does the whole quota stay with the remaining EU countries? Does some portion of it go? If so, how is that calculated? The complex mechanics of that have yet to be worked out. I do not know if any of my colleagues know more about it than I do. I apologise that I do not have the intimate detail of that. My understanding from recent discussions is that that is a big piece of work that has yet to be worked out in the overall arrangements.
Mr. John Callinan:
I will have to defer to the Department of Agriculture, Food and the Marine on what the Irish preference would be. Perhaps Ms Pauline Mulligan has insight on it. It is one of a number of issues where is much exploration into what the best interests of Ireland would be, but the point of those discussions and really getting into them has not been reached yet.
I thank Senator Burke.
I thank Mr. Callinan and all of his team who were with him today, including Ms McGrath, Ms Mulligan, Mr. Irwin, Mr. Martin, Mr. O'Connor, Mr. Gilvarry and the other officials who came with him. I wish them well in everything they are doing, both on their own behalf and, more important, on behalf of all of us. I am sure we will be engaging with them again.
I understand this is Mr. Callinan's first appearance before a committee in his new role. I congratulate him on his appointment and I wish him all the best in it.