Irexit: Ireland May Have to Consider Leaving the EU

Since the Brexit vote this summer most national and international media outlets were focused on the American presidential election. However, one story that got lost in the Trump firestorm was the fact that it increasing looks like the Irish government will have to seriously contemplate leaving the EU should the terms of the British Brexit “divorce” be hard rather than soft.

England is Ireland’s main trading partner and the main reason Ireland joined the Common Market (EU) in 1970 was because;” where the English market went Irish producers had to follow”. The prospect of Britain now leaving the EU within the next two year has put the Irish political establishment into an absolute tailspin. The matter is so serious that Enda Kenny, the Irish Premier, post-Brexit, went directly to Germany to plead for a “special case” for Ireland in the negotiations. Angela Merkel was having none of it. Since this political failure, matters have quickly deteriorated for Irish politicians and economic strategists.

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Last Tuesday, December 6th, the head of EU Brexit negotiations Michel Barnier stated that there would be no “cherry picking” in the terms of England’s exit and he reiterated that negotiations would be swift and blunt. This statement was greeted with dismay in Dublin. The political mood has darkened to such a degree that Ruiri Quinn, a former Irish Government Minister stated that; “the Brexit issue has become the greatest crisis facing the Irish people since World War II”. The reason for Mr. Quinn’s pejorative view is that in addition to pushing for a harsh Brexit treaty the European Commission is also moving to quickly abolish Ireland’s favorable 12.5% corporate tax rate. It is this favorable tax regime that has supported Ireland’s success in attracting a disproportionate amount of American Foreign Investment over the last 20 years or so. Without this “hook” the future ongoing development of Ireland’s export manufacturing base looks bleak.

Thus the poor Irish citizen is receiving bad news on all fronts and therefore I would not be too surprised that, should it prove to be necessary for economic survival, within the next two years the Irish elite will put their media machine in motion and “motivate” Irish public opinion to support an early Irexit referendum.

The following article by Wolfgang Münchau, was recently published in The Financial Times, Oct 10, 2016, and gives an English perspective on the issue:

It is quite instructive to recast the narrative about Europe’s multiple economic crises in terms of the business models of nations. The EU has a number that are unsustainable. A much-cited example is Germany’s overreliance on manufacturing. Another is Britain’s overreliance on finance.

The failure of national business models takes time to play out. Germany will probably still be uber-competitive in a decade’s time. But Brexit will accelerate the demise of Britain’s business model.

The City of London will surely remain Europe’s premier financial centre but it will not be able to retain its role as the financial hub of the euro zone. The single EU passport for financial services has enabled UK-registered financial institutions to operate throughout the union without subjecting themselves to local regulation and supervision. For 17 years, Britain was able to play this game without adopting the euro.

The City will now have to seek a new role because Theresa May’s insistence on immigration controls settles the issue. The UK prime minister’s Brexit doctrine leaves the EU no choice but to insist on a hard Brexit. Angela Merkel and François Hollande, the leaders of Germany and France, last week told us so. There is no scope for a fudge. Brexit means that Britain will leave the single market and the customs union.

So we are about to witness a shift away from an old unsustainable business model to something new. We should not pretend that this will be cost-free. The overt xenophobia at last week’s Conservative party conference may end up driving the very foreigners away the UK can least afford to lose.

There is a risk that Brexit and the associated change in model business will go wrong. Brexit is not necessarily a bad decision. But it requires the right kind of policies to work.

There is another country in Europe with an unsustainable business model: Ireland. It offers low corporate tax rates and legal tax avoidance to foreign investors. The ruling by the European Commission to force Apple to pay €13 billion to the Irish Government in taxes is a sign that this model may not be sustainable for much longer. Brussels is also pushing towards a harmonization of the corporate tax basis – the rules of what to tax.

Dublin has been resisting such a change, but with the UK out of the EU it will lose an ally in the fight against EU-imposed tax harmonization. Ireland has done well from its tax haven status. But this model is unsustainable.

Perhaps the confluence of Brexit and the long-term loss of a business model will persuade Ireland to follow the UK out of the EU. This will obviously depend on whether Ireland can find an alternative model inside the EU. It is possible, but not inevitable. An Irish exit will not happen unless and until there is more clarity of the costs of Brexit. It will also depend on whether the euro zone successfully manages the various crises facing it.

If all this develops as I expect – badly – the economic case for an Irish exit would strengthen. Ireland might choose to stay in the EU for political reasons. But those in Ireland in favour of EU membership should give some thought to what could go wrong. They might otherwise end up in the same place as the overconfident Remain supporters in the UK: bitter and without influence.

Market Technicals: A Radical Market Price “Re-Set” Is In Motion

Technical Summary:
Short Term Trend: Bullish
Medium Term Trend: Bullish
Long Term Trend: Bullish
Long Stochastics: Very Overbought
Short Stochastics: Very Overbought
Vix: Bottom of Recent Trading Range
McC. Oscillator: Mixed
A/D Line: Bullish

Before the American presidential election last November, while the Dow Industrials were reaching new all-time highs the same could not be said for the Dow Transports. From July 2016, for four months, the Trannies languished in a trading range that was well off all-time highs. In Dow Theory parlance this indicated that there was divergence within the Dow Theory indices, indicating rising market risk and developing technical weakness.

However, what a difference an election makes. In 25 business days, the Transports have quickly made up for their lost faith and have breached all-time highs with the Dow Industrials in full momentum agreement. This is a market that is now in full renewed bull mode. This fantastic momentum is obviously being powered by a price “re-set”, a modality still recalibrating the price-earnings effect of increased American infrastructural investment, repatriated corporate taxes, deregulated banking, empowered trade re-negotiations, freed American energy resources, significantly lower corporate tax rates, higher waged jobs, Federal government regulation shrinkage and accelerated military redevelopment.

Clearly, the price reset process has a long way to go given the current momentum prevalent in market price action, future interest rate raise shocks notwithstanding.

Thus with a radical Trump presidency, Brexit negotiations, prospective Fed interest rate policy changes, Dutch, German and French elections and a possible French EU Exit referendum (Frexit), I think 2017 is going to be one of the greatest trading years of all time.

Charts: Courtesy of StockCharts.Com

Reference: Wolfgang Münchau, The Financial Times, Oct 10, 2016.

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