Seanad Special Committee on the Withdrawal of the United Kingdom from the European Union debate -
Wednesday, 19 Jun 2019

Engagement with the Central Bank of Ireland

Chairman

Apologies have been received from Senators Marshall and Ned O'Sullivan. A number of committee meetings are taking place in parallel. If people are coming and going from this meeting, our guests should not take it personally. Unfortunately, that is the nature of this business.

I remind members to ensure their mobile phones are switched off. This is important as their use causes serious problems for broadcasting, editorial and sound staff. We are keen to make sure the transcripts from these meetings are wholly accurate.

Our first session today will deal with the implications for the Irish economy of the withdrawal of the United Kingdom from the European Union. I am delighted to welcome from the Central Bank of Ireland Dr. Mark Cassidy, director of economics and statistics, Ms Gina Fitgerald, head of the financial risks and governance division, and their colleagues.

The Seanad special committee engaged with the Central Bank two years ago when we drafted our initial report. All things being equal, the committee would have disbanded some time ago. However, that has not come to pass. Despite the fact that Brexit has not happened yet, there is much we still have to discuss and much has occurred which has impacted on the economy, the banking system and much else. Earlier this week, the International Monetary Fund, IMF, described Ireland as being uniquely vulnerable to a no-deal Brexit, so we are particularly interested in hearing the Central Bank’s analysis.

Before we begin, I remind everyone of the rules on privilege. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

With all that covered, I ask Mr. Cassidy to make his opening statement.

Dr. Mark Cassidy

I thank the Chairman and members of the Seanad special committee. We welcome the opportunity to appear before the committee today. I am joined by Gina Fitzgerald, head of the financial risks and governance division in the Central Bank. I will briefly set out the work undertaken in the Central Bank on Brexit as well as potential implications for the financial system and, in particular, the wider economy.

The Central Bank has been focused on Brexit risks since before the 2016 UK referendum. Following the referendum, a Brexit task force was established on a permanent basis. It meets and reports quarterly to the financial stability committee and the Central Bank Commission regarding Brexit-related political, economic and financial market developments, risks arising for firms supervised by the Central Bank and issues arising for the Central Bank, in particular with respect to authorisations. In September 2018, the Central Bank established a Brexit steering committee to oversee the further stages of the Central Bank’s preparations for the UK’s departure from the European Union focusing on cliff-edge risks and the adoption of mitigating actions where possible and appropriate.

The Central Bank’s work has focused, inter alia, on ensuring that, first, the risks to the Irish economy are understood; second, financial stability and consumer protection risks are identified and mitigated to the greatest extent possible, particularly regarding the cliff-edge risks associated with a hard or no-deal Brexit; third, regulated firms deliver on their responsibilities of appropriately preparing their businesses for these risks; and, fourth, we deliver our gatekeeper role in a robust, transparent and efficient way, consistent with our aspiration to operate to and influence European norms of supervision and, overall, ensure that Irish and European financial stability, investor protection and consumer protection risks are mitigated.

We have taken a transparent approach to this work, recognising its importance and the interest in it. We publish all the reports of our Brexit task force and answers to frequently asked questions. We have held several Brexit-related stakeholder round tables and published numerous reports and speeches.

I will now discuss our assessment of potential implications of Brexit for the Irish economy. The Central Bank's central forecast is that underlying economic activity is set to continue to grow at a relatively solid pace in 2019 and 2020, though some moderation in growth is in prospect, reflecting both the impact of a less favourable and more uncertain international environment and also the limits imposed by domestic capacity constraints and tightening labour market conditions. If a disorderly no-deal Brexit scenario can be avoided, the outlook for the economy over the next two years remains broadly favourable. Economic growth is set to be supported by a still solid pace of expansion in domestic economic activity, underpinned by continued growth in employment and real incomes, the ongoing recovery of the construction sector and growth in domestic Government spending.

As is now well understood, any type of Brexit would be negative for Ireland, with a disorderly, no-deal Brexit especially so. In previous analysis the bank has published work examining the potential medium-term impact on the Irish economy of an orderly World Trade Organization, WTO, no-deal scenario, a free trade area-like agreement such as the withdrawal agreement, and, most recently, a disorderly, no-deal Brexit. Even if a deal can be agreed, there will be additional trade frictions, which will have disruptive effects for businesses and consumers, and for the agriculture and food sectors in particular. However, the effects would be relatively contained and spread over the medium term.

A disorderly, no-deal scenario would, on the other hand, have very severe and immediate disruptive effects, with consequences for almost all areas of economic activity. Compared with a scenario where the UK remained an EU member, our estimates suggest that a disorderly Brexit would result in a substantial and permanent loss of output. The disruption and related decline in economic activity would be front-loaded and would give rise to a significantly more adverse outlook for the Irish economy in the first few years. Certain sectors and regions would be disproportionately affected, especially those which are more reliant on trade with the UK or which are more vulnerable to the imposition of tariff and non-tariff barriers, particularly sectors such as agriculture, food and smaller scale manufacturing and rural regions and those near the Border.

Brexit is not the only risk to the economic outlook. On the external side, there continue to be other downside risks facing the economy. Given the position of Ireland as a small, highly open economy and the important role of multinational firms within the economy, the evolution of global economic and trading conditions, taxation regimes and movements in major exchange rates will have an important bearing on economic performance. On the domestic side, while overall price inflation remains very subdued, wage growth has continued to pick up against a background where the remaining slack in the labour market is diminishing and there is a need to continue to guard against the risk that strong cyclical conditions give rise to overheating dynamics.

I will now briefly discuss the implications of Brexit for the financial system. On the basis of the specific Brexit work that we and others have undertaken and, crucially, the work of the last decade to drive a significantly more resilient financial system, the immediate cliff-edge financial stability risks of a no-deal Brexit are considered to be broadly manageable, albeit this eventuality would be challenging for all firms operating in Ireland. There are some remaining risks of consumer detriment. The Irish and UK financial systems are closely connected, with UK firms and firms from Gibraltar providing financial services to Irish consumers. The Central Bank has worked closely with the European and UK authorities to seek to ensure that those firms wishing to continue to provide services to Irish consumers are able to continue to do so in the event of a hard Brexit. The majority of UK based firms have taken appropriate action, but not all have to date. In this context, I am pleased to note that the Central Bank has worked with the Department of Finance to support the drafting of legislation to protect insurance customers in the event of no-deal Brexit, through the creation of a temporary run-off regime.

The nature, scale and complexity of the Irish financial system are changing as a result of Brexit. New authorisations and expansions of existing operations are increasing the size of many sectors. Our gatekeeping role is hugely important in mitigating financial stability risks and protecting market integrity and customers in Ireland and across Europe. It is imperative that any new business authorised here as a result of Brexit meets the high standards that are expected of any such firm authorised in the EU. We also continue to be active internationally to ensure that the risk of divergence between EU jurisdictions in how they handle relocations from the UK is mitigated. In order to address the concern of regulatory divergences and the risk of regulatory arbitrage between EU member states, we have long been engaging closely with the European Central Bank, across the Single Supervisory Mechanism, SSM, and the European supervisory authorities to agree Europe-wide approaches to the key policy and supervisory issues, stances and decisions that have arisen from Brexit.

Following the UK's departure from the EU, there will be a loss of experience and expertise when UK regulators are no longer sitting at the table. The UK's departure will require increased engagement on our part in the relevant EU and international fora. We have consistently and successfully been making a substantial effort in this regard since the crisis. We will continue to prioritise our work in this area. London is a truly global financial services centre operating within the EU and serving a very material amount of its financial services needs. Undoubtedly, the role of London and its interconnections with the EU will change post Brexit. It is critically important for the EU economy and all its citizens that it continues to have a financial services system that delivers within the EU, but also has deep global connectivity beyond it, including with London. We are now happy to take any of the committee's questions.

Senator Gerard P. Craughwell

I regret that I must leave very quickly after my contribution to go to another meeting. I am very interested in Dr. Cassidy's report. He spoke about growth in the economy, employment and real incomes but one of my great concerns is our dependence on the big software companies here. We have reached a point where these companies have to source accommodation for people they bring in from abroad and they have to compete with Irish salaries. Having spoken to some of the senior people in some of these companies I feel there is a real risk now that they will look elsewhere for cheaper accommodation and labour costs. Our labour costs compete internally rather than internationally. Dare I say there is some suggestion we are back in the bad old 1995-2000 days as companies have to bid for professionals. One senior executive told me that it would not take a whole lot to have the company move. Has the Central Bank considered that threat and its likely implications for the economy?

The Border has been a hobbyhorse of mine since the day after the referendum. Dr. Cassidy referred to the agrisector which I have always seen as part of our core economy. I cannot see how we can have an open Border.

I have never been able to see it. Nobody has ever explained to me how one can have an open border with a third country, in particular if there is a hard crash-out. I made the point previously that all we need is one carcass of beef to finish up in Berlin or Paris that is not true Irish beef or that has angel dust or something similar in it and our entire market in Europe, which accounts for approximately 60% of our beef market, would collapse. That is a serious concern.

Have the witnesses war-gamed the implications of the border issue? In my view, the suggestion that we will have checks at ports and use Dublin, Cork or Rosslare ports as points for checking customs places Ireland outside the European Union. If there are to be checks anywhere, they should be on the Border.

I am aware that some European companies that manufacture in Ireland and source component parts and raw materials through the UK are now being actively encouraged to look to suppliers in Europe. Have we looked at the manufacturing cost implications because it will all come down to costs in a post-Brexit world? Have we looked at the cost implications of shifting our purchasing to mainland Europe?

There has been talk of replacing the landbridge. I am now convinced that the landbridge notion will not work. Somebody suggested to me that the British might lay on one carriageway to Dover for Irish trucks and likewise for the return journey, but I cannot see that happening. There will be costs attached to using the seabridge option. For example, the journey by sea will be 36 hours rather than 18 hours. Has the Central Bank or any other body looked at the statistics on the time it will take to clear trucks? We are talking about tailbacks of 9 km in places. I would like to hear the statistics on that.

In fairness, the Government has put on a number of Brexit preparedness roadshows for SMEs. I was horrified and shocked to see at one of those meetings when companies were asked for a show of hands on who had a Brexit officer in place that only two hands went up in a packed room. Do the witnesses have any statistics on the position now? Have companies at last begun to realise that Brexit may very well come down the line?

In the context of inter-country partnerships within the EU, it is clear that our strongest ally is leaving so we may have to subdivide the European Union, as it were, and pick different partners for different topics. We might go to the Germans for finance and the French for agriculture and then pick some of the smaller countries to get a critical mass. Have the witnesses analysed which countries are most suited to which specific topics? I hope that is not too far outside their remit. I thank Mr. Cassidy, Ms Fitzgerald and their colleagues for their time.

Senator Gerald Nash

I have a direct question. The situation is comparable with the shock experienced in 2008 and 2009. The witnesses might be frank about the loss of output they expect in the event of a no-deal Brexit, the number of job losses, the quantum of business closures they might expect and where those businesses are located and in what sectors. While we know that, it is important for the witnesses to be clear on it. In real terms, what are we facing as an economy and society in the event of a no-deal Brexit? The reality is that whether we like it or not, given the political climate in Britain at the moment, we could very well be staring down the barrel of that no-deal exit gun.

Senator Paul Daly

I welcome the representatives from the Central Bank. I have some brief questions to flesh out what was said in the opening statement. I accept that the first issue I raise is not in our remit but it is related as it will affect us. To what extent has the Central Bank looked at the British economy post Brexit? Sterling is a stand-alone currency and while Britain is not in the eurozone, it is in the EU. Presuming that Britain does leave the EU and given that we will have sterling currency on the island, has the Central Bank looked at how that situation could and would affect us further down the line? It might not have been part of any of the stress tests carried out to date.

I am interested to hear about contact and research carried out by the Central Bank with consumers in the financial services sectors. How much previously proposed development in the economy has been parked with a view to allowing the prospective investors or developers to wait and see what will happen? We have economic growth at the moment and, leaving Brexit to one side, the Central Bank predicts continued economic growth. Do the witnesses have a sense that substantial development and investment that may well have occurred in recent years has been postponed because prospective developers or investors are sitting on their hands and playing a wait-and-see game? If the Brexit issue is resolved in a way that is reasonably in our favour, could a mini-Celtic tiger emerge as people who have been waiting to see what happens decide not to sit on their hands any longer?

It seems to be all negative in the context of Brexit, but are there any positives? To be honest, there was not much positivity in the opening statement. I cannot fault Dr. Cassidy on that. He has to call it as it is and much of it is speculative. Has he experienced any positive spin-offs to date that might not have happened if Brexit was not an issue?

Senator Niall Ó Donnghaile

I apologise to the Chairman and the witnesses as I was involved in a debate on a Bill in the Seanad Chamber. I read over the opening statement and there is an understandable frankness in terms of the severity of the impact of Brexit, whether there is a deal or otherwise. While I agree with the assertion that any type of Brexit is negative for us in Ireland, do the witnesses have a view on the importance and significance of the backstop in the context of the Central Bank’s remit and work? I ask the witnesses to refer to that. I do not have any further questions per se at this stage, I ask others on the back of the responses. The lack of comment on the significance of the backstop in terms of the Central Bank’s remit and work and the businesses that will be impacted as a result of Brexit was probably an unintentional omission from the remarks that I have seen.

Chairman

I, too, have some questions, most of which arise on the back of points raised by Senators Nash, Craughwell and Paul Daly. I would welcome more detail and exact figures on the prospective growth rates, both in a deal and a crash-out scenario. We are only facing those two prospects or the possibility of a referendum, but we will not go into that.

On the growth rate, there have been two other forecasts that have covered the period since the referendum based on the number of new banking licences that have been issued since the referendum. Overall, could the witnesses quantify the amount of increased activity in financial services in Ireland in that period? Is there a projection for how much that could possibly increase in both the deal and no-deal scenarios? Dr. Cassidy alluded to it in his opening remarks.

Other speakers referred to preparedness. How best can we manage the cliff-edge scenario? As Senator Ó Donnghaile correctly said - I have also made this point in every possible intervention over the past three years - there is no such thing as a good Brexit, but the cliff-edge crash-out scenario is extremely worrying. What increased measures can be taken to manage it by Government actors but also economic, business and civic society actors. As Senator Craughwell correctly pointed out, it is very hard to appoint a Brexit officer if one is also CEO, head of sales, head of cleaning or managing director of a business that employs two and a half people and one is working flat out around the clock.

My final question is a bit more specific. Dr. Cassidy addressed it directly as he was concluding. London is not going anywhere. Even if it is a crash-out scenario and the British economy declines significantly, London will still be one of the world’s major financial centres and it will still be extremely important for Ireland and our financial services sector that we maintain a complementary relationship with the city.

It is, first, a question of how we can maintain that engagement and, second, what we have done so far to maintain it. I am aware that quite a bit of work has been done. I have met more people from the City of London and various representative groups in the past three years than I ever thought I would have to. Senator Craughwell touched on the issue of developing alliances. I appreciate that within the European context, in a deal or a no-deal scenario, the priorities of the Irish economy, particularly of the financial services sector, might differ from those of colleagues in the EU 27. It is a question of how best we can position ourselves within the British economy but also within the EU 27 in order that we maintain access to the City of London and build on what has, to date, been a very strong and positive relationship for both the United Kingdom and Ireland.

Senator Joe O'Reilly

I welcome our guests and thank them for attending. As I was attending another meeting, I apologise if I raise something that was painstakingly dealt with. However, it is important that people receive very clear answers, even twice to the same questions, as they are very anxious about this issue. I come from County Cavan where it is particularly serious and already depressing the local economy, given the expectations and fears about it. In my constituency of Cavan-Monaghan not only is it depressing the economy, it is also halting potential expansion because people are unsure about where they will go. There is a litany of problems and dangerous results, apart from the brief of the Central Bank of Ireland and the focus on macro issues surrounding the Good Friday Agreement and the peace process. While the fallout is within the brief of the Central Bank, strictly the actual mechanics are not. Therefore, we will stick as near as we can to financial matters. That is to set the context for my questions.

Assuming there will be a hard Brexit, is there any merit in looking at the Central Bank's overall lending guidelines as a stimulus to the economy of the Border region and the wider economy? Is there potential for a change in lending policy and almost a Keynesian solution to inject money into the economy? Has the Central Bank given that matter any thought?

Teagasc has carried out research in this area. Has the Central Bank quantified the implications for agriculture and the agrifood industry? This relates to my previous question about lending rules and so on. Has the Central Bank thought about potential solutions in that regard? While there has been an increase in property prices in the Border region in which I live, I sense it is being halted or slowed because of the level of apprehension. Has the Central Bank thought about the implications for property prices and does it foresee a fall in them post Brexit? Is there any cause for alarm in that regard? Do the delegates want to venture a solution or engage in commentary on this issue which is not an easy one?

I am interested in the question of financial services. Will the delegates quantify for us the degree to which financial services are migrating here because of the potential for a breakaway by the United Kingdom and a hard Brexit? Are we gaining anything? If so, is there joy for my region? Without being ridiculously parochial, do the delegates see any potential for the location of new financial services in the region? How does the Central Bank see the currency question developing as we try to navigate our way through what might be a hard Brexit, although we would like the Border to be seamless?

I have mentioned agriculture. I do not want to be alarmist; I am simply reflecting points raised at all of the meetings I have attended with local sectoral groupings. There is gloom, apprehension and fear, particularly in the Border region, although I accept that it is a national issue, as reflected in all of the contributions made. Are there potential opportunities for the Border region? Is there anything I could say to my neighbours when they ask me what I did today for the great taxpayers of the country? Could I say I was at a meeting with the Central Bank and that it told me that there would be potential in a post-Brexit scenario or that, sadly, they told me that there would not be any? I am interested in the answer to that question. Please God, at the end of the day, none of this will apply, but we cannot afford not to be ready.

Chairman

I am sure the great taxpayers of County Cavan are very grateful for all of the Senator's continuing efforts. I welcome Senator Craughwell. I believe the sitting of the Seanad has been suspended for a stint. Without further ado, I invite Dr. Cassidy and his colleagues to address some of the questions asked.

Dr. Mark Cassidy

Every question is extremely important and relevant. I will group them and provide the baseline by providing what the Chairman asked for in our overall macro estimates if the no-deal scenario materialises. I will then move on to some of the questions about particular regions, sectors and issues such as, for example, the land bridge and how it might impact in different parts of the economy. There were questions about the property market and how the Central Bank's rules might play a role in that regard. There was a question about what might happen if a deal was agreed, as well as the potential opportunities and risks for the multinational sector in the tightening economy in such a scenario. I will pass on to Ms Fitzgerald some of the questions about the financial system, including some of the ones about our political influence. We can only speak about our influence at European fora, but Ms Fitzgerald will also discuss issues related to new firms in the financial sector coming here. If there are issues that have been overlooked, I will try to address them.

I will give more detail of what we think might happen in the event that there is a no-deal Brexit. We distinguish between scenarios in which some deal can be agreed to. In that case, of course, there will be a transition period until the end of 2020. There will be no material, immediate negative effect on the economy and there will be much more time for the economy to adjust. The effects are material but probably manageable and spread in the medium term. If a deal can be agreed to, similar to the withdrawal agreement, we would still expect strong economic growth in the short term, as per our central forecast. On the negative impact, compared to a situation where there had been no Brexit, in the medium term we would expect output to be around 1.75% less. There would be just under 20,000 fewer jobs. It is important to emphasise that this is in the context of positive growth elsewhere in the economy. Therefore, we would still expect the economy to grow in the medium term.

Most importantly, we think the effects would be materially worse in the event that there was no deal. They would be front-loaded in the sense that we would see most of the negative effects immediately.

The reason is that one would have a very sharp immediate downturn in the UK economy, as scenarios produced by the Bank of England show. In addition, one would have tariffs on Irish exports and imports imposed from day one and those tariffs would be extremely high, in particular, for the food and agriculture sectors. One would also have immediate disruptions, whether regulatory checks or increased documentary compliance, and all the forms of additional bureaucracy and delays in moving goods into and out of the country. These would have material effects.

A couple of questions were asked about the economy's preparedness. Evidence shows that the fact that the economy is not yet fully prepared, in particular small and medium-sized enterprises but also elements of the trading infrastructure, means that the most negative effects from what are known as non-tariff barriers tend to be felt immediately. Over time, the economy and businesses become better able to adjust to these new procedures but the immediate impact can be disruptive. The disorderly no-deal scenario could knock four percentage points of economic growth in the first year alone. To put that in context, we expect economic growth of approximately 4.25% this year and slightly more than 3.5% next year. We would still expect some modest positive growth in respect of a no-deal scenario but essentially it would knock off almost all growth in the first couple of years. The effect over the medium term would be that output would be a little over 6% lower in a no-deal Brexit scenario and there would be approximately 110,000 fewer jobs compared with a scenario in which Brexit did not take place. The effects are immediate.

Chairman

To clarify, would that be 110,000 fewer jobs created or the loss of 110,000 jobs in the existing market?

Dr. Mark Cassidy

It would be fewer net jobs than would have been the case. It is on a net basis. It is important to stress that we still see positive growth for the economy under all scenarios, but significantly weaker economic growth and significantly fewer jobs in a no-deal Brexit than if there was no Brexit, which is the ideal scenario, or if a deal was agreed.

An important factor relates to how those negative effects are distributed. The agrifood and agriculture sectors, the regions that export most to the UK and the regions with a high degree of concentration in exporting agricultural products would be most affected. From a regional perspective, the Border, midland and western region would be most affected. The broad agrifood sector employs approximately 170,000 persons, of whom roughly 100,000 are employed in direct agriculture. The remainder are in food processing and the like. The sector accounts for between 7% and 8% of overall employment in the economy but up to 20% of employment in some Border regions. There are significant numbers of people employed in agrifood sectors, from which probably half of exports go to the United Kingdom.

There are a number of reasons agrifood is most impacted. First, as mentioned, 42% of exports from the sector go to the UK compared with 11% for the economy as a whole. Second, tariffs are applied differently across sectors and far and way the highest tariff rates are imposed on agricultural products. Tariff rates on agricultural products could be up to 50% or 60% for some elements of the dairy and beef producing sectors. In addition, there are non-tariff barriers. If one thinks of the nature of agricultural exports, often they are fresh foods that need to get to market quickly. Additional delays, documentary compliance, etc., create particular burdens for these sectors. Finally, parts of the agricultural sector are not particularly viable at present. The degree of profitability and margins being earned are low in parts of the agricultural sector, particularly beef, which indicates that these are less resilient to the type of shock that Brexit might give rise to.

One question referred to the landbridge case. We have estimates quantifying the impact that this could have. We published a paper on these non-tariff barriers, which showed that in the case of a no-deal Brexit the average increase in the transport journey could be five hours. We have estimates that regardless of all the other effects, these barriers alone could reduce Irish-UK trade by just under 10%.

Senator Gerard P. Craughwell

If I may interrupt Dr. Cassidy , is that five hours on either side, in other words, five hours at Holyhead and another five hours at Dover, or is five hours for both sides?

Dr. Mark Cassidy

It is five hours overall. Approximately two thirds of Irish exports to non-EU countries use the landbridge. It is, therefore, an extremely important issue in terms of these additional costs.

The Border region is clearly most affected. The issue of the backstop came up and I am happy to take any additional questions on that. For me, the backstop is much more important from a political perspective than from an economic perspective. The Republic of Ireland's trade with Northern Ireland is important. Maybe 1.5% of our overall exports go to Northern Ireland and the proportion of our imports that from Northern Ireland is probably similar. The less disruptive the Border controls, the less will be the effects on North-South trade. The types of arrangements that materialise will be important but the political dimension of the backstop in the context of the Good Friday Agreement dwarfs the economic effects. As I highlighted, however, the economic effects are also important.

The currency issue came up in a couple of questions and it is very important. Sterling is now approximately 16% weaker than it was just before the referendum. This has created a much more difficult situation for exporters in terms of competitiveness of exporting into the UK market. Irish exports to the UK have held up quite well since the referendum. In the event of a no-deal Brexit, the risk of significant further weakening of sterling arises. Added to what has already occurred, this could create a very difficult situation for Irish exporters, particularly in agrifood sectors. We do not forecast what might happen in the event of a no-deal Brexit but it is quite clear that in such an event there would be further weakening of sterling, whereas if a deal could be agreed, the markets would probably be pleasantly surprised and there would probably be some strengthening of sterling against the euro. The outcome very much depends on what Brexit scenario materialises.

We have already seen a slowing in the property market. To back up what Senator Joe O'Reilly is seeing, we have seen strong increases in property prices in recent years. The rate of increase has slowed. That is an economy-wide phenomenon which reflects the fact that more supply is coming on stream and, probably, the Central Bank's measures and also that affordability pressures generally become more acute as prices rise. In terms of the outlook for property prices, Brexit may have some minor effects. If there is an economic slowdown overall, that could have a negative effect on property prices through its impact on demand. On the other hand, the increase in demand for accommodation from workers in new financial services may put some upward pressure on housing in Dublin. Overall, I believe the evolution or path of house prices will be most affected by more supply coming on stream in the coming years. We expect to see this increase in supply continue.

The Central Bank reviews its mortgage rules every year. Our latest review was in November last and its main finding was that these rules are critically important for financial stability reasons in order to protect borrowers and lenders from excessive lending, over-indebtedness and the types of problems that emerged during the early 2000s. If one has a limited supply of housing and the response is to provide more and more credit, the credit starts chasing up prices. It does not create more houses as the availability of houses does not increase. The mortgage rules are, therefore, are an important check in the market to prevent a return to the past. However, in the event of a no-deal Brexit, we have provided our recommendations on appropriate budgetary policy, fiscal policy and so on. Certainly, in the event of a no-deal Brexit, one would see some room for discretionary spending, for example, towards most affected targeted areas. Maybe that is the most appropriate, direct and transparent way of dealing with that type of issue.

I will make one final point before Ms Fitzgerald responds. I could not agree more with Senator O'Reilly's comment that we hope that a no-deal Brexit will be avoided. There is a great deal of uncertainty. A question was asked about uncertainty and companies holding off on investment decisions. We believe that is the case and there is considerable uncertainty, particularly among small and medium-size enterprises.

It is probably not worth their while to make long-term investment decisions until they know exactly what form of Brexit materialises. Likewise, in terms of preparedness, it is easy to say that SMEs should be prepared for all eventualities, but it is costly for those with lower profits to prepare for an eventuality that may not materialise. The degree of preparedness among small enterprises undoubtedly is not complete. There has been a holding off on investment. If a favourable deal were to go ahead before 31 October, there may be some economic bounce as a result.

Senator Paul Daly

Is there any fear of a mini-overheat of the economy if that was to happen?

Dr. Mark Cassidy

Yes, I am coming to that point. I will also address the issue relating to multinationals in that context as the concerns in regard to that sector are related to the upside scenario. In the event that a deal can be agreed, the outlook for the economy remains strong. The economy is approaching full employment. The latest quarterly unemployment figures, which I prefer to the monthly ones, point to an unemployment rate of 5%. Some of that data point to a unemployment rate of 4.5%. As the economy gets closer to full employment, there is a risk of overheating pressures, which manifest in wages and prices increasing at too fast a rate and cause competitiveness problems and difficulties for firms in terms of hiring additional workers. We are seeing an increase in vacancy rates, particularly among multinational firms. Our primary concern in that regard is the risk of overheating. We do not see it currently in the economy. Earlier, a comparison was made between now and 2006-07. We have very different economic circumstances now. The economy is much better shape now than it was then. Economic growth is not now being fuelled by domestic credit expansion or by inflows of money from abroad. We do not have an over-inflated construction sector, property sector or banking sector, such as we did in 2006-07. Nevertheless, overheating remains a concern that we will constantly monitor. The best indicator is wages. Currently, wages are increasing at approximately 3% per annum, which we think is a welcome rate of increase. We will keep an eye to the wage rate increase to ensure it does not begin to increase too fast because in that scenario multinational and Irish-owned firms would find it much more difficult to attract labour.

There are probably one or two questions in respect of which I will need to come back in later. Ms Fitzgerald will comment now on the financial system issues.

Ms Gina Fitzgerald

On the question on authorisations, sometimes the headline figure can be a little deceptive in terms of the level of activity coming here. There have been in excess of 100 authorisations in regard to Brexit thus far and a significant pipeline of applications is under consideration. They range from the big banks and insurance companies whose names are in the public domain to smaller investment firms and payment firms. There is quite an array from small one or two person shops and bigger operations. From an authorisation perspective, the Central Bank has varying degrees of activity and engagement with those firms, depending on the level of risk they would bring into the system. Some of those applications will be turned around in a matter of days and for others there would be much more substantive processes in respect of understanding the business models and the type of presence that we would need to be comfortable with them.

With regard to the changing financial landscape, it is probably well documented at this stage that on the banking side we are moving from a more traditional retail banking focus to wholesale banking activity, such as the investment banks. There are a few new firm types coming in the investment management sphere and asset management, which is a different type of market in that it is more about infrastructure. On insurance, there has been some increase in terms of speciality type insurance around marine and aviation, which are risks that we would not necessarily have seen previously in the sectors.

On building alliances, I will speak specifically to the financial sector because that is the area on which we are focused at European level. Building alliances is very much dependent on an issue-by-issue and sector-by-sector basis. In some sectors, we are an exporter of financial services from Ireland into the EU and, therefore, we have natural alliances with other EU member states in that regard. On banking, at a political level, we have signed up to various letters in terms of the Hanseatic League. We would be of that persuasion at a political level on banking and also very much a host member state on issues in banking in how we look at prudential waivers and so on.

In terms of the UK and continued engagement with it, as stated by the Chairman, we are very much determined to keep those strong relationships. We have strong relationships at working group level in the Central Bank and in Europe and very much at senior level. We have ongoing engagement with the UK authorities throughout this process, which has been constructive. We intend to continue that engagement.

Senator Gerard P. Craughwell

I would like to ask Dr. Cassidy about mortgages and the control the Central Bank has over them. A matter of frequent debate in my home is the couple paying rent of, say, €1,500 or €1,600 per month for a two-bedroom apartment, which they could buy with a 100% mortgage and service with €1,200 per month payments, leaving them with €300 per month in their pockets. Why are 100% mortgages not considered in cases where the mortgage repayment would be lower per month that the rental payment? I cite the example of a particular couple who have paid €97,000 in rent over the past seven years and who could have financed the property they are living in quite easily with that amount. I have been told that a return to 100% mortgages would be lunacy but I ask Dr. Cassidy to comment briefly on the matter.

Chairman

The Senator is drifting from the topic under discussion.

Senator Gerard P. Craughwell

I accept that but the issue forms part of the------

Chairman

In the context of what we asked Dr. Cassidy and his colleagues to discuss and the work we are trying to do as a committee in respect of preparedness and providing solutions, Senator Craughwell has meandered on that point. As relevant as it is to the overall economic look, perhaps the specifics might drift a little.

Senator Gerard P. Craughwell

I accept that.

Chairman

I am more than happy to allow Dr. Cassidy to comment if he wants.

Dr. Mark Cassidy

I will respond briefly because it is an important issue. The deposit requirement is 10% for first-time buyers. It is important to highlight that because some people think it is 20%. There is strong evidence regarding the risk of default and how that is dependent on the deposit requirement. The Central Bank has published a lot of analytical evidence on this, which shows that when the loan to value is above 85%, the risk of those borrowers getting into hot water increases substantially. It means any reduction in house prices or any economic shock to incomes can significantly impact on the ability of that borrower to repay. We introduce risk to take account of the different situations. The deposit requirement, therefore, is 10% for the first-time buyer in comparison with 20% more generally. We do have strong financial stability reasons for the deposit requirements. The 100% mortgages of a decade ago were a bad idea in hindsight. They certainly contributed to the crisis.

On the question regarding the positives and the opportunities as a result of Brexit, which I did not get to earlier, I gave some figures earlier, which incorporated one of the positives that nets off some of the disadvantages, namely, the potential for more inward foreign direct investment, either by firms that are currently based in the UK and wish to sell into the European market and will not be able to do so from the UK market or new firms wanting to sell in, which otherwise would have gone to the UK. Ms Fitzgerald discussed financial services, which I have less in mind in this regard. We have a thriving financial services sector, mostly located in Dublin. I am thinking more about direct investment that could be spread more regionally across the economy.

The ESRI estimates that Brexit could result in a positive medium-term impact of approximately 3% which is already incorporated in our numbers. As there will be that positive foreign direct investment, FDI, effect if there is a deal or not, I do not know of any economic benefit that will result from a no-deal Brexit. I see no other opportunities.

I did not address the prospects for the UK economy; rather, I discussed the exchange rate. The general outlook for the UK economy, in the event that there is a no-deal Brexit, is very negative. Bank of England estimates suggest output could be approximately 10% less. We are already seeing investment, exports and output in the United Kingdom being significantly affected.

If there is anything I overlooked or missed, I will be happy to come back in.

Chairman

I think that is all we can take; we hope to sleep at some stage.

Dr. Mark Cassidy

I apologise for beating the Chairman into submission.

Chairman

I do not mean it in a flippant manner. Dr. Cassidy covered a wide variety of issues within the general remit of the Central Bank and beyond. We are extremely appreciative of his appearance and ongoing work in the past few years. It has been a difficult few years leading into perhaps even more difficult years. Our gratitude to everyone in the Central Bank is heartfelt. The conclusions our guests will provide for us are vital in our ongoing work and awareness of what the country is facing into. It seems that, as a society, perhaps because of the 24-hour rolling news cycle, we come in and out of paying attention to what exactly might be looming on 31 October. It is important that all sectors of society, particularly economically, be aware of what could be around the corner and that they make the necessary recommended preparations. I appreciate Mr. Cassidy's frankness. His presence will be a great asset in the committee's work.

Sitting suspended at 3.02 p.m. and resumed at 3.05 p.m.

Chairman

From IBEC I welcome Dr. Pat Ivory, director of EU and international affairs, and Mr. Arnold Dillon, head of strategic campaigns. I also welcome Mr. Neil McDonnell, chief executive of ISME. We heard from both organisations in our first round of meetings more than two years ago. We have just had a lengthy session with the Central Bank of Ireland and would like to hear about what IBEC and ISME are doing and get their general overview.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.

I will take the opening statements. We will then take questions from committee members.

Dr. Pat Ivory

I am grateful to have another opportunity to set out the views and concerns of business on the crucial issue of Brexit. IBEC is the country's largest business organisation. In recent years we have been working intensively to support our member companies as they manage the ongoing uncertainty and plan for potential Brexit disruption. In many respects, the headline concerns of business, unfortunately, remain unchanged since we last addressed the joint committee two years ago. Political developments have, however, crystallised the immediate risks. The failure of the UK Government to ratify the withdrawal agreement has left business with the complex task and enormous cost of managing the uncertainty of moving Brexit deadlines. Millions of euro have been spent in putting in place and, in many cases, activating costly contingency plans.

The divisive and ongoing polarisation of the UK political debate has increased the likelihood of a no-deal outcome, further driving up the cost of contingency planning. Irish business supports the terms of the withdrawal agreement which comprehensively addresses the key challenges that arise in the exit process and the transition period associated with the agreement. From the perspective of business, customs and regulatory alignment across the island of Ireland is vital to avoid the return of a hard border, safeguard the all-island economy and protect the Good Friday agreement.

In recent months IBEC's work to support contingency planning has intensified. We have produced comprehensive guidance for business and hosted numerous events, providing a detailed expert insight into the complex issues that will need to be managed in such a scenario. While our members are very aware of the risks and planning accordingly, it would be wrong to suggest business, or the wider economy for that matter, could ever be ready for the profound overnight changes a no-deal Brexit at the end of October would involve. Despite the best efforts of business, successfully adjusting to a radically new trading environment with the United Kingdom is neither possible nor realistic, particularly for companies in the most exposed sectors in a no-deal scenario as there are too many variables and unknowns. What we do know is that the imposition of very high World Trade Organization, WTO, tariffs on certain goods, combined with additional customs and regulatory barriers, would cause major trade disruption. There is also the risk of increased illicit trade and smuggling across a range of products in a no-deal scenario.

Even in a worst case no-deal scenario we will need phased implementation of a new trading relationship and a compliance trajectory that will minimise disruption.

The political brinksmanship involved in setting non-credible deadlines has already cost the business community. Additional collateral damage must be avoided.

The European Commission's claim that contingency planning is complete does not reflect the complex challenges on the ground. In that context, further measures are urgently needed such as moratoria to facilitate data exchange and flows, the roll-over of current product labelling regimes and measures in other areas where it is simply impossible for business to change overnight. While most larger companies have comprehensive plans in place, many SMEs are ill-prepared. Despite major information campaigns, about 46,000 small companies of the 84,000 that trade with the United Kingdom have yet to register for the economic operator and registration identification, EORI, number that will be necessary to continue to trade post Brexit. There is still a job to be done.

While IBEC's work to support contingency planning will continue, it must be stressed that significant Government and EU interventions will be required to protect jobs and businesses if there is a no-deal outcome. It is important that the European Commission and the Government have fully developed and comprehensive plans that can be triggered without delay in such circumstances. The economic hit will be immediate; so too must the response.

Certain issues have been addressed in the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2019 such as the treatment of VAT on UK imports. However, a much more far-reaching state aid programme would be required in these circumstances. It would need to include a new enterprise stabilisation fund to provide short-term financing support for affected companies; direct capital, marketing and innovation supports for companies reorienting into new markets beyond the UK; and new trade support measures, including further export trade financing and export credit guarantees. IBEC has outlined these proposals to the Government in detail and we continue to work with the relevant Departments and agencies to prepare for all scenarios.

As we move towards another Brexit deadline, the macroeconomic backdrop remains benign. No other economy in western Europe had greater momentum entering 2019. However, a no-deal UK exit would significantly reframe the economic outlook and involve a major sterling depreciation, cancelled investment, falling consumer confidence, rising prices and significant trade disruption. It is crucial, therefore, that all efforts be focused on avoiding such an eventuality.

I thank committee members for their time. We look forward to answering questions they may have.

Mr. Neil McDonnell

I thank committee members for the invitation to appear before them. I do not intend to provide a macroeconomic analysis of the effects on small businesses of a Brexit on WTO terms. The economic effects have been well ventilated elsewhere. Brexit has been impacting on business directly for the last year, stalling investment decisions, changing marketing policies, curtailing employment in at-risk areas and, most importantly, reducing confidence.

Among members of the Irish SME Association, ISME, the quarterly business confidence indicator we employ to analyse business sentiment has not been so low since 2011. We thought this would lift after the postponement of Brexit in March, but it has not. Members told us that they had invested in inventories because of hard Brexit fears. These inventories are now being liquidated. Businesses face the same cycle again, building inventories ahead of the October deadline without any clarity on whether such inventories will be needed and sucking up working capital and management time. Brexit now ranks ahead of even insurance as a business concern for our members.

While we acknowledge the political difficulties in concluding a withdrawal agreement with the United Kingdom when that country has not come to an internal agreement on how to exit the European Union, we need creative solutions for how to assist our nearest neighbour and largest trading partner. The backstop may or may not be the material obstacle to the conclusion of a withdrawal agreement that some suggest it is. However, blind adherence by Ireland to the maintenance of the backstop could prove to be a costly policy if it proves to be the root cause in producing that which it seeks to avoid. Therefore, we ask legislators to be imaginative and flexible in their approach to what may be the end-game discussions on Brexit.

Small businesses lack the expertise, bandwidth, foresight, finance and, most of all, the time to carry out contingency planning for every conceivable form of Brexit. They rely on their political representatives and State and local authority agencies to assist them. More worryingly, many have adopted a fatalistic wait and see approach. As the committee has just heard, the low uptake of EORI numbers is indicative of this.

We are conscious of our duties as a trade association in helping SMEs to prepare for Brexit, despite the uncertainties. Brexit assistance measures are included in all of our communications with members and roadshows. We have a dedicated website area for all matters related to Brexit. However, members will need more than information in November. In particular, small businesses do not wish to take on more debt while addressing a problem that could reduce sales or increase their cost. That does not make sense, but it does explain why the Brexit loan scheme has been less successful than legislators might have intended. We wish members of the Oireachtas well in the crucial four months ahead. ISME will assist committee members and the Government in any way it can in preparing for Brexit.

Senator Gerard P. Craughwell

I thank both delegates for their excellent presentations. I am always amused when I arrive back here because I spent a good part of my life thrashing business organisations in my trade union activity. I compliment both organisations for the tremendous work they have done in the last couple of years in providing information for their members and running roadshows. Part of the sadness is what Mr. McDonnell alluded to, the low uptake as a result of people hoping it will be all right on the night or that maybe it will go away. A colleague of mine here believes there will be a dedicated carriageway running both ways from Holyhead to Dover, but we both know that is not realistic.

One of my concerns pertaining to IBEC is the size of the soft balance sheets held in Ireland. Mr. Danny McCoy recently stated 40% of the world's soft balance sheets were in this country. With Brexit coming down the line, companies are moving into Ireland from the United Kingdom, putting further pressure on accommodation costs. In speaking to the last group that appeared before us I made the point that we were seeing companies bid for employees in specialist areas. Rather than a jobs market, we almost have an auction market for specific highly skilled jobs. I really wonder about the damage that could be caused by something from which we are all hoping to benefit. Is there a latent aspect of high finance companies and various other firms coming into the country? I refer to the risk that they will end up pricing Ireland out of the market with reference to both labour costs and the cost of living. Have the two organisations looked at that issue?

Dr. Ivory referred to a hard border. This is an old hobby horse of mine. This country has never had a hard border in its entire history. It had a highly militarised border and I really fear the return of something similar. The fact that it was highly militarised, with so many ways to get across it, gave rise to a black market and smuggling operations. I wonder in particular about the danger of beef being imported from, say, Argentina into Northern Ireland which is within the United Kingdom before being loaded onto trucks, smuggled south and transported to Europe as Irish beef.

If that happens and it is caught, I cannot begin to think what it is going to do to us.

A number of the international chambers of commerce operating in Ireland are encouraging manufacturing to look to Europe for alternative sources of components. Have IBEC and ISME looked at the cost of changing to European-based component suppliers? Are there issues with quality if there is a move away from the UK to source alternative suppliers?

I turn now to the issue of the seabridge versus the landbridge. We were given an estimate earlier of the landbridge costing five hours. Concerning the seabridge, the Germans are looking at trying to get direct routes into Duisburg or the Hook of Holland. They think Cherbourg and Le Havre are too far away from mainland Europe. Have the organisations examined the cost of that for their members?

Regarding what happens post Brexit, at a recent conference I was told that we could expect that it would be ten years before this issue settles down. Have IBEC and ISME examined this and do they have an estimate of how long we are looking at? I think Mr. McDonnell referred to the backstop and that its latent aspect might be to make things worse. Will he elaborate on that? Has ISME considered an alternative system? Would it prefer a border to be in place with proper checks as against free movement over and back? I thank the representatives from both organisations for being here.

Senator Niall Ó Donnghaile

I thank the witnesses for their presentations. I want to ask them a question that I put to my colleagues earlier. It concerns the importance of the backstop from an organisational point of view and the companies represented by IBEC and ISME. I would like them to build on what they said in reference to regulatory alignment. Questions may arise from that. Initially, I want to get a corporate view and hear about anything that witnesses may be able to expand upon regarding the significance of the backstop.

Chairman

I would like to raise a few points, and one of them builds slightly on what Senator Craughwell said. The first relates to the international context. IBEC is a member of Business Europe. We have hosted its counterparts many times when they have come here to discuss this issue. Leaving aside the Confederation of British Industry, CBI, I ask the witnesses to comment on the degree to which solidarity has been maintained. How is IBEC working with colleagues to develop knowledge of the unique situation in which Ireland will find itself post Brexit compared to continental colleagues? I refer to how heavily exposed our economy will be to the British economy both directly and indirectly. Senator Craughwell has mentioned the landbridge at length in that regard.

We saw the second extension to this process in April and we throttle towards 31 October not knowing what is going to happen in the UK. That might be clearer in the next few weeks but it might also be less clear. Mr. McDonnell made a lengthy point on inventory. I have come across that issue in a stark way. A friend of mine owns a second hand used car dealership and he brings in a great deal of stock from the UK. He stocked up last year and now he has spent the first quarter of this year trying to get rid of that stock. He has done okay. Let us put it this way, however. As a result of that stocking up, there will be no summer holiday for him or his kids this year.

The extension period is welcome because it avoids the cliff edge. We all know how bad an uncontrolled Brexit could be. How damaging though is the uncertainty? Is it the uncertainty that is dangerous or is it more that in a parallel stream people think the threat has gone away? As a result, they have stopped preparing and assume the process will keep getting pushed on. This process will end at some stage, however. It will end with the agreement of a deal, a no-deal scenario or the UK revoking Article 50. This process will, however, end at some stage. Is this a little bit like the boy who cried wolf? By the time it eventually ends will there have been so many extensions and possible endings that the uncertainties will have just added to the overall confusion? How can we get around that?

Both organisations mentioned the work they do with their members and their engagement with Government. We sit beside each other at Brexit stakeholder forums and we have all been to the road shows, as Senator Craughwell mentioned. How prepared, however, can business be? Is it the case that it will never be fully prepared and is that why only 6% of people say they are prepared? Is that because nobody knows what they are preparing for? The witnesses have stressed the importance of information and legislative matters. When we talk about State aid packages, from a Government perspective, how exactly do we prepare them? We do not know when we will need to make those changes, when this process will end or when State aid will be required. How can that be best calculated?

Senator Gerard P. Craughwell

Regarding the Chair's question on the inventory-----

Chairman

The Senator can answer it.

Senator Gerard P. Craughwell

There is a cost to building inventory and then having to dispose of it because the process is being pushed out. Holding inventory is always a cost, and especially so when we are going through these cycles. When Mr. McDonnell addresses this issue, I ask him to address the costs that his members are experiencing. I am sorry for jumping in so quickly.

Chairman

That was said like a good quartermaster.

Senator Gerard P. Craughwell

If the Chair's mate has a good car, please ask him to give me a ring.

Chairman

I appreciate that. That is no bother; he has a few cars. I will advertise them later in private session. I call Dr. Ivory, Mr. McDonnell and Mr. Dillon.

Dr. Pat Ivory

I will take up the point concerning relations with other business groups across Europe and the degree of solidarity that exists regarding the current situation. I was in Helsinki this time last week for a meeting of the council of presidents of Business Europe. In addition to the formal meetings of the council of presidents, we also had a number of bilateral meetings with key strategic business partners. I am pleased that there is strong solidarity from European business. We all continue to support the acceptance of a withdrawal agreement with a transitional period attached. The political declaration is a part of the withdrawal agreement and there is further room for manoeuvre and negotiations on that element of the withdrawal package. There is no sign of any business group in Europe moving away from that position. There is very strong support for the backstop and that being part of the withdrawal agreement.

As well as meeting with our business partners, in the past few weeks, we have also met the European Commission's Brexit task force and the European Council's Brexit unit. The clear message from all of those meetings is that the withdrawal agreement will not be reopened for negotiation. On that basis, our advice to members is that they cannot rely on the impression sometimes given in the UK that a new Prime Minister will simply be able to reopen negotiations and arrive at a different deal. Our view is that the deal on the table is a good deal. There is no sign of the European Commission, the European Council or the Government moving away from that position. Our advice to our members, therefore, is that the possibility of a no-deal scenario has increased and we need to continue to deepen contingency planning for that outcome.

One of the questions Senator Craughwell asked concerned the preparedness of businesses. Our view regarding contingency planning is that much of it has been done by large companies. Much money has been spent on that contingency planning. The European Commission has also published many documents on such planning and our own ports and infrastructure have taken significant steps in this regard.

Customs and Revenue have taken significant measures in contingency planning. Despite all the best efforts of the authorities and business, it is our view that nothing can prepare for the catastrophic economic impact of a no-deal Brexit. In this context, we believe further measures are required and we have said this to the Commission and the Government. At Commission level, there is a need for agreement on personal data flows and exchange. While an adequacy agreement will be negotiated between the UK and EU, there should be a moratorium and freeze period during which data can still flow across borders. Otherwise we do not understand how business is going to operate. We cannot change labelling overnight and there are many other compliance issues. There has to be a compliance trajectory and period after a no-deal Brexit when a sensible approach is taken to enable business to keep going.

Mr. Arnold Dillon

The Chairman raised a couple of points on the mood in business with regard to the rolling extensions. There is obvious frustration and a challenge in terms of managing people and resources in trying to stay prepared. Business appreciates the approach of the Government on this, the importance of the backstop from a political perspective and the implications for the Good Friday Agreement. There is understanding that while the frustration and costs involved in those deadlines are painful, business is happy that extended deadlines are granted if the alternative is the impact of a potential no-deal Brexit and ramping up the tension on this element.

To return to one of the earlier points made on the wider economic issues that arise in the context of new investment, particularly in the context of Brexit and financial institutions, these are very big issues and IBEC and the business community are incredibly cognisant of them. We have set out significant and comprehensive proposals on infrastructure. We need to make sure the economy and the country in general are able to absorb inward investment and the talent implications in terms of squeezing the labour market and the talent pool. We have set out comprehensive proposals on this and we are more than happy to circulate them.

Mr. Neil McDonnell

I will take the questions in the order they arose. As to the soft balance sheet issue, as matters stand, small business sees itself in competition within a three-part economy. There is the small enterprise economy, the multinational economy and the State and semi-State economy. According to CSO figures, State employees are paid 35% more than private sector workers and multinational companies pay a premium above this again. Our people complain about trickle up in the employment market as it is. If Dublin were to become a refugee centre for even more big entities from London, the problem would be exacerbated. We are based on Kildare Street and we can see, as can committee members, what is happening on Molesworth Street with the number of entities moving in.

On EU suppliers, I echo the point made by Dr. Ivory. To give a practical example of this, I have a member in the cosmetics distribution business in Ireland which distributes a French cosmetics range that is a household name. It is packaged and labelled in the UK for the UK and Irish markets. Interestingly, my members have pointed out that there are commercial arrangements and licence distribution arrangements in place for the UK and Ireland that are held by UK companies. We have raised this matter with the Department of Business, Enterprise and Innovation and informed it that, in the event of a hard Brexit, some of these contracts may become unenforceable or a UK company may try to enforce a distribution contract that is unenforceable in Ireland. There are all sorts of issues. The French cosmetic products has its standard markings and English translation applied in the UK. That is not to say this cannot be replicated here or done somewhere else but it will be done at a significant cost. Alternatively, the UK could just agree to continue doing it and abide by the standards in place. That is a political consideration.

On the backstop alternatives, the difficulty with the backstop is that it has taken on a Jekyll and Hyde aspect. The political aspect, which has become unacceptable in the UK, is not fundamentally an area that occupies small business. The political difficulties with the backstop, as it is called, have taken on a life of their own, whereas from our perspective the backstop is an insurance policy and contingency policy against something bad happening. We see the backstop as a practical insurance policy against a bad event. There is total disconnect between the political imperative and the practical imperative.

We discussed the phytosanitary issue outside the room. What do we do with beef crossing the Border? It is acknowledged that there will have to be an all-island approach to this. Where it gets interesting is, for instance, in service businesses. I know I am dealing with some trade unionists here. Let us take a building company in Northern Ireland that decides in the brave new world that it will not comply with the working time directive. Will it be capable of tendering for business in the Republic? These are practical and legal considerations that will bother some of our members if Northern Ireland companies have the freedom to opt for particular regulatory regimes that are potentially anti-competitive and if, for example, our people are held to a 48-hour average working week but this requirement disappears elsewhere.

A substantial amount of the equipment purchased in the health service, particularly high-end kit, has been manufactured to British standards. These difficulties will go away if there is mutual recognition of standards but we have already complained to the Office of Government Procurement and the Department of Business, Enterprise and Innovation about so-called Brexit-proofing of contracts. There are tenders coming out from State and semi-State agencies stating they want to be insulated against possible consequences of Brexit, for instance, in the purchase of fixed assets that might be purchased under a British standard. Will that standard be acknowledged in future? These have serious implications for long-life assets.

The political point I made about the backstop is that when the Irish voted "No" in some European referenda in the past because of our red lines we succeeded in getting opt-outs that provided a political salve and opened up a way through for us. I would like to think something like this is achievable for the UK.

The Chairman asked about the international impact. ISME, like IBEC, is a member of a European business association, namely, SMEunited. I have to be honest and say that once we go beyond talking to the Dutch and Germans, there is not a huge amount of concern. Intellectually and in business terms, others have moved on. One of the difficulties that will emerge in any form of renegotiation is that people see commercial advantage in the UK leaving.

The notion that there will be hands reaching across the Channel to help the UK is a bit fanciful. This is not a significant concern outside the immediate Dover-Calais area. It is impossible to put a euro cost on uncertainty. If the Senator remembers the end of last year, the UK became the biggest purchaser for refrigeration facilities for medicines in the world, so one can start to put a high quantification on it. Ireland ran out of warehousing space. Nobody will build a warehouse for something that might not occur. What will happen is what is classically called rationing by price. Those that can afford to build inventories will do so and those who cannot will not, and they will accept the consequences.

With regard to state aid, most of what will be required is working capital. Our people are extremely reluctant to take on debt. That will be tricky to achieve within state aid rules. I am conscious that the State cannot just hand out money. The simple answer to how prepared businesses can be is that not all businesses can be prepared for every eventuality. Business has a tolerance for bad news. It just needs to be told it directly and honestly. There are not the same political considerations that one has to deal with with the electorate. People just want to quantify the worst case scenario and they are happy to put up with bad news.

Dr. Pat Ivory

Could I add to the point about the beef sector and the threat of Argentinian or Brazilian beef coming across the Border? There are two matters to address relating to the Border and the backstop is part of it. We have responsibility, as members of the European Union, to protect the integrity of the Single Market. That will be challenging and difficult in a no-deal situation but these are the sorts of challenges that we have to address. It is not just a matter of customs but also regulatory alignment. The wholefoods, dairy, beef and infant formula sector are all important parts of Irish industry, especially around the Border counties. There has to be action by State agencies and by the veterinary authorities on sanitary and phytosanitary, SPS, and inspection issues. These are all complex matters and further work has to be done on this. Our information is that customs and the Revenue Commissioners have introduced a 24-7 employment arrangement with new customs officers, such that they will be available around the clock, seven days a week, to facilitate things coming in and out of our ports. Are our other agencies at that level? Will SPS measures and inspections be able to match that role? We have to look at that.

On where the impact will be felt, the regional impact is extraordinarily important. For example, in the Cavan-Monaghan region, 33% of people employed are in Brexit-exposed sectors. Therefore we need to address those regional concerns. As one goes further through the country, into the south and the midlands, one will find significant emphasis on food, spirits and drinks production, all of which could be impacted by this. One of the stabilisation mechanisms we are proposing in the upcoming budget is that they should take into account the impact on workers. We propose to prepare a short-term work subsidy scheme for two years for vulnerable workers in the event of a no-deal Brexit. We also propose the introduction of an employment subsidy scheme with subsidies up to €10,000 over 24 months for employees affected in distressed firms. We need to address a range of measures in addition to the working capital and access to finance that Mr. McDonnell mentioned.

Chairman

I thank the witnesses for their presentations and frankness. A lot has changed and not much has changed in the last two years since we spoke. Their presence is greatly appreciated.

Sitting suspended at 3.45 p.m. and resumed in private session at 3.47 p.m.

The select committee adjourned at 3.48 p.m. until 2 p.m. on Wednesday, 3 July 2019.