On 20th February 2016 David Cameron announced that Britain would, on 23rd June 2016, hold a referendum on the United Kingdom's membership of the European Union.

One question will be asked in the referendum: "Should the United Kingdom remain a member of the European Union or leave the European Union?".

Mr. Cameron is spearheading the campaign for the UK to remain. He sees the choice in the referendum as being between an "even greater Britain" by staying in, or a "leap into the dark" by exiting. However, he faces a significant battle in his campaign, which has already been publicly opposed by six members of his own cabinet and the Conservative Mayor of London, Boris Johnson.

This article provides an overview of the major issues in relation to a Brexit and analyses the possible consequences that a Brexit may have for Ireland. In doing so, we have focused on issues that may be of most relevance to the financial services industry in Ireland.

What are the odds?

A recent survey by ORB International for the Daily Telegraph (carried out over 20th – 24th April, 2016) found that if the referendum was held now some 51% of those surveyed would vote to remain in the EU, whereas 43% would vote to leave.

These results indicate a two point gain for the "leave" camp1; somewhat surprising considering that commentators were of the opinion that the "stay" campaign had a good week, boosted by Barack Obama's visit and his rallying cry for Britain to remain. Sir Lynton Crosby writing for the Daily Telegraph2 is of the opinion that the effect of the US president's visit may not yet be felt in the numbers as it takes time for the impact of such factors to be fully absorbed.

It is of note however that the results of polls over the last number of months have been erratic, at best, and the likely outcome of the referendum remains impossible to predict. UK public opinion has proven very difficult to gauge on decisions on major issues of national importance in the recent past, as was clearly demonstrated by the outcome of both the 2014 Scottish independence referendum and last year's UK general election. The status quo may be in danger, particularly if turnout is low. There also seems to be a feeling that many Britons see Brexit as an inevitability at some point in the future and don't want to postpone it now and end up having to deal with even messier repercussions of separation from Europe down the road.

Brexit – unexplored territory

No member state has ever left the European Union, so there is no precedent for what might happen should the UK vote to leave. Although Article 50 of the Lisbon Treaty3 outlines the procedure for a member state to leave, the reality is that no-one knows what exactly the procedure would involve or how long it would take.

The Treaty does tell us that in the event of a "leave" vote, the UK government must notify the European Council of its intention to leave. The UK would have to exit within two years of the date of such notification, unless an extension to this timeframe could be agreed. However, the EU has no obligations in terms of the negotiations that it must undertake with the UK in the event of a Brexit, such as, for example, in terms of a trade deal. In addition, it is possible that a Brexit may necessitate changes to EU treaties to accommodate the reduced number of member states, which could result in a referendum being required in Ireland.

UK Relationship with the EU Post-Brexit

There is currently little clarity on what the UK's relationship with the EU would look like in the event of a Brexit. However, there are a number of broad possible models for the UK's ongoing relationship with the EU. The impact of Brexit on business here, in the UK and across the rest of the EU will depend on the model chosen.

The pattern of existing relationships between the EU and so called "third countries" suggests that there are three main possible models4:

(i) World Trade Organisation ("WTO") Approach

The UK, like all other EU member states, is a member of the WTO. If the UK did not negotiate a new relationship with the EU by the time it had left, then it would revert to its common membership of the WTO as a basis for trade. This model represents a minimum threshold and would amount to the most definitive break with the EU. It would be a major drawback for the UK if it had to fall back on WTO rules, which are likely to involve the imposition of trade tariffs5.

The "most-favoured nation" model used by the WTO would also mean that the UK could not offer better trade terms to EU member states than to other WTO members. This model would not require the UK to contribute to the EU budget nor would it have automatic access to the internal market of the EU. All UK exports to the EU would need to comply with relevant EU regulations; however, the UK would have no influence over the development or application of these.

(ii) The Swiss Model – Bilateral Accords

This model would involve the negotiation of bilateral accords dealing with UK access to certain sectors of the EU and would consist of some combination of tariff-free trade, open access to the services market and guarantees that companies operating in these markets would be treated in a fair and non-discriminatory way. It is unlikely that this model would go so far as establishing a customs union or addressing non-tariff barriers. Switzerland's arrangements with the EU go furthest in replicating the benefits of EU membership, but bring with them obligations such as facilitating the free movement of people, making a contribution to EU spending and compliance with rules governing the Single Market6. However, the ongoing viability of the Swiss model is in question7.

(iii) The Norwegian Model – EEA Membership

This involves membership of the EEA, but not of the EU. It is the model that is most integrated with the Single Market and would enable considerable access to the EU market. The UK would likely have to ensure that its domestic legislation complies with any EU legislation that forms part of an EEA agreement.

However, this model would not address many of the UK's political concerns; for example, it would still require a large contribution to the EU budget. In addition, it would not allow the UK to imposerestrictions on immigration.

(iv) Post Brexit Form of Relationship between the UK and Ireland

The United Kingdom and Ireland have since the 1920s operated a Common Travel Area8, which allows for nationals of both jurisdictions to travel and live in the other without immigration controls. In addition, both Ireland and the UK are part of the EU Customs Union9, which means that there are no customs controls between the countries. However, without this, goods being exported from one jurisdiction to the other could be subject to various forms of customs controls and their liability to duty determined according to complex "Rules of Origin"10.

It is unclear whether the Common Travel Area would (or could) continue in existence with the UK having left the EU, and Ireland remaining a member, in the same way that it did before both countries joined the EU in 1973.

Also, post Brexit the border with Northern Ireland would then become an external EU land border. This could give rise to very serious issues in terms of customs posts, passport controls etc., depending on the extent to which Brexit impacted the movement of goods, services and people between the UK and rest of the EU.

Potential Economic Impact of Brexit

Brexit has major economic implications for Ireland, the UK and Europe as a whole, in terms of trade, foreign direct investment, currency and exchange rates, and the freedom of goods, services, people and capital.

(i) Increased Market Volatility

The prospect of a Brexit has unsettled the financial markets during the first quarter of 2016 and it is expected that market volatility will increase around the time of the referendum, with the Bank of England set to provide additional liquidity to the UK financial system over a number of weeks in June 2016. It is difficult to estimate the extent of the impact that a Brexit would have on the UK financial system, but it is expected that there would be a good deal of uncertainty, the extent of which will depend on such factors as whether negotiations are amicable or confrontational and the form of relationship that a post-Brexit UK will have with the EU.

(ii) Medium to Long Term Economic Consequences

The UK's membership of the EU provides it with access to the world's largest single market, with an estimated GDP of £13 trillion. There is a concern that the reduction of market integration within the EU as a result of Brexit would have profoundly negative effects on the UK economy, would cause depreciation in Sterling, and result in import driven inflation. This could in turn result in wins for Irish companies reporting in Sterling, but with significant earnings in Euro11.

There is also a fear that leaving the EU would affect foreign direct investment in the UK. The EU is currently negotiating major new free-trade agreements with the United States (the Transatlantic Trade and Investment Partnership12) and Japan13. The likely economic benefits of these agreements for the UK could well be lost in the case of a Brexit.

On his recent trip to the United Kingdom, President Barack Obama warned that the UK would be at the "back of the queue" for trade deals with the US if it left the EU. He further cautioned the UK that it could take up to 10 years to negotiate trade deals with the US if it leaves the EU14. In addition, a recent HM Treasury report15 made for bleak reading, suggesting a reduction in GDP of anywhere between £2,600 and £5,200 per household after 15 years in the case of a Brexit, depending on the model of the relationship that the UK adopts with the EU.

Also, depending on the terms of the relationship between the UK and the EU post-Brexit, the UK could lose the four economic freedoms of the EU, being those of capital, labour, goods and services. This could prove very problematic for UK businesses that utilise those freedoms both directly and indirectly in their everyday trade. This in turn obviously has a "knock on" impact for the UK's trading partners, including Ireland.

(iii) Economic Uncertainty in Ireland

As a small open economy, many of the risks and challenges for Irish businesses stem from larger, foreign economies on which we tend to rely heavily. The possibility of a Brexit is, today, probably the most significant economic risk that we face.

The financial crisis of the past eight years has made clear that "financial links transmit and amplify economic calamities from one country to another"16; something very relevant for Ireland in the context of a Brexit, given that in terms of both trade integration and large financial exposures we have closer economic links with the UK than with any other country.

The importance of the UK as a trading partner to Ireland is difficult to overstate, with over €1.2 billion in goods and services traded weekly between the two economies. We export 16% of our goods and 19% of our services to the UK, so should a Brexit result in the imposition of economic tariffs against the UK, the effect of same would undoubtedly be felt here. The political and personal impact of new border controls might also be very significant.

Acting Irish Minister for Foreign Affairs and Trade, Charlie Flanagan17 has stated that the Irish business community is "extremely engaged on the potential impact of a British exit from the EU" and understandably so; a Brexit may have profound economic consequences for Ireland. Although it is difficult to estimate the extent of the impact that Brexit would have on Irish businesses, in an ESRI study published in November 2015, Edgar Morgenroth18 illustrated that in a "worst case" scenario, it could lead to a reduction in trade between Ireland and the UK of up to 20% and that this could in turn result in a reduction for Ireland of both foreign direct investment and exports.

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1 Since the previous ORB poll, carried out over 13th – 17th April, 2016: poll-13th-17th-april

2 The Daily Telegraph, 26th April, 2016 – "Exclusive Brexit poll: With one in five still not sure how they'll vote, it's all to play for".


4 HM Government – "Alternatives to membership: possible models for the United Kingdom outside the European Union", March 2016

5 Oliver Mangan, Chief Economist, AIB – "How Brexit Could Affect Your Business", 18th April, 2016


7 "Brexit deal on EU migrants inspires Switzerland " - inspires-switzerland/

8 The common travel area is in existence between Ireland and the UK (including the Channel Islands and the Isle of Man).



11 Investec: "Irish Equities – Country View", Gerard Moore and Philip O'Sullivan, 24th February, 2016



14 The Daily Telegraph, 22nd April, 2016 – "Barack Obama: Britain would go to the 'back of the queue' when it comes to US trade deals if it leaves the EU".

15 HM Government – "HM Treasury analysis: the long-term economic impact of EU membership and the alternatives "– April 2016".

16 Citi, UK Economics Focus – "Brexit Risk, Implications for Economies and Markets", 5th February, 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.