Transcript of Governor Gabriel Makhlouf’s interview with Martin Arnold, Financial Times

Interview with Governor Gabriel Makhlouf conducted by Martin Arnold on 21 October

Martin Arnold: How do you assess the economic risks of a no-deal Breixt, which is now your base case scenario at the Central Bank of Ireland?

Gabriel Makhlouf: It has become our base case. In July it wasn’t our base case. But it has become our base case this time round, mainly for two probably very obvious reasons. The first is that the closer you get to the end of December and the end of the transition period without a deal, the less likely there will be a deal. Secondly, I’m always cautious about the theatre that politicians like to put on around these sorts of things, so I tend not to take any of it particularly seriously. But the decision to actually introduce a bill that was going to override the withdrawal agreement seemed to be a signal that meant it would, if you look at it the other way around, it would make less sense for us to assume there would be a deal. 

I think the biggest impact in the EU-27 countries will be on us, Ireland is probably top of the list, and 2% is the ball figure we are talking about for 2021, and it will be smaller for 2022. That number disguises the fact that it is the agricultural and food sector that will be hit the most. 

But for Ireland it is obviously more than economics that is at stake here. If there is no deal that is an acrimonious no deal that actually does involve the withdrawal agreement and the Northern Ireland protocol being essentially torn up that would have all sorts of implications, which would have their own economic consequences. 

Martin Arnold: You are referring to the peace agreement?

Gabriel Makhlouf: Yes, the Good Friday Agreement. One of the interesting and underappreciated things from outside of Ireland is how invisible the border is today. I have people who work for me who live in the North and catch a train and come to work here - they haven’t recently because of the pandemic - but it’s just what you do. The island operates pretty seamlessly. If that fell away it would have economic consequences as well as other wider social and political ones. Having said all of that, what everyone including me is hoping is that there will be a deal and if there isn’t a deal, it will not be an acrimonious one that will see the protocol dismantled. 

The reality is that this whole process is lose-lose. The deal that is being discussed right now is all about how do you minimise losses. What people have to accept is that the UK left the EU at the end of January and what people have to do is accept the fact that there will be greater friction in UK trade than there had been previously and the transition period essentially is a time for all of us to prepare for that friction. I suspect that one of the things that has happened, for well-intentioned reasons for a lot of people, is the hope that the transition period would be extended and we could carry on doing what we have been doing. 

The financial services industry in Ireland is largely ready, not least because we were ready a year ago. There are some issues outstanding, but largely the industry is ready. There may be individual firms that aren’t completely ready. Outside financial services I suspect there will be firms that haven’t got their act completely together. If we get a deal we will have minimised the losses.

Martin Arnold: But there will still be losses, as your quarterly bulletin makes clear.

Gabriel Makhlouf: Certainly in the short and medium term there will be losses for everybody. In the long-term it is harder to say what will happen. There will be economic losses and there will be other losses. I have found it fascinating how little debate there has been in the UK about the fact that this deal that is being negotiated doesn’t include financial services, which is such an important part of the UK economy, that employs lots of people and pays lots of taxes, and yet the debate and the discussion has been about this free trade agreement that is fundamentally about goods. That surprised me. 

People talk about who will be the winners from this, but I would argue that in the short term there will be no winners. Not really. You could argue that the European Banking Authority moving from London to Paris and the European Medicines Agency moving from London to Amsterdam, those are sort of wins for the receiving country and losses for the UK. In the grand scheme of things they are minor. Taking a longer term view, certainly some people have talked about for the past few years if Frankfurt going to replace London as the EU’s financial centre, is Dublin going to do it, could it be Paris, what about Amsterdam. I think all of us would rather it carry on being London, but there is going to be change. 

Martin Arnold: So it moves at a glacial pace, but you think it could be significant over time? 

Gabriel Makhlouf: Given the - as you put it - glacial pace that these things move, notwithstanding the last few years of protectionism, we are seeing a massive growth of Asia - and I don’t just mean China, I mean Asia. We should be thinking in the EU, and I include the UK in that, how are we as a region positioning ourselves in this world where we are going to have very big financial centres, much bigger than we have now in Asia. 

Martin Arnold: What about the recent rise in coronavirus infections and subsequent restrictions, what impact will those have?

Gabriel Makhlouf: We do think this latest lockdown is obviously going to hit the domestic economy in 2020. We are already modelling a 7% drop in underlying consumer demand. We are still not closing schools, construction sites or manufacturing. But there will be a hit. There is a reasonable assumption that the six-week lockdown happens fairly regularly. We’ll have to revise our models. Certainly, it could go negative in Ireland. The fourth quarter is going to be negative. 

Martin Arnold: You revised up your forecast for GDP this year recently, why is that?

Gabriel Makhlouf: Since the trough in April, the economy has rebounded, but was uneven and incomplete. We will end the year with one of the smallest drops in GDP in the euro area and probably one of the biggest drops in consumption. The impact of that has been offset by exports, particularly by pharmaceutical and chemicals groups, they have been incredibly resilient. 

Martin Arnold: So the economy is facing a double-whammy?

Gabriel Makhlouf: Yes. There is a whammy from the pandemic that is hitting particular sectors hard and then we have the added whammy of Brexit and, if there is no deal, that’s a particularly big whammy. 

Martin Arnold: Have you seen any sign of inventories being built up ahead of the Brexit deadline? 

Gabriel Makhlouf: I haven’t specifically seen that. But I would expect it to be happening.

Martin Arnold: What about the impact on people’s movement?

Gabriel Makhlouf: We have agreed to maintain a common travel area with the UK after Brexit that will maintain freedom of movement between the two countries. But what worries me is the consequences for young people, who will be losing the opportunity to work anywhere in Europe and what that will mean for the way our society and economies work together. 

Martin Arnold: What about the land bridge that Irish companies use to transport many of its exports to the rest of the EU via the UK? Do you expect that to be disrupted?

Gabriel Makhlouf: That sort of friction could happen even if there is a deal. There is only one tunnel and there’s only so many ferries, so if they start getting bogged down it is going to hit everyone who uses them. 

Martin Arnold: How about foreign direct investment? Ireland has done well in attracting a lot of FDI in recent years, how will Brexit affect that?

Gabriel Makhlouf: We have done well because of Ireland’s attractiveness as a destination for investment and its links with the US. We have seen some businesses move parts of their business to Dublin, or to Ireland, from London. For greenfield sites it may in the past have been neutral between the UK and Ireland, in the future they may pick Ireland if they want to sell into the EU. In the longer term, FDI is going to be more influenced by what kind of free trade agreements the UK agrees with other governments, what is the outcome of the US election and what happens with international tax reform.

Martin Arnold: How bad could the Brexit disruption be for business?

Gabriel Makhlouf: The nature of tariffs that are going to come into play is that they shouldn’t be systemic. Businesses should either bear the extra costs or look to restructure. The food sector will be hit significantly and some firms will find it tough and many may struggle - that is why 2 per cent of GDP is still a significant hit.