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Northern Ireland crisis risks economy and U.K. unity

It is already one of the least productive economies in the developed world
The province’s dismal economy will be particularly stark when compared with the Republic of Ireland. REUTERS/Clodagh Kilcoyne

By Carol Ryan

LONDON (Reuters Breakingviews) - Northern Ireland’s political crisis risks both its economy and the U.K.’s unity. The British government will be forced to pass the region’s budget after talks to form a government failed. A return to direct rule from London may follow; an outcome that could see growth weaken and heighten sectarian tensions.

The region has been without a government since January, when a decade-long power-sharing agreement between the Democratic Unionist Party and Irish nationalist group Sinn Fein ended amid a financial scandal. Attempts to forge a new deal were scuppered by Sinn Fein’s demands for legal protections for the Irish language, the main tongue of 0.2 per cent of the population. The party has been emboldened by UK Prime Minister Theresa May’s decision to form an alliance with the DUP to preserve her majority at Westminster.

The stalemate is bad news for Northern Ireland’s economy. It is already one of the least productive in the developed world according to PwC data, and is reliant on fiscal transfers from London for roughly 30 per cent of government income. It will now rely on Westminster to pass a budget, and, if there is no truce, to rule directly. The status of one billion pounds of additional funding promised to the DUP as a quid pro quo for propping up Theresa May’s government is now in question, delaying infrastructure projects. The parties’ ambitions to lower the region’s corporate tax rate may be shelved too, reducing its ability to compete with the low-tax Republic of Ireland.

Economic strains will have political consequences. The province’s dismal economy will be particularly stark when compared with the Republic of Ireland. It is already on track to grow more than four times faster this year than the 1.2 per cent forecast for Northern Ireland according to EY data. An abrupt exit from the EU could further hurt Northern Ireland, if it means the return of a hard border with the Republic. Such damage, inflicted under direct UK rule, could boost support for independence, while exonerating Sinn Fein. It is already calling for Dublin to play a role in the province’s governance. A showdown over the status of Northern Ireland may be the inevitable outcome of Brexit.

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