Via CNBC

Mary Lou McDonald (C), President of Sinn Fein and Eoin O’Broin (L) of Sinn Fein greet supporters in Dublin City Centre on February 10, 2020 in Dublin, Ireland.

Charles McQuillan

Nationalist Irish party Sinn Fein’s likely ambition to reunify Ireland, and the possible societal, political and economic ramifications of that could be a risk to the country’s economy, according to an economist.

Capital Economics’ Senior Europe Economist Jack Allen-Reynolds said Monday that Ireland’s general election result “does not change our view on the near-term outlook for the economy, which should maintain a decent pace this year and next.”

“But it does raise questions about the longer-term risks to public finances, particularly if Irish unification eventually becomes a more realistic possibility,” he said in a note, adding that there are “at least” two key risks for the country.

“The first is that the increased influence of SF (Sinn Fein) means that Ireland runs much looser fiscal policy, which could lead to concerns about debt sustainability. The second is that there is a serious push for Irish reunification,” he said.

“SF has said that it would only join a coalition if other parties agreed to hold a referendum on Irish unity. FF (Fianna Fail) is also pro-unification, but is more cautious on holding a vote. If unification ever took place, it could put a huge strain on Ireland’s public finances,” he said.

Allen-Reynolds noted that whatever the outcome of the coalition talks, fiscal policy is likely to be a little looser over the next few years than it has been for some time.

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“Ireland’s budget balance has switched from deficit to surplus since the last election, thanks to a combination of fairly strong economic growth and tight fiscal policy. But during the election campaign, polls suggest that by far the most important issues for voters were health care and housing, and all of the parties have pledged to increase spending in these areas.”

Coalition government

With the votes all counted Monday, Ireland’s main opposition party Fianna Fail won the most seats in Dublin’s 160-seat Parliament by winning 38. But that was just one seat more than the nationalist Sinn Fein party, which saw its popularity surge in the vote (it won 14 more seats than it did in the 2016 election).

Prime Minister Leo Varadkar’s Fine Gael party, meanwhile, won 35 seats and the Green Party 12 seats. The results set up what’s likely to be challenging and difficult negotiations to form a coalition government.

Mary Lou McDonald, the leader of Sinn Fein — a party that has sought the reunification of the Republic of Ireland and Northern Ireland (a part of the U.K.) and in the past had links to the paramilitary organization, the IRA — said the result was “something of a revolution in the ballot box.”

Both Fianna Fail and Fine Gael had ruled out working with the party before the election, because of its former IRA links and tax policies — the left-wing party wants to cut taxes for lower earners, offset by increased taxes on higher earners — a moot point for the other parties. All parties had pledged to boost spending on health care and housing, key concerns for voters.

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How negotiations go between the parties, and whose policies take precedence, matters because Ireland’s economy is something of a rare bright spot in Western Europe, a region that has seen growth slow in the last year amid global trade uncertainty and despite continuing European Central Bank stimulus.

The European Commission predicted in its Autumn Forecast that Ireland’s real gross domestic product (GDP) grew by 6.6% year-on-year in the first half of 2019, well above the euro area average. The Commission expected GDP growth to reach 5.6% in 2019 and to moderate to 3.5% in 2020 and 3.2% in 2021, it said, “on the back of increasing capacity constraints and an expected slowdown in government expenditure.”

The EU’s Commission noted in its last economic forecasts in November that “modified domestic demand, a measure of domestic activity that strips out some of the effects of multinationals, grew by 2.3% year-on-year in the first half of 2019, supported by robust, albeit moderating, private consumption and construction investment. Modified domestic demand is projected to grow over 3% on average over the forecast horizon.”

Lukewarm market response

Bert Colijn, senior euro zone economist at ING, noted Monday that the financial market response from the election has been lukewarm so far with Irish stocks underperforming their European peers Monday, but Irish bond yields have been largely unaffected. How the different parties approach the economy will be the real test, however.

“Sinn Féin proposals on the economy are less conservative — especially on housing market issues — than those of Fine Gael and Fianna Fáil, but how this election will change Irish economic policies remains a big question mark given the difficulty of government formation,” he said in a note Monday.

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“As Irish government debt is lower than the euro zone average and a relatively fiscally conservative 2020 budget has been submitted, a longer government coalition phase is unlikely to have immediate consequences from a public finances perspective.”