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Ireland has threatened to veto Brexit trade talks with the U.K. unless complex issues surrounding its border with Northern Ireland are resolved.
The country's EU commissioner Phil Hogan said on Sunday that Ireland could veto the talks between the U.K. and the European Union (EU) if it is not given assurances that there will be no "hard border" between Ireland and Northern Ireland after Brexit.
The EU has said also that sufficient progress must be made on the Irish border issue before it will give the green light to trade talks at a summit in mid-December.
But Liam Fox, the U.K.'s international trade secretary, has said that the border issue could not be settled until a trade deal was agreed — putting Ireland and the U.K. at odds over whether the border or trade comes first.
The issue of a "hard border" is controversial, but could be required if the U.K. quits both the EU's single market (which allows the free movement of goods, people, capital and services between EU nations) and customs union (which would see the U.K. placing tariffs on goods entering the country from outside the EU).
British Prime Minister Teresa May and her minority government, which is supported on a vote-by-vote basis by the Democratic Unionist Party (DUP) in Northern Ireland, has ruled out remaining in either the EU's single market or customs union, leaving a conundrum over the future of the freedom of movement, trade and goods between the Irish and Northern Irish territories.
Mujtaba Rahman, the head of Eurasia Group's Europe practice, told CNBC on Monday that the border issue presented a "massive challenge" to Brexit negotiations and the U.K. government.
"The solution to this is really unclear. 2018 will be a very challenging year and Ireland is key to that," he said. Rahman did not believe that the Irish would veto trade talks, however, as he believed the other EU nations would exert pressure on the country to allow progress to be made at the EU summit next month.
"I don't think the Irish will veto trade talks and I think the U.K. will table a serious offer for more money (for the "divorce bill") in an attempt to isolate the Irish. But, at the same time, there will be pressure on the Irish to not block progress as I think there is a desire among the 27 EU nations to see talks progress on to trade soon," Rahman said.
A porous border between Northern Ireland and Ireland is likely to be unacceptable to the EU, as it could undermine the bloc's single market and rules over the quality and control of goods entering the 27-country union.
Meanwhile, a "hard border" is politically toxic on an island where enormous efforts have been made over the years to overcome sectarianism between Irish nationalists and Northern Irish unionists. What's more, free trade is crucial for the Northern Irish (and U.K.) and Irish economies.
In 2015, Ireland exported 112.4 billion euros worth of goods. Some 15.6 billion euros — or 13.9 percent — of these goods went to the U.K. In the same year, goods imported into Ireland amounted to 70.1 billion euros, with 18 billion — or 25.7 percent — of these arriving from the U.K., according to 2016 data from Ireland's Central Statistics Office.
There are several other "red line" issues within the Brexit negotiations — not least of all the so-called "divorce bill" of what the U.K. owes the EU and the thorny issue of citizens' rights post-Brexit. But the subject of the border between the Republic of Ireland and Northern Ireland carries historical, political, cultural and economic weight.
Northern Ireland's modern history has been dominated by sectarianism and a territorial conflict between, mainly Catholic, Irish nationalists wanting the north of the country to be reunited with the republic and, mainly Protestant, unionists wanting Northern Ireland to stay a part of the U.K.
Those divisions have remained largely the same in politics, with the region's biggest parties, the pro-U.K. Democratic Unionist Party (DUP) in Northern Ireland having just one seat more than the leftwing republican party Sinn Fein.
After decades of violence between nationalists and unionists in an era known as "the Troubles," a peace deal known as the Good Friday Agreement was reached in 1998. It created a power-sharing assembly for both nationalists and unionists to have equal say. In practice, however, joint leadership between the rival DUP and Sinn Fein parties has not been easy and in January this year, the power-sharing government collapsed and is yet to be reinstated.
Eurasia Group's Rahman noted that there was a danger that Article 50, the process of leaving the EU, was "getting mixed up in the peace process" and that the volatile political situation was not helping matters.
In an interview with The Observer newspaper Sunday, Ireland's EU Commissioner Hogan said that the U.K. or at least Northern Ireland, which is a part of the kingdom, would be better off staying in the single market or customs union to resolve the border issue. But that solution is unacceptable to the DUP as it does not want to see Northern Ireland with rules that separate it from the U.K.
This means that another, more bespoke arrangement will have to be agreed, with the possibility of a separate customs union partnership or free trade arrangement being mooted as a possibility by Irish Prime Minister Leo Varadkar. In October, however, he told parliament that that position was "not our negotiating position or preference by any means," Reuters reported.
JPMorgan Economist Malcolm Barr said the idea of Northern Ireland remaining a part of the single market, as it currently stands, was "not going to work" and that some kind of agreement could be reached on a sector-by-sector basis.
"The idea (of remaining in the single market) is just politically untenable, so I think we'll see both sides move towards a sector-by-sector solution in which there is a discussion about how much regulatory alignment is needed and what mechanisms would be the best to ensure that," he said.
He emphasized that creativity, tolerance, compromise and flexibility were needed to create a bespoke, technical agreement that could allow as "invisible a border as possible."
"The only solution is a hybrid of approaches which require everyone to be flexible," he told CNBC. "But it will be a bearable solution rather than an acceptable one, however."
Rahman agreed that an agreement needed to be carefully managed and that "there will have to be some form of checks at the border — there will need to be some kind of controls."
"This is the gateway to the Europeans' market so they need to ensure that their borders are secure, through controls and checks," he said.
"There could be a use of technology to try to make the border as invisible and porous as possible, but this implies a high degree of regulatory convergence, which implies minimal checks. But then again, if Northern Ireland moves away from the U.K. (in terms of rules over the movement of goods), the DUP won't allow that," he said, adding: "It's not clear what the solution is, frankly."