The "land annuities" caused the most contention in Britain. The annuties were money that the British government had loaned to Irish farmers before the Government of Ireland Act of 1921 and which the farmers had agreed to repay. Part of the Anglo-Irish treaty was that the Free State government would collect these debts and return the money to Britain. Britain was so furious with the Irish for keeping the money, that they imposed a 20% tariff on trade with the Free State. The Irish found that they could no longer sell their beef to Britain or Northern Ireland and so they retaliated by imposing a tariff in the opposite direction. This prevented Britain selling coal to Ireland. However, Britain did not depend on Ireland as much as Ireland did on Britain, and this seriously crippled the Irish economy. After 5 years, in 1938, the two countries signed an agreement to end the trade war. Under this settlement the Free State give Britian �10,000,000 to pay off the annuities and in return Britian pulled out of her naval bases in Ireland. Adolf Hitler had come to power in Germany in 1933 and, since then, British relations with Germany had deteriorated. Therefore pulling out of the naval bases was a hard choice for Britain, considering that war was looking increasingly possible.

In 1936, de Valera abolished the King's right to interfere in Free State affairs, although he was still recognised as the Head of Commonwealth. This abolition, imposed via the External Relations Act, coincided with the abdication of King Edward 8th so that Britain did not have time to object to it. In 1937 de Valera introduced a new constitution, replacing the one agreed after the formation of the Free State. It included a number of issues: (a) The Irish Free State was to be renamed "Eire" (b) the Prime Minister was to be renamed the Taoiseach (c) the head of state would be an elected President, not the King (d) [article 2] declared that Eire's boundary consisted of the whole island of Ireland (e) [article 3] declared that the Eire government had the right to pass laws for the whole island although only enforcing them in the 26 counties. The new constitution was put to a referendum and was narrowly accepted by the people.

In September 1939, the UK went to war with Germany when it invaded Poland ignoring British and French demands for it not to. Northern Ireland, as part of the UK, found itself at war too. Eire, being a small country with few military resources, immediately declared neutrality. The return of the naval ports had come just in time, since Eire would have had to oust the British to remain neutral. The Eire government looked with increasing anxiousness as Hitler invaded and took over 8 neutral European countries in 1940, since they knew that the Irish army wouldn't have a hope against the Germans in an invasion. (In fact documents found after the war showed that Hitler had genuine plans to invade Ireland. The operation, called "Operation Green", would have provided a springboard for invading mainland Britain through its unprotected west coast. The invasion never happened due to German distractions in the USSR.) Nevertheless, de Valera refused to join the war. When the IRA began collaborating with the Germans in 1940, the Eire government cracked down hard in order not to anger the British and provoke a strategic invasion.

Despite the government's official line, however, the Irish people sympathised with the British and 40,000 Irish joined the British army and over 150,000 worked for the war effort. Nevertheless, the Irish declaration of neutrality brought resentment in Northern Ireland where times had got hard with rationing and blackouts while Eire could still trade freely.

In mid 1940, Britain looked to be in an impossible situation. With most of Europe in NAZI hands, and the USA refusing to join the war, they were desperate for any help. In June a British minister, Malcolm MacDonald came to Dublin and more or less offered to give Northern Ireland to Eire in return for military help. He told de Valera that he believed that Stormont would agree to this idea. De Valera, however, was sceptical and did not think that Stormont would be that easy to persuade. He also feared the consequences of a large Unionist population being pushed into Eire against their will. So he refused the offer.

In April and May 1941, the Germans began bombing cities in the UK nightly in a tactic known as the 'Blitz'. Stormont was complacent, believing that the Germans would not attack a part of the UK as far away as Northern Ireland, and did not install many air-raid shelters. However they were wrong: in German eyes Northern Ireland was contributing to the war effort and was therefore as much a target as the rest of the UK. On several nights, but mainly on the night of 15-16 April 1941, German bombers pounded both Belfast and Derry with hundreds of tonnes of explosives, killing 900 people, destroying thousands of buildings and making 10,000 people homeless. Largely due to the lack of air-raid shelters Belfast suffered more casualties than any UK city except London. Despite Irish neutrality, the fire brigades from Dundalk, Drogheda and Dublin assisted in the Blitz. Many people, united across their politics by fear, fled into the country. Some wealthier people lived in hotels in Eire during the Blitz. Eire did not get off totally scot-free. One set of lost German bombers mistook Cork for Cardiff and bombed it. Dublin was also lightly bombed on a number of occasions. On each occasion, the Eire government swallowed hard and let it pass.

Again, Eire viewed its policy of neutrality with some artistic license. For example it permitted British and US planes to overfly county Donegal on their way to bases in Fermanagh and when British airmen crashed in Eire they were quietly escorted to the border, while German pilots were interned. All told, aside from the loss of life and property, the war was good for both Eire and Northern Ireland. Northern Ireland's flagging ship and cloth industries boomed. And a new industry, aircraft manufacture, was set up in Belfast which still exists today. Eire benefitted with many of its citizens employed in the war effort. It also enjoyed trade with Britain for scarce goods that Eire could get as a neutral country, such as butter.

The only things to mar the good relations between the two states were (a) de Valera condemning the siting of US bases in Northern Ireland (b) de Valera expressing his condolences to the German ambassador when Hitler died (c) Britain's public, verbal, attack on Eire when the war was over for not joining the 'crusade against fascism'.