A correction in economic cycle: EU solidarity may come at a high price

Even if last week’s stock markets stumble was just a punctuation mark in the boom-to-bust cycle it was a reminder, to borrow a phrase from another recurring nightmare, that “they haven’t gone away you know”.

That our economic stability, our capacity to evolve as a society, is so tied to the moods of the markets seems a remarkable concession, even if a plausible alternative seems remote.

Share prices staged a modest recovery yesterday so the alarm bells fell silent — until the next time. And there will be a next time.

Christine Lagarde

International Monetary Fund managing director Christine Lagarde spoke to that likelihood at the the World Government Summit in Dubai last weekend when she warned that financial reforms are urgently needed to avoid the next crisis.

She wants authorities to move to regulation of activities, not entities. Ms Lagarde described last week’s sell-off as a “welcome correction”.

It is not hard to imagine that she might suggest a “welcome correction” in Irish consumer sentiment, though retailers might disagree.

Figures published yesterday showed consumer sentiment rose to a 17-year peak last month.

The KBC Bank Ireland/ESRI consumer sentiment index found sentiment had increased to 110.4 in January, from 103.2 in December, highlighting stronger household finances.

Strangely, that survey also found that concerns over Brexit had abated.

Renewed optimism was reflected in yesterday’s Visa’s Consumer Spending Index, which signalled a +5.3% year-on-year expansion in household expenditure, up from the +4.9% increase seen in December.

This tigerish pace contrasts starkly with the situation in Britain where consumer spending fell for the fifth month in-a-row.

Overall consumer expenditure fell 1.2% year-on-year in January and spending has fallen in eight of the past nine months.

This reversal is blamed on rising living costs and lacklustre wage growth but Brexit uncertainty is influential too.

It is hard to predict how long Irish consumer sentiment can ignore Brexit probabilities — one of which might be a far lower tax regime in Britain which may, though not certainly, divert some foreign investors happy to work outside the EU.

This prospect brings, for Ireland, the primary issue on Brexit into focus — how reliable is EU opposition to a return of a border on this island?

So far it seems secure but this weekend there was an indication of what that solidarity might cost us.

The German ambassador to Ireland warned that conflict regarding tax harmonisation policies will inevitably come to a head this year.

Ambassador Deike Potzel warned “we cannot have major tech giants profiting from infrastructure and sales from European taxpayers and routing their tax in Ireland. We are very much in favour of tax harmonisation”.

Defending corporation tax rates has been a matter of faith for Irish governments for some decades, as has the rejection of tax-haven accusations.

However, as hard-Brexit Tories are discovering, it is more than unlikely we can have our cake and eat it.

It is hard to see how support on the border will not be linked to higher corporation tax rates.

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