Politics likely to trump global markets again

The focus on ballot box is unlikely to wane in 2017, writes Dermot O’Leary.

Politics likely to trump global markets again

Up until 2016, while elections in the developed world have shifted power between left and right, liberals and conservatives, there were very few examples of votes that have altered the status quo.

The events of 2016 have the potential to alter the shape of history in so many important ways.

The fact that the US electorate has elevated a former TV star to the highest political office in the world is just an interesting footnote to the more important policy shifts that his election may present.

Many uncertainties exist, but the rhetoric suggests the US is about to embark on a radical departure from the accepted norm.

Corporation tax reform is set to be the centrepiece of his economic plan and is likely to be one of the first policy changes introduced early in his term.

Mr Trump’s aim is to reduce the incentives for US firms to produce abroad, thus returning capital and labour to US shores.

This will be done through a carrot (lower taxes) and stick (penalties) approach. If introduced, the threat to the rest of the world is a very real one, with a decades-old trend of increased globalisation put at risk.

Given the leadership role US companies have played in the drive to globalisation for the past four decades, foreign countries that have benefited from this development should be afraid. This includes Ireland.

On this side of the Atlantic, the EU has been dealt a severe blow by the UK electorate’s decision to leave. The EU has had many crises over the decades and has used these occasions to further strengthen the bloc.

However, a shrinking of the Union is something that was not foreseen and seriously raises the risks of the ongoing survival of the entire project.

Where it goes from here depends on whether EU leaders heed the lessons of these recent political events.

If they don’t listen to the concerns of citizens and adapt it is difficult to see how the bloc will survive.

Voters will once again have an opportunity to let their opinions be known in 2017 when a number of key elections take place.

First up is the general elections in the Netherlands in mid-March, followed by French and German general elections in June and October.

The “conventional wisdom” suggests that “establishment” parties will win out against the more radical factions, but given the events of the past year, one should take predictions from polls with a very large pinch of salt.

Ireland has had its own tricky political climate to deal with and will continue to do so. If success is judged by the survival of government, then the experiment in “new politics” since the 2016 general election has been a success.

If it is judged upon the implementation of progressive policies, then the arrangement has been a failure. It appears that policies are being determined by politics rather than thorough analysis of economic and social needs and the potential outcomes.

This is not a healthy situation and can give rise to a short-term mind-set, to the detriment of the economy over the medium-term.

From an Irish perspective, the international political developments in 2016 could hardly have been worse. They have the potential to alter the direction of the economy over the coming years.

While Ireland’s exposure to the UK has dwindled over the past few decades, it has remained the most important market, by far, for employment-intensive Irish indigenous industry.

Ireland, therefore, is more than just a casual observer in the discussions that will take place between the EU and the UK on the future relationship post-Brexit in 2017 and 2018. The Trump tax plan will seriously reduce the tax advantage that Ireland has had over the US. This has acted as an important factor in attracting US capital here. Of course, FDI is attracted to Ireland by a lot more than tax, but Mr Trump’s tax plan has the potential to significantly alter incentives to producing abroad.

In this context, Ireland has to seriously reconsider its FDI offering and move its focus beyond the US quickly.

It is difficult to think of a time when voters have had a more profound impact on the direction of markets and economies. After the developments in 2016, the focus on the ballot box is unlikely to wane in 2017.

Dermot O’Leary is chief economist with Goodbody

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