The clock is ticking

IF THE UK referendum on EU membership was held tomorrow the British people would vote ‘No’.

That is the unequivocal message of the UK’s recent EU Parliamentary and council elections. That is also what impelled British prime minister David Cameron to vehemently oppose the appointment of Federalist Jean Claude Junker as president-elect of the EU Commission. He failed in his attempt.

Suppose this happens in 2017; suppose the UK does vote to exit — where would this leave Ireland?

Britain is Ireland’s largest trading partner. Both labour markets are closely integrated. Since the Good Friday Agreement, British-Irish relationships have never been better.

Ireland, North and South, constitute a ‘single island economy’ with extensive and growing cross-border institutions and linkages. Faced with an unstoppable move by the EU towards full political union in the form of a federalised superstate, a decision by the British people to exit the EU would impact radically on Ireland.

Here’s the background.

When Ireland chose to join the EMS/ERM in 1978, it severed the longest currency union in modern European history: the one-for-one, no margins link between the punt and sterling.

At a purely operational level, the aim was to avoid ‘importing inflation’ from Britain. Margaret Thatcher’s monetarist policies soon turned that assumption upside down — we might have been better to stick with sterling.

But the break was about much more than a policy option to curb inflation. The wider context was a commitment by government to use every policy instrument to move towards fiscal balance, growth and employment.

But it was Ireland itself which took responsibility for changing its economic trajectory and, most important of all, had the autonomy and instruments at its disposal to do. It has since ceded these instruments; and ceded them not to the EU, but to eurozone within which, in reality, Ireland is now a ‘bit’ player, and for France and Germany, one with a really annoying corporate tax regime.

Britain also joined the ERM briefly. The strain on its domestic economy of sticking within the ERM was far too great. Its ignominious exit in 1992 turned out to be a blessing in disguise. By retaining control over its policy instruments — budgetary policy, in particular — the UK has recovered more rapidly from the economic crisis than even the IMF had anticipated.

So, why would Britain, which is not a member of the eurozone, want to leave the EU itself? There is a pronounced historical antipathy between Britain and the ‘Continent’ aka Germany and France. It has to do with being an ‘island nation’ and, also wars. But there are also more pressing practical issues to do with the future, rather than the past.

The eurozone began as a subset within the wider EU. The financial crisis, particularly its effects on peripheral economies, provided a catalyst for the Franco-German alliance to successfully engineer what is really a ‘reverse takeover’ of the governance of the EU.

This is Britain — and Ireland’s — problem. The governance of the eurozone, and political values on which it is based, are very different to those of the EU. Post-crisis, the eurozone has been reshaped into an entity that is knitted together by a wholly new set of coercive treaties and institutions.

This model was developed, and has been imposed, by Germany as the dominant creditor country of what is a fundamentally skewed and imbalanced currency zone, with aspirations to be a federal super state. This mindset, and these instruments, is not in any substantive sense, aligned with the founding vision and values of the EU.

For Ireland, this has meant the emasculation of budgetary autonomy, including productive capital spending. The consequence has been the loss by Ireland of its capacity to adjust to internal imbalances through growth — as we have done on at least three occasions since Independence.

The result of Ireland’s subservience to this new governance is perpetual indebtedness. The debt/GDP ratio exceeds 120%. This is well in excess of what the troika itself considered stable, with considerable upside risk. France, for example, thinks it has real problems with a ratio of 90%. Paradoxically, Ireland’s excessively high ratio is used by the troika to justify continued austerity.

The future debt ‘burden’ depends on the stock of debt, the growth of the economy and the trend in interest rates. Ireland is forced by the EU/ECB to carry an excessive stock of debt. Debt servicing absorbs about 20% of total government revenue every year. The economic case for a write-down is unassailable. But no one in the ECB or the commission is listening.

As regards growth, there is no traction to a recovery within the eurozone which might jump-start the Irish economy. Domestically, the economy is not close to growing at a rate that will reduce the debt ratio to anything remotely sustainable.

CSO estimates indicate that GDP, in volume terms, decreased by 0.3% in 2013. A very recent report by the Bundestag pointed out — somewhat ironically — that Ireland simply had no growth plan.

Interest rates are under upward pressure. Globally, there is, as the BIS recently noted, a tension between ‘exuberant financial markets’ and stagnant underlying economic conditions: this reflects too much ‘alchemy’ by central banks and is not sustainable.

So, the option of stimulating domestic growth, such as we achieved in transitioning from the 1950s to the 1960s — the greatest sustained expansion in our history — has been ceded to the troika while, at the same time, they have refused a debt write-off which would make some difference to future sustainability.

While the ECB/Commission cannot formulate a policy to accommodate the diverse needs of 28 countries, they have stymied Ireland’s own capacity to recover. The most notable achievement of the Government is to obfuscate these realities.

We are coming close to the budget. The ‘spin’ by Government, now spooked by the local and EU election results, is that it will ‘defy’ the troika and settle for a ‘budgetary adjustment’ (ie, taking yet more out of the economy) of less than €2bn.

This is such nonsense. There is not a TD that does not know it. The economy will suffer further from these further cuts, so will the health service; more small shops in the backwaters of the cities and in rural areas will close. There will be even more funerals. Reality.

The NTMA has been notably successful in managing Ireland’s relationship with the capital markets. But at least part of that is because the markets have taken a position that the framing, and surveillance, of national budgets of peripheral economies is, in effect, ‘outsourced’ to the same ‘authorities of austerity’, whose first priority in crisis management has been to shore up the banking systems rather than the businesses from whom banks ultimately get their legitimacy, and their profits. It’s actually worse than that: the ECB is again considering providing more cheap funding to banks to help them ‘round trip’ — buy national bonds cheaply, rather than direct funding of businesses.

The debt markets, in other words, are betting on perpetual national dependency. Our budget must be submitted to and approved by the commission before being submitted to the Dáil. Indeed, on one recent occasion, the budget provisions were discussed in the Bundestag — who recently visited us — before being seen, much less debated, on the floor of the Dáil.

These are the issues that the British EU Referendum is all about. Notwithstanding EU platitudes about ‘reform’, David Cameron’s opposition to Federalism will be unavailing. And if the eurozone are not listening to David Cameron about ‘reform’, they will certainly not be listening to us, ‘the good boys and girls’ of the eurozone; the ones who demonstrated that they could push a country to the limit to comply with ‘stability and growth’ ratios that not one finance minister could justify.

Ireland’s CT rate will, as I said at the time of Lisbon 1 (remember, the one we were ‘asked’ to vote on again, and to do it right this time) — be gone in three to five years. Ireland’s only attraction for FDI then will be a low wage, externally controlled economy. We are better than that.

Ireland, committed to the EU, is experiencing the sharp end of what the EU has actually become; while Britain’s innate distrust of a Federal Europe, dominated from the centre, has been vindicated.

There is surely a case for re-envisaging political and economic relationships between the UK and the Republic of Ireland; including the economic synergies this would generate eg in energy as well as the national responsibilities and policy options it would repatriate to both Ireland and the UK.

This new relationship would be associated with, but outside of, of a fully Federal Europe. A new relationship between the autonomous countries of Wales, Ireland, Scotland and England (WISE) provides an alternative model to the Merkel/Juncker model, and one that is far more closely aligned with what the original EEC envisaged.

We have two years to negotiate it.

Ray Kinsella is a former professor of banking and finance at the Smurfit School


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