More on Brexit

Theresa May’s speech last week, while providing very little new information, provoked a lot of debate about the future relationship between the United (or perhaps more aptly the Disunited) Kingdom and the EU, and the potential consequences for Ireland. In particular there is much debate about the nature of the trade deal that might be achieved, and what Ireland should do. No doubt this debate will continue until the UK has left the EU and probably beyond.

However, what people are forgetting is that for there to be a trade agreement there first needs to be a successful outcome to the Article 50 negotiations. Some commentators do not distinguish the Article 50 negotiations, which are solely about the exit of the UK from the EU, from the trade negotiations, which in any case can’t be completed (at least in terms of signatures and giving legal effect to them) until the UK has actually left the EU.

The lack of attention on the Article 50 negotiations also seems to apply to the UK government, which other than indicating the likely time period in which Article 50 is going to be triggered, has not commented in detail about these. Theresa May’s speech last week is no exception in this. It would appear that the outcome of these negotiations is taken for granted, which might be due to a lack of understanding of what they entail.

A key aspect of the negotiations relates to the assets and liabilities shared between the Member States. The EU owns significant financial assets and of course also owns significant property assets. The 2015 consolidated EU accounts show that these assets were worth €154 billion. Of course the EU also has substantial liabilities, such as contractually committed expenditures but also pension liabilities. These amounted to €226billion in 2015. If one simply apportioned the net liabilities according to economic size the UK would owe the EU €12.6 billion.

Apportioning the UK share of the net liabilities amounting to €72 billion is going to be a tricky task, especially as the simple aggregate approach used here for illustrative purposes will have to be replaced by a much more detailed approach. Thus, instead of arguing about the shares for the two figures on assets and liabilities the negotiations will be about lots of figures.

Some commentators have also suggested alternative numbers, which are presumably based on different underlying data. For example the Financial Times has suggested that net payments from the UK to the EU could range between €20 billion and €60 billion. Apart from the potential for disagreements in attributing assets and liabilities to the UK, it should not be taken for granted that a Eurosceptic Westminster would approve payment of billions of pounds to ‘Brussels bureaucrats’. Failing to successfully complete the Article 50 negotiations would make trade negotiations difficult if not impossible.

What should Ireland do to mitigate the consequences of Brexit? Some people (e.g. Nigel Farage) are arguing that Ireland should also leave the EU. This is utter nonsense! Does anyone believe that Ireland could cut a good trade deal with a country that is over ten times larger in economic terms (GDP) and 14 times large in terms of population (the UK) rather than being part of a block that is almost 5 times larger than the UK? Brexiteers are trying to stir disagreement among EU members as a broken EU will be a lot easier to leave and doing deals with (small) individual countries will also be more advantageous for the UK.

The fact that Ireland trades extensively with non-EU countries, and particularly the US is not evidence that Ireland does not need the EU, but the opposite. Multinational companies that are responsible for the bulk of Irish trade are in Ireland because of EU membership. The EU has concluded trade deals with a range of countries and blocks and a small country like Ireland is not going to negotiate a better deal than the EU.

The latter point also applies to the UK. While Theresa May is now using the slogan of “making Britain truly global”, she and fellow Brexiteers have failed to show how the EU stopped the UK from being global. Indeed the evidence shows that Germany went global, i.e. increased its export share with non-EU countries accounting for EU expansion effects, from the 1980’s onwards. Using this definition the UK only started globalising in the early part of the last decade (see Morgenroth, 2017). Far from stopping countries going global the EU has actually facilitated globalisation for countries that wanted to pursue this goal (something that has been criticised by certain groups). Failure to do so is thus likely to be due to domestic policy failings.

So what should Ireland do? Firstly, it is important to note that when it comes to trade, the objectives of the EU are the same as those of Ireland – to keep trade as free as possible. Similarly, every EU Member State will want to protect its firms from unfair competition. This implies that the EU negotiating stance is likely to be reactive, responding to deviations by the UK from the status quo on trade barriers as well as other factors such as the adherence to State Aid Rules.

Secondly, while Ireland is particularly exposed to the negative impacts of Brexit, there are other EU Members, which will have shared concerns. For example as is now well known, the Irish agri-food sector is particularly exposed. Analysis shows that the Danish pork exports are as exposed Brexit as Irish beef exports to the UK (see Lawless and Morgenroth, 2016). Thus, there are natural allies which will have similar interests when it comes to the negotiations. The detailed analysis of which sectors, firms and regions are most exposed will help identify potential mitigating actions, for example by helping develop alternative markets.
Thirdly, EU Members will have the same objectives when it comes to attracting investment (both of foreign and UK firms) away from the UK, even if they will be competing against each other for this investment. Ireland is already more successful in attracting FDI than its size would suggest and it is likely that this will also apply to any investment diverted from the UK, at least in sectors where Ireland is already strong.

Finally, it is important to remember that it is not the EU that is turning its back on Ireland but that it is the UK that is doing so by leaving the EU – no amount of rhetoric changes this fact.

Central Bank workshop on macroprudential policy

The Central Bank will host a workshop entitled “Evaluating the effectiveness of macroprudential policies” on Wednesday February 8th in the Institute of Banking in conjunction with the European Central Banking Network and the Centre for Economic Policy Research. A description of the event is outlined below.

Macroprudential policies to mitigate structural and cyclical systemic risk are now in operation in a number of countries.  Assessing the impact of these policies on the resilience of the financial sector and the wider economy is at the core of research and policy activities following the crisis.  Given the multi-faceted concept of financial stability that these policies are meant to contribute to and the still emerging theoretical framework, a number of analytical approaches have been advanced for policy evaluation and design.  The workshop will bring together the policy and academic communities to consider these evaluation approaches covering the use of macro models, time series techniques and the analysis of micro data. Of particular interest are those policies aimed at enhancing the resilience of banks, households and other sectors of the economy through building up structural capital buffers (e.g. G-SIB, O-SII, SRB) and enacting borrower-based measures (e.g. Loan-to-Value and Loan-to-Income limits).

Programme: 

08:45 Coffee and Registration

09:15 Session 1 Policy Panel – Chaired by Fabrizio Coricelli (Paris School of Economics and CEPR) with Vice-President Claudia M. Buch (Deutsche Bundesbank), Governor Boštjan Jazbec (Banka Slovenije), Governor Philip R. Lane (Central Bank of Ireland)

10:00 The use and effectiveness of macroprudential policies: New evidence – Eugenio Cerutti (International Monetary Fund)

10:50 Coffee

11:10 Inspecting the mechanism: Leverage and the Great Recession in the Eurozone – Philippe Martin (Science Po Paris and CEPR)

12:00 The impact of bank capital on economic activity – evidence from a mixed-cross-section GVAR model – Christoffer Kok (European Central Bank)

12:50 Lunch

14:00 Capital inflows – the good, the bad and the bubbly – Dennis Reinhardt (Bank of England)

14:50 The impact of macroprudential housing finance tools in Canada: 2005-2010 – Tom Roberts (Bank of Canada)

15:40 Coffee

16:00 Objective-setting and communication of macroprudential policies – Jochen Schanz (Bank for International Settlements)

16:50 Closing remarks – Governor Philip R. Lane (Central Bank of Ireland)

The workshop is hosted by the Central Bank of Ireland as part of a series of annual events organized by the European Central Banking Network (ECBN) in cooperation with CEPR.

To register for the event or for any queries, please email fsdadmin@centralbank.ie by Friday 3rd February 2017.

Venue: The Institute of Banking, Citi Building, IFSC, 1 North Wall Quay, Dublin 1, Ireland – https://goo.gl/maps/aLj85WQdjWu.

Launch of World Wealth and Income Database

Readers might be interested in the new World Wealth and Income Database, which was just launched at the American Economic Association (AEA) annual meeting in Chicago.

It is coordinated by a small core team located at the World Inequality Lab at the Paris School of Economics.

The presentation slides from the AEA are available here and the corresponding explanatory paper is visible here.

The database aims to offer open access to the most extensive available database on the historical evolution of the global distribution of income and wealth, both within and between countries.

From an Irish perspective, what’s most notable is the paucity of data on the distribution of income and wealth, something that Patrick Honohon commented upon as governor of the central bank in 2014.

However, there does seem to be updated data (most likely from Brian Nolan), on the top 1% income share from 1938-2009.

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Celtic Phoenix or Leprechaun Economics?

Readers might be interested in this UCD Geary working paper, which was featured in the Sunday Business Post yesterday. The title of the paper is “Celtic Phoenix or Leprechaun Economics: the Political Economy of an FDI-led Growth Model in Europe”.

Our core argument is that Ireland’s post-crisis economic recovery was driven by foreign direct investment (FDI) from Silicon Valley, and whilst this growth model was made possible by Ireland’s low corporate tax rates, it was also a result of inward migration, with these firms using Ireland to directly access the European labour market.

We also demonstrate that Irish fiscal and wage policies have not redistributed gains from the FDI recovery to the broader population. As a result, the economic recovery has been most actively felt by those in the FDI sectors, including foreign-national workers from the EU and beyond.

We suggest that this experience indicates that Ireland’s FDI-led growth model has created clear winners and losers. The FDI growth regime been made possible by inward migration and European integration, but given the unequal distribution of the economic benefits that this generates, it is unlikely to be politically, or electorally, sustainable.

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2017 WINIR Conference – Call For Papers

The 2017 World Interdisciplinary Network for Institutional Research Conference will be held from Thursday 14th to Saturday 16th of September 2017 in Utrecht University, Netherlands.

The conference welcomes contributions from any academic discipline that address the challenges and dynamics of the economic, political, legal and social institutions of our time. Submissions on any other aspect of institutional research are also welcome.

Organisers are requesting abstract submissions (300 words max.). All submission must be about institutions, organisations and/or institutional thought.

Keynotes lectures, representing three academic disciplines, will be given by Johanna Mair (Hertie School of Governance), James Robinson (University of Chicago) and Juliet Schor (Boston College).

The conference will also feature a round table on “ICT, Open Societies and New Institutions” with José van Dijck (Royal Netherlands Academy of Arts and Sciences), Haroon Sheikh (Dasym Investment Strategies) and Fredrik Söderqvist (Unionen), and will be preceded by a PhD workshop.

The abstract submission deadline is Monday 13th of March 2017. More information can be found here.

Reminder: Irish Economic Association Annual Conference 2017 call for papers

The 31st Annual Irish Economic Association Conference will be held in the Institute of Banking in Dublin on Thursday May 4th and Friday May 5th, 2017.

Frank Walsh from the school of economics UCD is the local organiser

Conference email: ieaconference2017@gmail.com

The ESR guest lecture will be given by Professor Deirdre McCloskey (University of Illinois at Chicago) and the Edgeworth Lecture by Professor John Muellbauer (University of Oxford).

The Association invites submissions of papers to be considered for the conference programme. Papers may be on any area in Economics, Finance or Econometrics.

The deadline for submitted articles is the 7th of February 2017 and submissions can be made through https://iea2017.exordo.com

Please circulate the call for papers amongst your colleagues especially younger researchers who may not be on the mailing list.

http://www.iea.ie/