More on the Article 50 process

Kevin’s article in the Irish Times is excellent. In the post below I make some of the same points and some others.

The farce on Monday highlighted Theresa May’s political weakness. It has also, yet again, revealed that many of the Brexiteers (and also many commentators) simply do not understand what is going on.

Various UK commentators and politicians have called on the EU to compromise. For example the BBC reported that “David Davis has said the EU must be willing to give ground too if further progress in Brexit talks is to be made.” This seems to stem from a belief that the so called phase 1 ‘negotiations’ are conducted in the usual way of political negotiations, where each side gives in a little, and in the end some clever form of words is found whereby each side can claim they got their way. This is simply not the case here.

The Article 50 process is about establishing what the UK is going to do regarding their financial liabilities, citizens rights (here the UK will also want to establish what the EU intends to do), whether a hard border on the island of Ireland will be necessitated by the future actions of the UK and whether the Good Friday Agreement, an internationally binding agreement can be maintained.

It is important to remember that it is the UK that wants to deviate from the status quo, so it is up to the UK to spell out in detail what it wants to change. The EU will determine if this is satisfactory for them to move to phase 2 where the future relationship between the UK and the EU will be negotiated.

Determining whether the UK proposals on these Article 50 issues are satisfactory is a technical matter not a political one. Either regulations in the UK (or Northern Ireland) will differ or they won’t, either the UK will end up agreeing to tariffs with third countries that deviate from those in the Customs Union or they don’t. If the UK wants to move in a direction where an open border would undermine the integrity of the EU Single Market and Customs Union, then border controls will be necessary.

Whatever is agreed will need to stand up to legal challenge, e.g. when the first lorry load of chlorinated chicken or beef that entered the UK at lower tariffs than are due in the EU, rolls across the border – so some clever form of words won’t do. There can be no compromise or a la carte approach here.

What can be offered to ease some of the unfounded DUP fears, are assurances regarding the status of Northern Ireland as a part of the UK (unless of course, as is provided for in the Good Friday Agreement, a majority decide to change that).

The plea for some give from the EU side reveals another misconception among Brexiteers and that is that the UK is an equal partner in this. Instead it is by a long way the junior partner in the process.

The latest World Bank World Development Indicators shows that the UK is the 6th largest economy in the world. It slipped a place, at least in part due to Brexit, making France the 5th largest economy, but importantly the EU excluding the UK is almost six times larger than the UK in economic terms. The potential losses of a failure to agree a trade deal are also considerably more significant for the UK than the EU – over four and a half times those suffered by the EU (based on Lawless and Morgenroth, 2016, I also have estimates that put this seven times). Of course Ireland is something of an outlier but even here the impact on total trade is less than half that potentially suffered by the UK.

This coupled with the fact that the EU is the UKs largest trading partner, means that walking away from the process is a strategy that would maximise the self-harm to the UK economy, as this would mean that the UK will not get a trade deal with the EU. Of course a trade deal with the EU would be the quickest one to put in place and of course it would also cover the largest share of UK trade so it is also the most important one.

Brexit and the Irish border

As we get closer to the important EU Council meeting the amount of coverage on Brexit has increased significantly. Of course more noise does not necessarily equate to more content – there is a lot of uninformed opinion around.

There are some fundamental issues that need to be understood.

While we are talking about the border between Ireland and Northern Ireland, we are also talking about a future external border of the EU. That means the issue of the Irish border is very important to the EU and our EU partners and all have the same objectives – to avoid a hard border. Thus, the negative commentary directed at Ireland by Brexiteers and the Brexiteer press, apart from being mostly factually wrong, is badly misdirected.

Of course the impact of a hard border would be felt more by Ireland than in any other Member State (you can find analysis on this here), but the nature of the border is a crucial determinant of the integrity of EU Customs Union and Single Market, and is thus of crucial importance to the EU. This latter point appears not be understood by everyone. To illustrate the significance of the EU external border, and the Irish border will be that post Brexit, it is useful to consider an example:

The UK wants to sign trade deals with other countries, which presumably will give other countries access to the UK market on different terms than are available in the EU. This is why the UK wants to leave the Customs Union. If the UK allows beef from a third country into the UK at a lower tariff than the EU would charge and/or subject to less regulation than applies in the EU (as part of a trade deal), then this beef could enter the EU if there is no hard border. Of course with lower tariffs in the UK than in the EU exporters would move their product through the UK (Northern Ireland) into the EU.

This would mean that the UK would effectively determine EU external trade policy. The EU will not allow such a situation to arise – and neither should Ireland as such a situation is likely to have significant negative impact on Irish businesses and consumers (remember the regulations are there to protect consumers).

This means that the apparent offer by the UK, that there will be no regulatory divergence at least for Northern Ireland, will not avoid the need for a hard border as the issue of different tariffs is not covered by that offer. A hard border will only be avoided if the UK, or at least Northern Ireland, stay in the Customs Union and there is no regulatory divergence – there is no way around this! An offer to avoid regulatory divergence is not enough to move to the next phase of the negotiations.

Even a special status for Northern Ireland, where the border runs through the Irish Sea and where UK authorities ensure that third country products do not end up in the EU market, is problematic as it would be difficult for the EU to enforce the proper policing of that border, given that it is located outside the EU in a sovereign country.

Another important point relates to opinions about the use of existing or yet to be invented technological solution to police the border. A lot of the legitimate routine trade is already processed electronically, and could easily continue to be processed that way. But that does not remove the need to check that what is being transported is what had been declared, and more importantly border checkpoints are there to stop illegal activity. It is hardly credible that criminals are going to be declaring their trade via an online system!? Importantly, once the UK is outside the Customs Union illegal activity will not only encompass the usual things like drug smuggling but will also encompass shipments where the tariffs and duties due in the EU have not been paid or where the goods do not meet EU regulatory requirements. In the event that the UK is outside the Customs Union (tariffs) and Single Market (regulations), Ireland is obliged to police this border adequately, which means physical checks.

This brings me to my next point. It would be very easy for the UK to guarantee that it will not introduce physical border checks, but given the arguments I put forward above, what the UK would needs to guarantee is that the EU will not need to put in physical border check in response to changes introduced by the UK in the wake of Brexit, namely deviations from regulations, tariffs and tariff-quotas.

Finally, there is talk about some form of words being found that would allow negotiations to progress to the next phase. Again given the facts, what is needed are very concrete undertakings that would be legally binding and would avoid the need for a hard border i.e. that the UK will not leave the Customs Union and there will be no regulatory divergence. Without such undertakings the negations should not proceed to phase two. Importantly, this is the point where Ireland holds all the cards, and it would be great mistake to settle for anything less than such an undertaking.

Latest issue of the Economic and Social Review

The Economic and Social Review has just published its latest issue at (Vol 48, No 3, Autumn 2017)

Articles

Taxation, Debt and Relative Prices in the Long Run: The Irish Experience
Vahagn Galstyan, Adnan Velic

An Irish Welcome? Changing Irish Attitudes to Immigrants
and Immigration: The Role of Recession and Immigration
Frances McGinnity, Gillian Kingston

Does the Month of Birth Affect Educational and Health Outcomes? A Population-Based Analysis Using the Northern Ireland Longitudinal Study
Stefanie Doebler, Ian Shuttleworth, Myles Gould

Policy Section Articles

Modelling the Medium- to Long-Term Potential Macroeconomic Impact of Brexit on Ireland
Adele Bergin, Abian Garcia-Rodriguez, Edgar L. W. Morgenroth, Donal Smith

How Sensitive is Irish Income Tax Revenue to Underlying Economic Activity?
Yota Deli, Derek Lambert, Martina Lawless, Kieran McQuinn, Edgar L. W. Morgenroth

Valuing Informal Care in Ireland: Beyond the Traditional Production Boundary
Paul Hanly, Corina Sheerin

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.

Senior Macroeconomist Posts

ESRI is looking to recruit 2 senior research economists in macroeconomics
The ESRI is seeking to expand its existing research capabilities in the following areas; housing, public finances and general macroeconomics. Accordingly, the Institute is looking to hire two senior research economists with proven track records in applied, econometric research in any or all of these areas. The appointments may be tenure track positions or on a secondment basis. The roles will involve contributing and leading research programmes in housing, public finances and general macroeconomics and the successful candidates will be expected to produce relevant high-quality research papers which can be published in both international peer-reviewed journals and domestically-oriented policy papers.
More information can be found here:
For any queries concerning the position, e-mail: kieran.mcquinn@esri.ie

IEA 2015 Conference

The 29th Annual Irish Economic Association Conference will be held at the Institute of Banking, IFSC, 1 North Wall Quay, Dublin 1 on Thursday May 7th and Friday May 8th, 2015. The ESR guest lecture will be given by Professor Christopher Udry (Yale University) and the Edgeworth Lecture by Professor Giancarlo Corsetti (University of Cambridge). This year we have a very strong and expanded programme.

Registration for the conference is through the exordo site. Early registration costs 100 euros and includes dinner on the 7th. There is a much lower price for student delegates at 35 euros.

Bookings for accommodation should be made directly. We have negotiated some discounted hotel rooms at the Maldron Hotel, Cardiff Lane, which is close to the conference venue (mention the “IEA2015″).

I’m looking forward to seeing you there.