The Euro

I thought I’d take a break from Brexit and Trump, and write a Critical Quarterly column about the Euro for a change. The main point I take from it now, a few months after writing it,  is that we should stop teaching our students that if a currency union faces shocks that are symmetric, rather than asymmetric, then there is no problem. The post-2008 experience teaches us that free rider problems and ideology can lead to very sub-optimal responses even to symmetric shocks.

Negotiations and trust

I am reading Hugo Young’s wonderful This Blessed Plot (is it really possible that it is out of print? How could that possibly be?). He agrees that de Gaulle behaved “monstrously” in vetoing the UK application to join the EEC in 1963, but also makes a good case that Macmillan deserves a share of the blame too. Macmillan’s approach to the negotiations was “conditional and tentative, creeping in a state of high suspicion towards this moment of historic destiny”; the UK made it clear that it wanted to “unpick” the Treaty of Rome in certain ways and wasn’t “necessarily willing to accept the acquis communautaire” — although it was offering nothing in compensation for this. Macmillan went out of his way to emphasize the fact that the Commonwealth and the UK’s relationship with the US were central concerns for him, strengthening de Gaulle’s view that the UK did not really belong in the EEC. Nor did the UK show any great enthusiasm for joining that organisation, in case this might weaken its bargaining hand. All of this merely served to strengthen European suspicions about the UK, and not only in France, and made it much easier for de Gaulle to eventually veto the UK application (just as UK diplomatic ineptness had made it easier for him to veto Plan G some years previously).

The story is not irrelevant today. Imagine that the UK had said, in June or July 2016, that given the closeness of the vote it would seek the closest possible relationship with the EU. Imagine that it had said that avoiding a hard border in Ireland was a major priority, but that it also wanted to avoid the emergence of trade barriers within the UK. Imagine that it had said that, therefore, it would be seeking to remain within a UK-EU customs union, and that it would unilaterally commit to remaining fully aligned with all EU regulations regarding goods. Imagine that it had said that, self-evidently, this would require it to abide by all relevant ECJ rulings, and that it would naturally be willing to make a contribution to the EU budget (but nowhere near as big a one as at present, of course). And imagine that it had said that it would also be willing to sign up to a broader set of guarantees ensuring that it would not try to steal a competitive march on the rest of Europe by undermining labour and regulatory standards more generally.

It might have been quite difficult for the EU to reject such an offer outright, and there might even have been reasons for it to welcome it. The EU could have made it clear that under these circumstances there would not be free access to the EU market for services, and that this might have very negative implications for various manufacturers based in the UK for whom the provision of services to their clients is an important part of their business. It could have added that these difficulties might be surmountable if the UK accepted all four freedoms of the Single Market and paid more into the EU budget. The UK might have objected to these objections. But at least there might have been a basis for negotiation.

It seems as though the UK government may finally be inching towards a situation in which it finds itself proposing something very like the hypothetical offer outlined above. There are still mad aspects to what is supposedly being suggested, notably the proposal that the UK collect customs duties on behalf of a customs union of which it is not a member, and that goods destined for the internal UK market should potentially be allowed to face an entirely different set of tariffs. And yet, the UK is apparently proposing to remain harmonized with EU regulations for goods. We are slowly getting there.

But only very slowly, and only in the face of enormous domestic political resistance. The UK did not proactively propose the solution suggested above – it is being dragged there, kicking and screaming, since it is finally coming to realize that there is no sensible alternative (other than accepting not only a customs union but all four Single Market freedoms, or not leaving the EU at all). Its government has worked, not to build up trust, but to destroy it. Its ministers have made no secret of their disdain for the EU. The UK government has made it clear that it really does want to do free trade deals around the world, and that it really does want the freedom to regulate – or deregulate – as it chooses. Even if Her Majesty’s Government is forced by circumstances to sign up to something that precludes this, we know that this would be only reluctantly: it is quite obvious that the UK does not want this solution. And we also know from experience that its government is capable of signing a document one day, and denying that it means what it says the next.

And what this means is that there is no trust on the other side of the table; nor should there be. And that implies that even if this British government eventually comes to accept that it needs to sign up to full customs union membership, as well as full compliance with EU regulations as regards goods, an offer along those lines may not be acceptable to the EU. Indeed, it seems almost certain that it will not be.

But it is still worth asking what would have happened if clear minds and strategic thinking had prevailed in London in June and July 2016, and such an offer had immediately been proposed without any strings being attached. There would still have been those who, like de Gaulle in 1963, would have wanted to reject it, and they might still have gotten their way. (They might even have been right: I am not implicitly comparing them to de Gaulle, who clearly behaved badly.) But I am willing to bet that it would have been more difficult for them.

 

 

The Meeting of the Waters

The editor of Critical Quarterly bought me a drink last December and told me that he was planning a special issue on, of all things, Thomas Moore’s The Meeting of the Waters. Would I care to write an economics column on the theme?

Well, it’s one thing to write a quarterly column on whatever is interesting me at the time, another entirely to write them to order. But since we were coming up to Christmas, and since my father’s family is from Wicklow, I said yes.

You can read the result here, and while I’m not sure how much economics there is in it, I did manage to work in a reference to Sargent and Velde!

Who is fudging? (Answer: not the EU.)

There has been a lot of talk since yesterday’s deal pointing out that there has been a certain amount of fudging going on. But there is fudge and fudge, and it’s helpful to be clear about what’s being fudged and by whom.

Paragraph 49 states:

“The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s objective is to achieve these objectives through the overall EU-UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and Customs Union which, now or in the future, support North-South cooperation, the all-island economy, and the protection of the 1998 Agreement.”

These are commitments made by the UK to the EU and there is very little fudge here. The UK is committing as a backstop solution to the full alignment needed to “support North-South cooperation, the all-island economy, and the protection of the 1998 Agreement” in the context of an over-arching commitment to avoid a hard border. Avoiding a hard border requires full alignment for all traded goods. North-South cooperation involves the famous 142 areas of North-South cooperation we have been hearing about, and brings services like health into the mix. The all-island economy is even broader. And the Good Friday Agreement brings things like human rights into the mix.

Paragraph 50 states that:

“In the absence of agreed solutions, as set out in the previous paragraph , the United Kingdom will ensure that no new regulatory barriers develop between Northern Ireland and the rest of the United Kingdom, unless, consistent with the 1998 Agreement, the Northern Ireland Executive and Assembly agree that distinct arrangements are appropriate for Northern Ireland. In all circumstances, the United Kingdom will continue to ensure the same unfettered access for Northern Ireland’s businesses to the whole of the United Kingdom internal market.”

Notice anything? These are not commitments made by the EU. These are, once again, commitments made by the UK, in this instance to the DUP.

Paragraphs 49+50 appear to be a bit of a fudge, although the fudge can be undone by the entire UK maintaining full alignment with the EU. But let’s be clear: this is the UK fudging, not the EU, and the UK needs to fudge at this stage because of the internal contradictions of its own position. But the EU will naturally take the view that the UK must meet its commitments made to the EU in Paragraph 49. There is no fudge here: the EU has sought and obtained an impressive series of concessions from the UK, and the UK will be held to its word.

Note also that Paragraph 45 states that:

“The United Kingdom respects Ireland’s ongoing membership of the European Union and all of the corresponding rights and obligations that entails, in particular Ireland’s place in the Internal Market and the Customs Union. The United Kingdom also recalls its commitment to preserving the integrity of its internal market and Northern Ireland’s place within it, as the United Kingdom leaves the European Union’s Internal Market and Customs Union.”

These are again UK commitments, and the first of these is in the present context a commitment to respect the fact that the EU needs to police the external frontiers of its Internal Market and Customs Union. So the turning-a-blind-eye-to-smuggling non-solution is out.

And finally, note that Paragraph 46 states that:

“The commitments and principles outlined in this joint report will not pre-determine the outcome of wider discussions on the future relationship between the European Union and the United Kingdom and are, as necessary, specific to the unique circumstances on the island of Ireland. They are made and must be upheld in all circumstances, irrespective of the nature of any future agreement between the European Union and United Kingdom.”

The first sentence rules out the Brexiteers’ Baldrick-like cunning plan to use whatever special arrangements may be reached on the island of Ireland as precedents, allowing them to have their cake and eat it when it comes to the economic relationship between Great Britain and the European Union. And the second sentence commits the UK to uphold its engagements on Ireland in all circumstances.

As I say, it doesn’t seem to me as though the EU allowed much fudging when it came to the UK’s commitments to the EU regarding Ireland.

How Her Majesty’s Government simultaneously manages to meet its Paragraph 49 obligations to the EU, and its Paragraph 50 obligations to the DUP, taking account of inter alia Paragraphs 45 and 46, is something it will have to figure out. The UK government clearly ought to fulfil its commitments to the DUP, but whether it does so or not is hardly a primary concern of the EU. Paragraph 49 is what the EU will care about, not Paragraph 50. (Although Ireland would be very happy if the UK met both obligations in the only way that seems possible, namely by effectively staying in a Single Market and Customs Union type of arrangement with the EU.) If the UK wants to leave the EU in a civilised and amical manner, and strike a trade deal with the EU in the future, it will have to uphold the very clear commitments it has made to the EU. How the British deal with British fudge — whether Mrs May betrays the DUP, or abandons her previous red lines regarding membership of a customs union and the Single Market —  is a matter for them. But sooner or later they are going to be forced to confront and deal with the internal contradictions of their position.