Britain and the EU

Though Ireland and the UK joined at the same time, the UK always remained semi-detached from the EU. Brussels affairs received barely a mention in the Blair-era diaries of British government ministers and advisors. That this was not even noticed by British reviewers is telling. London regarded itself as more significant on the world stage than Brussels. And, strange as this might sound to Irish ears, until German reunification it had perhaps good reason to do so.

The “supra-national” nature of the EU was designed by France to limit German post-war independence. As Ernest Bevin, Britain’s post-war Labour Foreign Secretary, commented: “when you open that Pandora’s box you’ll find it full of Trojan horses”. Britain felt neither the need nor the desire to have its independence limited in this way. For centuries it had stood secure in its island fortress, holding the balance of power between competing continental states. In the immediate post-war period it looked as much to the US and the Commonwealth as to Europe. The US was of much greater military importance. And as the world’s first industrial nation Britain had long pursued a ‘cheap food’ policy: the agricultural protectionism of the Common Market held little appeal.

Britain’s interest in Europe is as a free trade area. It viewed the creation of the single currency as a federalist step “far too far”, a position with which very many economists agreed.

Post-referendum Britain is not the only polity in existential crisis. The EU itself is clearly in the same position. The eurozone crisis side-lined the European Commission as member states looked to their own interests first. As a leading academic wrote recently, “supranational agents’ ability to take autonomous decisions can only be sustained in matters where the extent of disagreement among national governments over policy outcomes is relatively low”. The European elite thinks that the only way forward is through further integration: “more Europe”. But there is almost zero support across the European electorate for this.

The reaction to the referendum outcome has thrown a sharp light on clashing cultures. British political culture has always been suspicious of grandiose schemes and popular culture has always been irritated by layers upon layers of bureaucracy. (Ireland bears some responsibility for the latter, in that “a Commissioner from every member state” was given to us as a concession after one of our ‘no’ votes. Every commissioner views as their legacy the amount of legislation that they leave behind on the statute books.) The other side of the culture clash is reflected in the furious reaction of the European elite to the British vote, and the apparent desire to get the British out the door as quickly as possible. Twice the Irish voted no, and twice we were asked to vote again. Why did Europe react so differently to us, when there was so much less at stake?

The British vote is also clearly an inchoate reaction to globalisation, or perhaps more accurately to its “collateral damage”. In this it seems as one with the political support for the Trump campaign in the US.

Surely European leaders would be better advised to take a long hard look at how such widespread concerns might be addressed rather than rush to accept a British withdrawal? The latter may well lead to the break-up not just of the UK but to the withdrawal of other EU member states over time. It will entail years of negotiation on future relationships – at the bare minimum between the UK and Europe, and between the UK and Ireland. More worrying perhaps – given the class, age and geographic fault lines reflected in the referendum vote – is the legacy of bitterness and, quite possibly, civil strife that it will bequeath to Britain.

There is no need to rush Britain to withdraw, other than as a threat to other potential waverers. But this is hardly what the European project was supposed to be about. A year or two of uncertainty, particularly given the fragility of the global economy, is clearly undesirable. But the next general election in Britain is likely to offer the electorate an opportunity to visit the issue anew. Europe can use the hiatus to consider how the concerns of so many of its electorates can be addressed. A substantial electorate has spoken. Is Europe prepared to listen?

Ireland exits the EDP

Unsurprisingly the European Commission have concluded that Ireland’s “excessive deficit” per the reference values in the TFEU has been corrected.  The Commission decision is here.

The Commission have also published their country-specific recommendations on Ireland based on this staff report.

There is lots in the staff report but on the fiscal side in introducing their CSRs the Commission note:

[Following the abrogation of the excessive deficit procedure, Ireland is in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule.] In its 2016 stability programme, which is based on a no-policy-change assumption, the government plans gradual improvements of the headline balance until reaching a surplus of 0.4% of GDP in 2018. The revised medium-term budgetary objective  a structural deficit of 0.5% of GDP – is expected to be reached in 2018. However, the annual change in the recalculated11 structural balance of 0.1% of GDP in 2016 does not ensure sufficient progress towards the medium-term budgetary objective. According to the stability programme, the government debt-toGDP ratio is expected to fall to 88.2% in 2016 and to continue declining to 85.5% in 2017. The macroeconomic scenario underpinning these budgetary projections is plausible. However, the measures needed to support the planned deficit targets from 2017 onwards have not been sufficiently specified. Based on the Commission 2016 spring forecast, there is a risk of some deviation from the recommended fiscal adjustment in 2016, while Ireland is projected to be compliant in 2017 under unchanged policies. Ireland is forecast to comply with the transitional debt rule in 2016 and 2017. Based on its assessment of the stability programme and taking into account the Commission 2016 spring forecast, the Council is of the opinion that Ireland is expected to broadly comply with the provisions of the Stability and Growth Pact. Nevertheless, further measures will be needed to ensure compliance in 2016.

The Commission press release detailing all of the decisions taken and documents published today is here.

Draft SPU Update: Risks

The Department of Finance has released a Spring-less Statement (.pdf), showing some interesting debt dynamics projections and a really nice risk-assessment section (see page 26) and their likely impacts on the Irish economy. Brexit figures highly, as one might imagine, but so do other external demand shocks and domestic issues, and the fiscal risks associated with not meeting our climate change targets. The Department writes:

There are fiscal risks associated with a legally binding EU Effort Sharing Decision on climate change covering the 2013-2020 period. Ireland is obliged to achieve a 20 per cent Greenhouse Gas emissions reduction (compared to 2005 levels) in certain sectors. Current EPA projections estimate that Ireland will not achieve this reduction and failure to comply may incur costs of hundreds of millions through the purchase of carbon credits until such time as the target is complied with. Similarly, further new costs may arise in the context of a new EU climate and energy framework for the period 2020-2030, which will set new emissions reduction targets.

Scary stuff.