Implications for Ireland of the new Trump Regime

There’s a lot of wrong-headed analysis doing the rounds on the implications of the proposals of the new US Administration for Ireland.  Will US companies “be enticed home” by a dramatic cut in the US corporate tax rate? Companies don’t primarily come to Europe for tax reasons. They come for market access. Ireland captures a disproportionate share of these inflows, to a large extent because our rate is low RELATIVE TO OTHER European rates. In fact, given the US tax-credit system, US MNCs in Europe would not be able to recoup upon repatriating their profits the difference between high European rates and a potential new low US rate; this would work in Ireland’s favour (to the disadvantage of high-rate European economies).

Lower rates outside the US encourage US MNCs to keep their profits offshore (though a huge proportion of these can actually be, and are, held in US bonds and banks). If fewer profits are held offshore this WILL reduce overseas RE-investments, as these are currently financed out of offshore profits.

A dramatic reduction in the US rate would reduce the inventive for re-domiciling, though, as John FitzGerald and Mary Everett (of the Central Bank) have both shown, re-domiciling into Ireland probably does us more harm than good. In any case large, rich, central (as opposed to peripheral) economies tend to have higher corporate tax rates for revenue-maximising reasons.

US protectionism would trigger retaliation which would in turn trigger vastly more tariff-jumping FDI into Europe and elsewhere. Nor would a retreat of US corporations to the US mean that their external sales would be replaced by US exports; a substantial proportion would be captured by foreign competitor companies. And a huge proportion of current US exports go as inputs to their own subsidiaries abroad. The US State Department would also not be happy with a reduction in US FDI: think of the “soft power” this overseas investment grants the US. So the proposed very low US rate is unlikely to be in America’s interests. This might well impact on the chances of getting the proposals through Congress, even if President-elect Trump decides to run with them.

Irish higher education, post Brexit

Two interesting think pieces in the Irish Times today. One by TCD’s Brian Lucey on the challenges and opportunities facing Ireland’s Higher Education sector after Brexit, and another by UCC’s Phillip O’Kane on creating a single International University of Ireland made of the best bits of the higher education landscape. 

The Deparment of Finance and the ESRI have a briefing paper modeling the impact of Brexit on the Irish economy. Their takeaway:

the level of Irish output is permanently below what it otherwise would have been in the absence of BREXIT.

‘Nuff said.

Conference on the German 3-Pillar Banking Model, RDS, 16 November 2016

The RDS will be hosting a conference on alternative banking models, focusing on the German 3-Pillar Banking System. The presentations will focus on the development and operation of the German Sparkasse banks and how to re-introduce that model of banking into Ireland. The Sparkasse banks focus on SME lending and form the backbone of the German banking system, especially in economically depressed regions and were a key part of the transition of the old East Germany.

Key speakers will be:

Prof. Eoin O’Dell, TCD Law School

Topic: How to create an Irish legislative environment for Sparkasse-style public mandate banking. 

Dr. Karl-Peter Schackmann-Fallis, Executive Member of the Board of the German Savings Banks Association

Topic: The Roots of German Local Banking, and its Future.

Mr.Heinrich Haasis, President of the World Bank of the Savings Banks, The Chairman of the Board of the Sparkassenstiftung für internationale Kooperation

Topic: Think global, act locally, cooperate internationally! How Sparkassen style banks have been introduced around the globe to benefit SMEs and the local community.

The event will be chaired by former TCD Economics Professor and Senator Sean Barrett.

Dr. Barrett was a member of Joint Oireachtas Inquiry into the Banking Crisis. Dr. Barrett will chair the conference and provide a closing comment on how the failures of 2008-13 could have been avoided and the need for a new approach to banking in Ireland. 

Registration for the event is here: http://www.rds.ie/Whats-On/Event/26638 

What: Conference on the German 3-Pillar Banking Model

When: 16 November 2016, 10h00-15h30

Where: The Royal Dublin Society (RDS) Library, Ballsbridge

The fatal flaw of the populist approach

The world is awash with populists. From Ireland’s independents to President Duterte of the Philippines, from Germany’s anti-immigrant AfD party to Norbert Hofer of the far-right Freedom Party of Austria, from Ukip and Jeremy Corbyn in Britain to Donald Trump in the US, populists are on the rise. And we’re not talking just a few random demagogues here, though personality does go a long way. (Trump-related Pulp Fiction pun intended, by the way.)

We are seeing a rise in populist parties getting and holding onto power in several European countries including Finland, Hungary, Latvia, Lithuania, Norway, Ireland and Switzerland. Iceland is about to elect the Pirate Party (no really) to power. The French Front National may well take power in France, riding a wave of anti-immigrant sentiment there.

Populists come from both sides of the political spectrum: Greece’s Syriza party and Spain’s Podemos party consider themselves of the left, while Germany’s AfD and France’s Front National are on the far right.

So it’s a problem. Old, established, centrist parties have lost their grip on power – spectacularly so in Greece – while newer parties are standing mostly on a basis of what they are not – Corbyn is not a Blairite, Marine Le Pen is not Nicolas Sarkozy, and so forth. The 32nd Dáil contains 19 TDs who are nominally ‘independent’, with 12 more in left or far-left groupings. Ireland does not produce far-right TDs that often, though it does produce some very right-wing policies from time to time.

Continue reading “The fatal flaw of the populist approach”

The Political Economy of Brexit; London Will Adapt.

Everyone is trying to second guess the negotiating strategy of Theresa May, and how the EU will respond. No country should be more concerned about this than Ireland, the only EU country to share a border with the UK. Next week, the Irish government will host an all Ireland civic dialogue.  Political economy considerations have never been more important.

In hindsight Brexit might be conceived as a long-term inevitability, which can be traced back to the structural fault-lines of EU enlargement, and the free movement of peoples into Europe’s largest ‘open’ labour market. Helen Thompson, a professor at Cambridge has suggested as such:

  1. The euro crisis politicized the city of London, which became the default offshore finance centre for euro clearing.
  2. EU enlargement, and then the euro crisis, turned Britain into Europe’s employer of last resort, turning it into an offshore labour market.
  3. This spurred and politicised a latent immigration concern within large swathes of public opinion, and the electorate.
  4. Very quickly, the euro crisis, and the response to it, not least the Fiscal Compact Treaty, exposed the future of Europe as a two tier Union: between the Euro area, and the rest of the EU.
  5. The balance of power (i.e. the rise of Germany) changed and weakened Britain, who were increasingly “outside” the EU process, despite being the employer of last resort for the euro area.

In terms of the political economy of Brexit, the biggest risks don’t really pertain to the city of London (who’s core priority will be to allow some sort of system for the free movement of workers within their sector). The city’s strengths, paradoxically, make it a source of weakness. The Conservative government are confident London’s financial service based economy will adapt. This is much less the case with medium-tech trade and manufacturing (think Nissan and car manufacturing).

For all sectors of Britain’s political economy, a Norway style deal is probably preferable (European Economic Area). Theresa May, and political elites, are not likely to push for this, as it implies complete free movement, and won’t wash electorally. However, Theresa May will want access to tariff free trade, primarily to ensure that the North of England is not badly effected, and that firms such as Nissan in Sunderland don’t pull out and move to Spain. Manufacturing has more to lose than Finance.

This implies that Theresa May will push for a customs union – tariff free – allowing imports for British based manufacturing supply chains. The question then is whether it is a customs union for everything? Theresa May could opt out of agriculture, and then use this as a bargaining card in negotiating other international trade deals, outside the EU.

The question of free movement will be determined by how Teresa May considers Ireland. If she gives priority to maintaining free movement within Ireland (north and south), which I think she will, then this implies there will be no visa controls at the British borders. Hence, it is probable that Theresa May will aim to get a series of sectoral deals – and allow for the free movement of people within sectors, particularly ICT and Finance. This is what ultimately matters for the city of London.

Those most affected within the City of London will be legal services. British lawyers, who predominately rent off the finance sector, will no longer have a hearing on mergers and acquisitions within EU law. But I can’t see Theresa May negotiating a strategy to ensure British lawyers have access to EU courts. What she will want to ensure, on behalf of business and finance elites, is that the city remains a magnet for high-skilled talent. This could be achieved with sectoral deals.

Britain’s main bargaining card is that their consumption-oriented economy, and open labour market, in addition to a high-tech cluster in London, has carried the employment burden of the Eurozone’s labour market woes, in addition to absorbing so much labour from central and eastern Europe. Germany has done little, if anything, to increase domestic demand, to compensate this. So it’s worth asking, absent the liberal-oriented British economy, where will unemployed EU workers go?