John Bruton

Opinions & Ideas

Page 3 of 45

PETER  MATTHEWS RIP

 

I would like to join the many, well deserved, tributes to the late Peter Matthews. He was a brave, good humoured and principled politician.  He always had the best interests of his country at heart. He served as a member of  Dail Eireann for a relatively short time, but made a major impact.

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EAMON DE VALERA, A WILL TO POWER

I have just finished reading the late Ronan Fanning’s “Eamon de Valera, a Will to Power”, aided in part by an enforced day  long sojourn in Dublin airport, when my flight to Brussels  was grounded by Storm Doris.

De Valera has been the subject of many biographies, but this is the only one I have read. I met him once, shortly after I became a Parliamentary Secretary in Liam Cosgrave’s government, in 1973. He was totally blind at the time, but he knew who I was, and was encouraging to me in my commitment to political life, even though we were not of the same party.

Ronan Fanning’s book is very well written. It seems to me that it captures the essence of de Valera , without getting into excessive details about any of the transactions of his career.

As is well known he was born in America to a Limerick girl,Kate Coll, who became separated from her Spanish husband, Vivion de Valera, early in their marriage.

She had to work to live and this was not compatible with caring for her small two and a half year old son, who was sent to Ireland to be looked after by his grandmother and uncles. They were a farm labouring family and life was hard.

But Eamon was a bright student, and made a huge effort, and had to to overcome his uncle’s objections, to get to school in the Christian Brothers in Charleville, with the aim of winning a scholarship to a boarding secondary school.  He won one, to Blackrock College in Dublin, at the age of 14.

Blackrock College seems to have become a second home to him, and the priests in the college took the place of his absent parents. Thanks to Blackrock, he retained a love of rugby to the end of his life, preferring it to Gaelic football, a fact he did not advertise in nationalist circles.

Ronan Fanning believes de Valera first became the leader of Irish republicans when a prisoner in 1917 after the 1916 Rebellion.

His leadership style was not collegial. He listened but made the big decisions alone. This was a big problem with the Treaty negotiations of 1921. Because de Valera did not go to London himself, the Treaty was not HIS decision, and he was unhappy with any decisions that he himself had not taken.

His failure to lead properly on this matter contributed to  the Civil War and to his own temporary political demise.

When he came to power in 1932, building on the work of his predecessors, he set about removing the remaining limitations in the Treaty. These were mostly symbolic, apart from the return of the Treaty ports in 1938. If the Royal Navy still had those ports in 1939, Ireland would probably not have had the luxury of neutrality in the Second World War.

He was politically clever in setting the objectives for his party….the ending of partition and the restoration of the Irish language.

Both objectives stirred nationalistic emotions, and this were helpful in mobilising support at election time. But both were also practically unachievable, and thus could be re used, election after election.

De Valera had no interest in economics.  This explains why he started a ruinous trade war with Britain over annuities,  that were properly owing to Britain, for land purchase. De Valera was prepared to sacrifice the livelihoods of those engaged in Ireland’s largest industry for a point of nationalistic principle. Something similar is happening today, only now it is the British who trying to harness the nationalist horse for party political gain, without regard for the economic consequences for trade between our two neighbouring islands.

The opening up of the Irish economy in the 1950’s began while de Valera still led his party. Fanning credits this to his then Finance Minister Dr Jim Ryan, as much as to Sean Lemass. The contribution of Ryan’s predecessor, Gerard Sweetman is not mentioned.

 

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WHAT IS THE ALTERNATIVE TO A HARD BREXIT?

I believe  conditions can be created in which the UK voters could decide not to leave the EU at all.  Ireland should work to create those conditions. The terms for Brexit set out by Mrs May will  do incalculable damage to this island, politically, emotionally and economically.  We cannot simply wait for this to happen. While seeking to mitigate the effects of Mrs May chosen hard Brexit, we must  also do everything we can to ensure that there is no Brexit.

Apart from a few open questions, Theresa May has said what she wants. She wants out of the single market, out of the customs union, and “control” over immigration

The open questions she has avoided so far are about the financial terms of the divorce, the status of EU citizens living in the UK and vice versa, and two aspects of a future trade agreement (if there ever is one), namely arbitrating disputes, and  third country imports getting into the EU via the UK.

It is unlikely that the Article 50 letter, she will send to Donald Tusk next month,will us  tell much more about the UK negotiating position than the Lancaster House speech did. So it is time now to start thinking about how the EU will respond to Mrs May’s letter.

On the present schedule, the European Council would meet in April to agree the orientation it would give to the EU negotiators for the discussions with the UK that would start in June. These orientations would be agreed by consensus, so every EU head of government would have to be satisfied.  For Ireland, this April European Council meeting is potentially the most important European meeting a Taoiseach will ever attend.

In working out the orientation to be given to the negotiators, the crucial thing is for the European Council  to work out what would be it’s ” best alternative to a negotiated agreement” (BATNA). It is important to have an alternative ready because there is every possibility that no agreement will be reached within the two year time frame for negotiation, and ratification, of a withdrawal agreement.

Mrs May has  said that , for her , no deal at all  preferable  to a bad deal . Her BATNA, so to speak, is no deal at all.

“No deal” would mean the UK simply crashing out of the EU overnight, sometime before the end of March 2019.  This “no deal” scenario would be an overnight halt to flights, to trade and to commerce. There would be immediate, massive currency instability.

From the point of view of pure negotiating tactics, maybe it not surprising that Mrs May would threaten “no deal”.   But to do so, in the absence of a well crafted fall back position, is something  the UK cannot really afford.  It vindicates Tony Blair’s description of the UK government as “not driving the (Brexit) bus”, but rather “being driven” by partisan and ideological forces it has not tried to control .   In the absence of a real alternative to a hard Brexit, it  is on auto pilot heading towards a cliff.

The EU country that would be worst affected by the UK crashing out of the EU, with no deal  is, of course, be Ireland . So Ireland must use all its imagination and ingenuity to see if a creative way out for the UK and the EU can be found.

SHOULD THE EU OFFER UK VOTERS ANOTHER OPTION?

If the UK government is unable or unwilling, because of domestic politics, to work out a responsible “best available alternative to a negotiated agreement”(BATNA), then the EU side should do so for it.  It should adopt it alongside its line by line response the UK’s negotiating demands

Having a BATNA, would also strengthen the EU’s negotiating position. It would provide something with which an emerging deal could be compared. It would also provide a basis on which the UK could reconsider its decision of 23 June 2016, if it wants to do that.

As Tony Blair said, UK voters have a” right to change their minds”. After all politicians are allowed to change their minds, so why not voters?   If  UK voters, in a referendum,  sent their government on a mission towards Brexit, it would be reasonable that the same voters, rather than Parliament, tshould adjudicate on what will have been achieved (or not) by their delegates.

If UK voters ever do change their minds about Brexit, it will happen slowly and incrementally. Parts of the Brexit scenario, obscured during the Referendum, will become clearer during the negotiation. The unavoidable interconnections between EU freedoms, and EU rules, will emerge.   For this to happen, it will be in the EU side’s interest to ensure that there is maximum public understanding of the unfolding negotiation. Transparency will work in the EU’s interest.  A running commentary is exactly what is needed in the interest of public education!  

If the alternative to EU rules, is no rules at all, citizens, in both the EU countries and the UK, may come see EU membership in a different light. They may, for the first time in many cases, see the EU as something that simplifies their lives, rather than the reverse.

In my view, the “best available alternative to a negotiated agreement”, BATNA, that the EU side should adopt is an offer of continuing UK membership of the EU  broadly on the basis that the UK  was a member in 2015,  before David Cameron’s ill fated “renegotiation”.  

The 2015 terms were generous to the UK. They allowed it to opt out of the euro, of Schengen, of Justice and Policing cooperation, of the Stability and Growth Pact, and of  the justiciability in the UK of the European Convention. Furthermore, the UK itself had also decided, without Brexit, that it would have a referendum of any new EU powers. In that sense the UK was already having its cake, while eating it, before it ever decided on Brexit. These 2015 terms should be left on the table by the EU side, but without the unjustifiable UK budget rebate.

Of course, at this stage, the UK would reject such an offer out of hand.  But, as the inevitable consequences of  Brexit become clearer, UK public opinion might begin to see merit in it, particularly when it is compared with the costs of  simply crashing out of the EU, overnight,  with no deal at all, which is Mrs May’s fall back  negotiating scenario.

The resistance to keeping such an offer on the table is more likely to come from some existing EU member states. Some members will point to the UK’s insatiable demands, when it was a member , for opt outs, rebates, and exceptions.  Arlene Foster’s analogy about feeding crocodiles may come to their minds. They will recall General de Gaulle’s original veto of UK membership, and his foresight that the UK would never settle in as a member. They might also argue that offering the UK a way back, after it has triggered Article 50, might encourage others to try it on too.  

 But if they sit back and think about it, they will, I believe, conclude that a UK that inside the EU, is better for the EU, than a UK that outside. This will be so even if a trade deal is eventually concluded with the UK. Keeping the offer of resumed UK membership on the table would be good politics, and good economics for the EU.

The terms of the Lisbon Treaty do create some difficulty for this approach.

Article 50 (3) says a country that has sought to leave the EU under that article will be automatically excluded from the EU two years after it has triggered Article 50 unless the EU side “unanimously decides to extend the period”.

Article  50 (5) says that, if a state, that has withdrawn for the EU, asks to rejoin, it has to do under article 49, where the application would have to be ratified by all existing members.

Others may argue that the UK cannot withdraw its Article 50 letter once it has sent it.  This is a matter for the European Court of Justice to decide, but article 6.8 of the Vienna Convention on treaties explicitly allows revocation of a notice of intention to withdraw from a treaty.

These problems are real, but not insurmountable. A political declaration by the EU heads of Government in April  in favour of facilitating an eventual  UK resumption of EU membership, on its 2015 terms minus the budget rebate , would create a realistic basis for comparison in the debate  about Brexit that, in a sense  is only  now starting in the UK.  

 

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THE COMPLEXITIES OF BREXIT ……. CUSTOMS CHECKS, RULES OF ORIGIN, TARIFF COLLECTION…… DOING BUSINESS WILL BECOME MORE EXPENSIVE

Here are some extracts from a recent report by the Bruges Group, a UK think tank that has long favoured Brexit, which outlines some of the difficulties that will arise for UK exports to the EU (including Ireland), and probably for EU exports to the UK (including Northern Ireland) .

It was based on primary research carried out by the Bruges Group with managers in the logistics industry. It is long, but well worth reading in full.

It sets out, in alarming detail, the way in which the costs of doing business will be increased by the UK initiative to leave the European Union;

“Exporting into the EU requires a convoluted process to be completed. Goods must have assigned to them an identification number, inputted at the port of destination. The larger exporters find the process easier. They can make their declarations at the end of the month. Those who export less to the EU will, however, be faced with bureaucratic hurdles.

Clearance for use, allowing the product to go into circulation to be sold in the UK, or an EU country, needs to be obtained. The process for assessing this, even in the EU, will differ from country to country. Mostly, however, this is often just a theoretical problem, rarely do customs officials demand compliance with national standards and rarely do they conduct a strict examination of documentation declaring that an item conforms to national or EU standards.”

“ It is legally possible to detain goods on the grounds of differing standards, but in practice this only usually applies to items that are deemed to be dangerous, illegal, or subject to anti-dumping duty (a tax on products suspected of being sold substantially below their normal value in market in which it was produced).”

Still, the process of shipping goods to and from the EU is not without other bureaucratic impediments. The freedom of the items is also strictly regulated. From outside the EU, any goods entering the EU, if not cleared at port, which can be a laborious process, must be stored in a bonded warehouse, also known as an Enhanced Remote Transit Shed (ERTS) warehouse, until they are declared to customs for an approved treatment or use.

“ Transhipped cargo not in free circulation will also require what is known as a CMR document. The CMR is a consignment note with a standard set of transport and liability conditions, which replaces individual businesses’ terms and conditions. It confirms that the carrier (i.e. the road haulage company) has received the goods and that a contract of carriage exists between the trader and the carrier. It derives from the Convention on the Contract for the International Carriage of Goods by Road. The process of clearing customs is increasingly becoming electronic. Systems used by exporters that integrate with the British customs system are the CNS and Destin8 computer systems.

Value Added Tax (VAT) is often charged on imported goods,  that is in addition to any customs duties. The details must be entered onto the Customs Handling of Import and Export Freight (CHIEF) system. This system records the declaration to the customs authorities details of the goods whether they are transported by land, air and sea entering or leaving the UK/EU. It allows importers, exporters and freight forwarders to complete customs information electronically. This is not without charge.

“ If there is no prior agreement for each consignment, going to a specific destination, to clear customs the importer must produce customs records for each, pay VAT and the customs duty, if any. This will be calculated per the value of the item at its final point of sale. The VAT rate will differ from country to country, and even item to item. In some cases, a product will be exempt, VAT will not apply. In other cases, an item will be zero-rated, requiring the documentation to be completed but with no final payment. Even where tariffs are eliminated when importing from outside of the EU there is still the requirement to  pay Value Added Tax. If the exporter is registered for VAT then this can be claimed back but only if they registered. There is also the requirement for an input VAT certificate to be completed.

“ Remaining a part of the EU’s customs union (having its trade rules apply) without being in the EU, does not eliminate the requirement to complete form filling. The requirement to clear customs and complete documentation, known as an ATA Carnet, to validate the origin of goods and confirm that they are free from tariffs even applies to Turkey. This country is considered a part of the EU’s customs union and therefore has tariff free access for industrial products; but it is not bureaucracy free access.

“ David Davis’ Department for Exiting the European Union must focus on addressing the logistical trade hurdles of delays at customs posts. The alternative will be even worse congestion on the M20 after Brexit than that which exists at present. Concern five: There will be complex new ‘rules of origin’ and additional paperwork for British goods

Another area in which the EU could try to ‘punish’ the UK would be in the form of new red tape and potentially costly and complicated new ‘rules of origin’ (ROO) for British exporters. If a business is sending produce to the EU from a country that has a free trade deal it must prove that they were mostly manufactured or re-worked in a country that has such an agreement with the EU. If the business cannot confirm the origin of the goods, then the tariffs will apply. This can be sidestepped by making some modifications to the products in the exporting state, yet this may be subject to investigation. This is an infrequent occurrence, yet the need for paperwork to prove its provenance is not rare. If the goods are of UK origin and if Britain has a free trade agreement, namely no tariffs to pay, importing into an EU country will require a Certificate of Origin. Such documentation can be obtained from a relevant countries chamber of commerce, they are however, expensive.

Anything that is already inside the customs union that has originated from a non-member will have been charged at its original port of entry and can therefore circulate freely within the EU. At present, as the UK is an integral part of the EU’s customs union, British exporters to the other 27 do not have to prove that they comply with the EU’s rules of origin. Goods entering the UK from outside the EU will have been charged the relevant customs duty when entering Britain. As supply chains are becoming increasingly globalised the need to demonstrate an item’s origins can be a complex burden.

The Trade Policy Research Centre argued that ‘the process of adapting to rules of origin based duty-free trade under a new UK-EU free trade agreement would be tedious, costly and disruptive to trade.

However, some developments are making this concern less relevant. The reduction in tariffs, where many goods are zero rated, reduces the need to complete the administrative duties. The EU has extended the area in which origin can be accumulated to not only cover more states but also to allow for an item to be obtained and manufactured in a number of countries without the final product losing the benefit of being tariff free when it enters the EU. This system has been in existence in the EU and European Free Trade Association since 1997 and for Turkey since 1999. Over time the EU does grant greater allowance to other countries to claim exception from rules of origin.

And from 2017 under World Customs Union rules the procedure declaring a products origin will be simplified. As WTO members, the UK and EU are signed up to the WTO agreement on Rules of Origin in which signatories ‘Recognizing that it is desirable to provide transparency of laws, regulations, and practices regarding rules of origin’ affirm that they are committed: ‘…to ensure that rules of origin themselves do not create unnecessary obstacles to trade. ‘Agree that: ‘Members shall ensure that their rules of origin are not used as instruments to pursue trade objectives directly or indirectly; rules of origin shall not themselves create restrictive, distorting, or disruptive effects on international trade.

‘They shall not pose unduly strict requirements or require the fulfilment of a certain condition not related to manufacturing or processing, as a prerequisite for the determination of the country of origin. ‘The rules of origin that they apply to imports and exports are not more stringent than the rules of origin they apply to determine whether or not a good is domestic and shall not discriminate between other Members, irrespective of the affiliation of the manufacturers of the good concerned. ‘Their rules of origin are administered in a consistent, uniform, impartial and reasonable manner.’ Rules of origin disputes in the WTO system are overseen by the WTO Committee on Rules of Origin and the WCO Technical Committee.

The UK is also a member of the WCO (World Customs Organization) an international body which works closely with the WTO and WCO member countries to identify, minimise and resolve problems such as rules of origin and other customs issues.

The EU is also a member of the WCO, as are its member states. The European Commission website confirms that: ‘On 30 June 2007, the Council of the World Customs Organization (WCO) decided to accept the request of the European Union to join the WCO as of 1st July 2007. This decision grants to the European Union rights and obligations on an interim basis akin to those enjoyed by WCO Members. The EU is a contracting party to several WCO Conventions, and contributes to the work of this organisation.’

The EU cannot therefore; arbitrarily impose red tape or inordinate Rules of Origin requirements upon the UK and still meet its WCO obligations. The EU is also signed up to the GATT agreement which states that: ‘The contracting parties also recognize the need for minimizing the incidence and complexity of import and export formalities and for decreasing and simplifying import and export documentation requirements. ‘No contracting party shall impose substantial penalties for minor breaches of customs regulations or procedural requirements. In particular, no penalty in respect of any omission or mistake in customs documentation which is easily rectifiable and obviously made without fraudulent intent or gross negligence shall be greater than necessary to serve merely as a warning.’

When we combine all these points with the fact that the EU and its member states are also signed up to the WTO agreement on trade facilitation, the potential risks of additional red tape and paperwork for importers and exporters look less and less likely, post Brexit.

Even if the EU wished to try to impose trading barriers in this way, there would be a substantive knock-on effect to the EU-UK cross border supply chains as a consequence. They will be aware of this, and all sides will wish to minimize this possibility from occurring by ensuring ROO requirements and other forms of red tape are kept to a minimum.

Finally, imposing difficult new ROO procedures upon the UK would be going against the EU’s ‘direction of travel’ in this area, which is to simplify and relax their rules (with a special focus on simplifying them for developing countries)40. In 2010, the European Commission admitted that:

‘The present rules of origin are old and outdated, having been drawn up in the 1970s.”

These difficulties will impact disproportionately on Ireland, and on smaller firms who will not easily be able to spread these costs over a large volume of business.

It is remarkable that these matters are being brought to light by a group that favours Brexit.

One does not get the impression that Thesesa May, who seems to think the UK can have a “seamless” trade relationship with the EU after Brexit, has read this Bruges Group paper.

As the reader will have seen, the Bruges Group itself hopes that the difficulties it has identified will be overcome by non enforcement of the rules in some cases or by goodwill from the EU on the general issues.

As competing commercial interests will be involved, this seems to me to be unduly optimistic.

It is important that Ireland examine all these matters for itself.

It will be Irish Customs authorities that will have to implement these rules.

New facilities will have to built at Irish ports which do business with the UK, and along the land border.

Additional staff will have to be recruited . The cost will be substantial.

A fast track for shipments direct to the EU, not going through the UK, may have to be provided at Irish ports. This would reduce the cost for business but this will involve substantial infrastructure investment by the Irish taxpayer. EU funds ought to be deployed to assist this.

 

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TWO GREAT DEMOCRACIES….VERY DIFFERENT MOODS

I visited India in the past week on business.

India is the largest democracy in the world.

The United States is the second largest.

Politics is robust in both countries, but in India the mood is one of increasing openness towards the rest of the world, whereas that in the United States is in favour of building walls.

India is a good vantage point from which to contemplate the moral content of the anti globalisation rhetoric of Donald Trump, Bernie Sanders and their followers.  

Given that the United States is one of the richest and best endowed countries in the world, “America First” seems to me to be a particularly selfish motto for a great country. Yet it is espoused by left wing anti trade Democrats, just as much as it is by the new President

Looking at this from the standpoint of India, one realises that it is thanks in part to globalisation, to  the opening of markets, and to the transfer of western technology to the country, that in India

  •   its economy is growing at  7.5% pa, faster than China
  •   85 million people  exited poverty in India in  the three years from 2010 to 2012
  •   life expectancy  has doubled from  31 years  in 1947 to  65 today
  •   trade represents a higher share of India’s GDP than it does of China.

India is urbanising rapidly. It is estimated that another 250 million people will arrive in India’s overcrowded cities in the next 20 years.

8 million young people enter the Indian workforce every year, many in rural areas where few job opportunities exist outside agriculture. In fact only 16% of India’s existing workforce is in waged employment.

The opportunities to invest in the development of India’s infrastructure are enormous. Sanitary services and road building are seriously deficient. Air pollution and unsanitary living conditions continue to damage the health of many Indians.

Europe needs to work with India to protect the open global economy, while enabling states to put in place robust taxation systems that can distribute the fruits of  globalisation fairly.

 

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1917 TO 1923… YEARS THAT MADE EUROPE WHAT IT IS TODAY

I strongly recommend “The Vanquished, Why the First World War failed to end 1917-1923” by Robert Gerwarth .

The book deals with the last year of the Great War, and with the many small wars it generated  that continued for another five years, including  one in Ireland.

Before the Great War, multi ethnic Empires operated relatively peacefully. While the Imperial  idea,  and  multi ethnicity, clashed with the ethnic nationalism that flourished in intellectual circles, the political arrangements worked and were adaptable.

Austro Hungary had a multi ethnic Parliament with representation from the minorities present. 23% of the Emperors subjects spoke German, 20% Hungarian, 16% Czech or Slovak, 10% Polish, 9% Serbo Croat,  8% Ukrainian, 6% Romanian and so on. All coexisted.

The Ottoman Empire, though Muslim, tolerated Christian and Jewish minorities.

The United Kingdom of Great Britain and Ireland may have been dominated by the English, but its Parliament had large Irish and Scottish representation.

The Russian Empire contained minorities too numerous to list.

The permissive consensus, that allowed these entities like these to resolve their internal differences by generally peaceful methods, was shattered by the sacrifices and brutality of the War.

It was a war that lasted far longer, and took far more lives, than anyone expected when it started.

It is a global tragedy that the gross over reaction of Austro Hungary to the assassination of Archduke Ferdinand in July 1914, started a conflict, with whose  consequences we still live today.

100 years later, the Brexit negotiations, the refugee crisis and the hangover of the financial crisis in Greece, Italy and some other countries will put immense stress on the bonds of tolerance that hold the European Union together.

They will from time to time bring to the surface buried tensions and resentments between European nations that date back to events of the 1917-1923 period which are so brilliantly described in this book.

Ministers and diplomats, attending fraught European meetings over the next few years, who want to understand where some of their colleagues from the other 26 countries are coming from, could profit from reading this book . It will help them understand where the, often unarticulated historical assumptions and fears come from, that may help explain behaviour that might otherwise seem unreasonable or disproportionate.

For example, the  present day fears in the Baltic States, of both Russia and Germany, date from events between 1917 to 1923.

So do the tensions between Poland and Ukraine, between Poland and Russia, between Greece and Turkey, between Turkey and the western powers, and between Bulgaria and both Romania and Greece.

So also can Russian fears of encirclement be traced back to the humiliating peace imposed on it by Germany in 1918, and to the subsequent western interventions in its Civil War in the early 1920’s.

The authoritarian and nationalistic trends in Hungarian politics can be explained by the fact that the post War settlement was much harder on Hungary, even than it was on Imperial Germany. Large Hungarian speaking populations remain in neighbouring Serbia, Slovakia and Romania to this day.

In 1919,the First World War had left much of Europe starving and desolated. Order had  broke down. States were too weak to exercise their proper monopoly on the use of force.

Resentments abounded about the supposed injustice of the imposed peace settlements. Demobilised soldiers know no other trade than war.  Minorities, particularly the Jews, were scapegoated all over central Europe, for misfortunes for which they had no responsibility at all.  Bolshevism was seen as an imminent threat.

States and populations turned to paramilitary organisations to restore order, in these frightening circumstances,  and out of that understandable desire for order grew Fascism and the Nazis.

This is a well written book which deserves a wide readership.

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POPULISM IS A CRISIS OF ENTITLEMENT, AND HIGHER INTEREST WILL SQUEEZE SOME COUNTRIES MORE THAN OTHERS

The Federal Reserve Bank of the United States raised interest rates last December. This was the first rate rise in almost ten years. At the time three more rate increases were forecast this year. The Federal Reserve’s policy on interest rates can have a global effect.

Ireland’s fiscal squeeze of the 1980 to 1987 period, of which I had direct experience, was caused  by the Federal Reserve’s decision to tackle  US inflation by raising interest rates and restricting the money supply.

A rise in interest rates this year would affect countries differently.

If a country has a big government debt, by comparison with its annual tax revenue, it will have to make more cuts or tax increases to accommodate to a higher interest rate.

If a country’s economy is growing slowly, and it  has low future growth potential, because it has an ageing society, the effect of an interest rate rise will be even more severe.

Goldman Sachs recently compared the situations of Germany, France , Italy and Spain.

If there was a 100 basis points increase in interest rates ,

+ Germany would have to trim its budget by 0.5% of GDP,

+ France and Spain by 0.75% of their GDP, but

+ Italy would have to trim its budget by 1%.

This is because the

+ Italian government debt is 140% of the Italian annual GDP,

+  the French and Spanish debts around 100% of their GDP while

+  Germany’s is only around 75%

These effects would come about slowly. If countries have debts with long maturities , it will take a while for a rise in interest rates to have their full effect. General inflation is not a problem today, but sectors of the global economy can become over heated.

Goldman Sachs did not do similar calculations for smaller countries like Greece, which has a debt/ GDP ratio of 180%, or for the UK, whose ratio is 90%.

But both countries are facing difficult futures, partly because of their own freely taken  democratic decisions, in Greece’s case quite long ago, but in the UK’s case very recently. Euro zone countries are able to keep interest rates low because the ECB is buying their bonds, but there are prudential limits to this. If a country’s banks buy an undue amount of  their  own government’s bonds, that can create an unhealthy linkage between to solvency of the banks and the solvency of the government.

The Goldman Sachs calculations do not take full account of human factors like the lack of dynamism which can arise when countries come to believe they are “entitled “ to a certain standard of income, without taking account of the value of what they can sell to the rest of the world.

Ageing societies, with large retired populations, are particularly prone to this sense of entitlement because they feel that the work that they did in the past, entitles them to a good standard of living today. Unfortunately the money their work earned is long spent, and pensions can only be paid out of what can be earned in the future.

If that money does not come in, people will look for someone to blame. Often the blame takers are immigrants, even though these immigrants are often the ones who are paying the taxes and earning the money ,that support the entitlements of many native residents. For example , EU immigrants in the UK pay much more in taxes than they take out in benefits, but that was ignored by UK voters.

This gap between expectations and what can be afforded , is the explanation for the so called “populism” we see among ageing populations in the UK, the US and elsewhere.

Populism is really a crisis of entitlement.  

Populism will become more severe if ,  and when, interest rates rise.

We need an informed electorate that votes knowledgeably, an electorate that accepts that  interest rates, free trade, immigration and demographics are all interlinked with one another.

We need  to  find better ways of explaining the links between

+   the prospect of  higher international interest rates, and the desirability of reducing government debt levels

+   the importance of preserving open markets and overseas earnings  if we are to afford decent pensions,

+    the link  between allowing immigration, and having enough young people to work and pay taxes in future

+    the fact that  decisions, twenty years ago,  to have fewer children, are liable to  affect what  welfare  states will be able to afford , twenty years from now

 

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TEARING UP 40 YEARS OF COMMON RULE MAKING…..THE MEANING OF THERESA MAY’S SPEECH

Once Theresa May said ,at her party Conference in Birmingham in October, that she was insisting on immigration controls, on rejecting the jurisdiction of the ECJ, and on making trade deals with non EU countries, a hard Brexit became inevitable.

MAY SAYS SHE WANTS A STRONG EU

She said in her recent speech that she wants the European Union to be strong and successful, without the UK.

It was important that she say that. It set a good tone and it differentiates her position from that of Donald Trump, who, like Vladimir Putin, wants the EU to break up.

Mrs May says she wants the EU to stay together, but for that to happen, there can be no question of a country, including her own, being offered better terms by the EU, for leaving the EU, than it would obtain if it stayed in the EU.

That is not “punishing” anybody, it is common sense.

Mrs May set out her goals, but not all the pitfalls on the way.

FINAL DEAL WILL HAVE TO BE RATIFIED BY THE PARLIAMENTS OF ALL EU STATES

The eventual Free Trade agreement she wants with EU will not be finalised in Brussels. It will have to be approved by the 27 or more Parliaments within the EU.  The difficulties Ukraine and Canada have had getting their Agreements approved show how unpredictable that may be. Convincing Michel Barnier to agree may be the least of the UK’s negotiating problems!

She said that, on leaving the EU, the UK will retain all the  then existing EU rules for goods and services, but will then change them, as necessary afterwards. This implies a gradual hardening of the border in Ireland, as UK standards begin to diverge from EU standards.

MORE BUREAUCRACY INEVITABLE

To the extent that the UK diverges from EU standards, the UK businesses will have to apply two sets of standards, one for the UK market, and another for the 45% of UK exports that go to the EU. More paperwork, not less!

Once the UK has left the EU, goods coming  into the EU (including into Ireland) from the UK will be subject to checking under “Rules of Origin” requirements, in other words to check that they do not contain an undue amount of content that is not from the UK at all, but from elsewhere.

For example, there will have to be checks that UK beef burgers do not contain Brazilian beef.  These “Rules of Origin” checks will involve a lot of delays, and yet more bureaucracy, which will be especially onerous for small firms.

One study estimated that the need to apply “Rules of Origin” checks could reduce trade volumes by 9%.

PROBLEMS FOR RETAILERS

The UK decision to leave the Customs Union will create big problems for the Irish retail trade. Many retail chains treat Ireland as an extension of the UK retail market and have built their distribution chains, the network of warehouses, and their logistics on that basis.

Now transiting goods destined for Ireland through the UK, or from Ireland via the UK to continental Europe, will become much more complex. Customs inspections, paperwork and even road use costs may arise. These problems could be mitigated by new customs agreements, but this will not be easy. These problems will be particularly acute for food products, which are perishable.

New ways of getting goods in and out of Ireland, avoiding the UK , may have to be devised. Ireland will need to redirect its transport infrastructure towards the continent and away from UK routes which will require investment in new infrastructure at ports like Rosslare and Cork.

HALF IN, AND HALF OUT, OF THE CUSTOMS UNION?

Theresa May was remarkably unclear about the sort of relationship she wants with the EU Customs Union. She wants bits of it, but not all of it.

In attempting this unusual feat, she will run into difficulties with the World Trade Organisation (WTO), a body of which the UK now wants to become a fully independent member.

The WTO works on the basis of non discrimination, or the so called “Most Favoured Nation” principle.

As I understand it, any concessions that the EU Customs Union grants to the UK, as a non EU member, would have to be extended to all the EU Customs Union’s trading partners, unless the concessions cover “substantially all” trade between the UK and the Customs Union.  If this is so, Theresa May’s formula will be unworkable. The UK will have to be either ” substantially in”, or “substantially out”, of the Customs Union.

Any concessions the UK might get to allow it to be partially in, or partially out, of the EU Customs Union for a given product or service, will have to be purchased at a price from the EU and from the other members of the WTO.  The whole process will be dragged out by other countries seeking an advantage in an apparently unrelated field.

It will drag on, and on.

HOW IRELAND SHOULD APPROACH THE BREXIT NEGOTIATIONS, WHEN THEY START

Theresa May’s commitment to the Common Travel Area (CTA) with Ireland is welcome, but the CTA is an understanding rather than an enforceable legal agreement. The extent to which it gives legally enforceable right to work in either jurisdiction will be tested in the negotiations. Spain will seek similar rights for Spanish workers working in Gibraltar.

How should Ireland approach the negotiation of UK exit from the EU?

Obviously, Ireland has more to lose in this than any other EU country.

But Ireland needs to be clear in its own mind that it is in the EU, and intends to stay there.

Ireland has  prospered in the EU, in a way it  did not prosper before it  joined and when it was dependent on the British market. Ireland has prospered thanks to foreign investment, which came to Ireland on the explicit assurance that Ireland would remain in the EU and that firms located in Ireland  would have full access to the EU single market.

Incidentally, the UK also did better economically in the 43 years since it joined the EU, than it did in the period before it did so.

There has been a lot of abstract commentary in the Irish media about the stance Ireland should take in the Brexit negotiations. Some have suggested that Ireland detach itself from the common EU negotiating stance. This would be a big mistake, because in trade negotiations size matters.

While the negotiations will be conducted by the European Commission, they will be intensely scrutinised at every meeting of the European Council, where Ireland will be represented by the Taoiseach. No move will be made without intense Irish involvement on the EU side.

Irish Embassies in every EU capital will be vigilant. Ireland will need to deepen its understanding of the fears and hopes of every one of its 26 EU partners, understand their history, and speak their languages. It is by framing Ireland’s goals in terms that the  other 26 can see is in their interests too, that Ireland will maximise its success in the Brexit negotiations.

As Brexit is a British initiative, it is proper that, as the first step, Britain should accompany its application to leave the EU, with a detailed prospectus setting out how its proposed relationship with the Customs Union might work, specifying how its proposals might be reconciled with WTO rules.

It is better that the UK identify any legal, practical , and logistical  difficulties, for itself and by itself.

In that way, it will own the problem, and own the solution.

It is not for the EU to tell the UK what to do, because that would just allow the UK to blame Brussels for the bad news, and blame others for problems that are INHERENT in what the UK itself is now looking for.

IN ANY NEGOTIATION, SIZE MATTERS

Of course, Ireland can continue to work with the UK on common problems. To the extent that bilateral discussions with the UK can smooth the overall path of the wider negotiations,  that would be welcomed by Ireland’s EU partners.

But Ireland would have to be entirely transparent with its EU partners in regard to any discussions it might have with the UK, on any subject that was part of the overall EU/ UK negotiations. That is vital.

On issues of importance to Ireland, the extra leverage Ireland will have, as a member of the EU team, will help Ireland get a much better deal than it could ever get, as a smaller country negotiating on its own, with a much bigger UK.

In any negotiation, size matters!

IRELAND MUST BECOME HYPER COMPETITIVE

Now that it is clear that we have to prepare for a hard Brexit, Ireland should adopt an aggressive strategy to improve its overall competitiveness.

That is how we will attract new business to Ireland, and withstand the destructive currency gyrations that unfortunately will be part of the Brexit process.

Ireland must become hyper competitive. The right action agenda for the government is to be found in the “Competitiveness Challenge”, presented to the government last month by the National Competitiveness Council.

In his foreword to the Report, the Taoiseach said “We need to continue our effort to control and reduce costs-whether for property, legal services, finance or energy”

As the Report points out, Ireland has the 5th highest productivity in the OECD, after Luxembourg, Norway, the US and Belgium. To overcome Brexit, we should aim now at first, not fifth, place on this table!

When the UK leaves the EU, we will still be competing with them, and they will be freed of the discipline of   EU state aid rules, and thus able, if they wish, to compete unfairly with us. Comparing Ireland with the UK, on the World Bank Rankings, the Competitiveness Council Report  says that,  for a business wanting to

+  get electricity, Ireland is in 33rd place, while the UK is in 17th place in the world

+  get a Construction permit, Ireland is in 38th place, while the UK is in 17th place

+  enforce a contract, Ireland is in 90th place in the world, while the UK is in 31st place (our case clearance rate in our courts is the worst in the EU)

+  trade across borders, Ireland is in 27th place, while the UK is in 13th place

+   get Credit, Ireland is in 32nd place , while the UK is in 20th place.

The remedy to each of these problems is different. It will usually involve action by several government Departments. So a “whole government” approach will be needed, with a narrow focus on dramatically improving Ireland’s competitiveness position in every area where our costs of doing business are too high.

The Taoiseach, and his office, are in an ideal position to drive this because he has unique authority to clear away road blocks caused by disputes between Departments.

PAY AND TAX POLICY MUST TAKE HARD BREXIT INTO ACCOUNT

 Making Ireland hyper competitive, so as to withstand a  hard Brexit, would provide a unifying agenda for the New Politics, going beyond the Programme for Partnership government, which after all agreed when Brexit  seemed unlikely.

If the national aim is to be hyper competitive, that must influence public sector pay claims. It strengthens the case for setting up a “Rainy Day Fund” to meet unexpected fiscal eventualities, and the case for a strong Independent Parliamentary Budget Office. We will not be able to afford to narrow our tax base. We should not spend today, what we are unsure we will actually earn tomorrow!

We will not be able to afford any work disincentives in our tax and income support systems, nor to have so many households where no one is working, an area where Ireland is worse than any other EU country.

The clarity we now have from Theresa May’s speech about the direction Brexit will take, is the signal we needed for a comprehensive plan to make the Irish economy hyper competitive, starting now, even before the UK writes its Article 50 letter.

 

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MARY QUEEN OF SCOTS ……A STORY THAT ILLUMINATES PRESENT DAY POLITICS

I bought Antonia Frasers biography of Mary Queen of Scots, in a second hand bookshop in Paris, a few years ago, and eventually got around to reading its 667 pages over the Christmas period.

It  is a riveting personal story of a woman who became Queen of Scotland  as an infant,  and  who spent her childhood and teenage years in France, where  she  married the King .

Then, after the King of France had died, and she was still only 19 years old, she returned to Scotland in 1561 to take up her responsibility as monarch of her native country.

Politics was different then.

In Scotland, much the real power rested with the nobility, who controlled the land and its revenues, and who could, and did, dictate to the monarch. Parliaments were often no more than a vehicle for the power of the landed nobility.

Religion added a new source of contention, especially if the monarch and her subjects had different religious beliefs. Mary was a convinced Catholic, while the majority of her subjects had recently become Protestant followers of Calvin and Knox…Presbyterians.

She did not attempt to force her Catholic religious views on her subjects, in stark contrast to the policy followed in England by the monarchs of that country, both Protestant and Catholic.

In Scotland the drive for religious conformity came from the bottom up.iin England, it came from the top down.

Mary also had a claim on the English throne, through her grandmother, Margaret Tudor, a sister of Henry XIII.

So when all  Henry VIII’s offspring had no children, Mary would have been the uncontested  heir to the English throne too, after the death of Queen Elizabeth I.

In fact, she could even claim precedence over Elizabeth, because , in Catholic eyes, Elizabeth was illegitimate, because her mother, Anne Boleyn’s marriage to Henry VIII took place, while his first wife, Catherine, was still alive. As we know, the Pope did not agree to annul Henry’s marriage to Catherine.

Interestingly Mary’s own grandmother, Margaret Tudor, a staunch Catholic, had had an annulment of her marriage to her second husband, the Earl of Angus.

Mary herself had numerous half brothers and sisters, because her father had had active relations with women, other than Mary’s mother.

So Mary’s person, and her choice of husband (she had three), became an instrument in the  politics of Europe, and in the struggle for predominance between France, Spain and England, and between Catholicism and Protestantism.

Although she was a charming intelligent and generally cautious ruler, the forces with which she had to contend eventually became far too great for her.

She was forced to abdicate in 1567, attempted to regain the throne by force, and was defeated. She had to quit Scotland, leaving her infant son,  James, who was eventually to become King of both England and Scotland, behind, never to see him again. She was only 25.

But, instead of fleeing to France where she would have been well received and had many powerful relatives, she fled to England. This was a fatal and foolish mistake.

In England, she became an acute embarrassment to her host, Queen Elizabeth, who feared , with reason, that, as a legitimate claimant to the English throne, Mary would provide a rallying point for English Catholics and their continental allies, who wanted to dethrone Elizabeth, and restore the Catholic faith.

Eventually, after twenty years imprisonment, Elizabeth had Mary executed in 1587, when she was still only 44 years of age.

This tragic story brings out the deep historical, political and religious differences between Scotland and England. It exposes the roots of the suspicion between England and the continent, a suspicion that is not prevalent in Scotland. States were much weaker then than they are today.

It reminds the reader how different were the priorities of political actors 500 years ago. Heredity and religion were much more important than trade and economics. Only the pursuit of power is a constant.

 

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DERMOT GALLAGHER   RIP

I wish to express a deep sense of loss on hearing of the death of former Ambassador, Dermot Gallagher, who I consider to have been a great friend and neighbour, as well as a brilliant servant of Ireland.

Dermot was Irish Ambassador in the United States during my time as Taoiseach.

On my first arrival in Washington as Taoiseach in March 1995, I was immediately struck by the depth of the links all over the United States, but particularly in policy making circles in Washington, that Dermot, and indeed his wife Maeve, had built up on behalf of Ireland.

These links extended right across both US political parties, and across all three branches of the US government.  This influence on behalf of Ireland was the result of immensely hard work and patience on Dermot’s part. He was instrumental in securing US support for the process of peace building in Ireland, and notably in securing the services of Senator George Mitchell.

He was a model Ambassador. He provided very valuable advice to me when it was my honour to fill a similar role subsequently.

Finola joins me in extending heartfelt sympathy to Maeve and his grieving family

Statement by John Bruton, former Taoiseach

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