Tuesday 25 October 2016

Europe's new reality: In Brussels nothing is quite the same after Brexit

Published 09/07/2016 | 02:30

Despite Spain and Portugal being in the budget firing line, ‘in the post-Brexit landscape, no one will be keen to rock the economic boat’
Despite Spain and Portugal being in the budget firing line, ‘in the post-Brexit landscape, no one will be keen to rock the economic boat’

The shifts in the European Union's post-Brexit political landscape are beginning to emerge. On the one hand, a new post- referendum economic nervousness look favourable for Spain and Portugal, who by rights should be in Brussels' firing line for breaching the bloc's deficit rules.

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On the other hand, Britain's withdrawal process is already starting to feel like a reality - and one that has reinvigorated EU lawmakers long hamstrung by the UK's half-in, half-out attitude.

Ideas that would have been unthinkable before the referendum - such as the move this week to shed light on the beneficial owners of trusts, a proposal inserted last-minute into the EU's new anti-money laundering rules and which the UK opposed - are now seeing the light of day.

EU negotiators have also reached a deal on new rules for occupational pensions, a subject that had been put on ice ahead of the referendum.

The UK hasn't yet filed for divorce, but the cracks are already showing in its relationship with its jilted partner.

At the same time though, the new geo-political uncertainty looks likely to rein in so-called austerity hawks, undermining Brussels' long time commitment to tough budgetary discpline.

That is playing out in the European Commission's handling of Spain and Portugal, which were this week threatened with fines for breaching the bloc's deficit rules.

The question is, should the EU impose fines on already cash-strapped countries when there is so much market volatility and economic uncertainty around after the UK result?

The issue will go down to the wire on Tuesday when EU finance ministers will be called on to decide whether the two countries have taken "effective action" to reduce their deficits.

The European Commission says they haven't, and it must decide how best to deploy its new post-crisis powers to enforce discipline.

Spain was due to bring its budget deficit below the EU's 3pc limit by the end of this year, but at a projected 3.9pc it is likely to come in way off the mark.

Portugal had until last year to do the same, but its 2015 deficit was confirmed by the EU's statistics agency at 4.4pc.

Both were warned in May that they risked breaching budget rules, and given until now to come up with new savings.

Both had already been given repeated extensions to the deficit reduction deadlines, so the Commission is now obliged to come down hard on them or face accusations of political weakness or complaints from deficit hawks such as Germany, the Netherlands and Finland.

But France and Italy got away unscathed when they broke the budget rules last year.

EU auditors said as much in a report earlier this year, accusing the EU executive of being overly lenient and not even-handed, but Commission president Jean-Claude Juncker was defiant when asked why Paris was not given a slap on the wrist.

"Because it is France," he said.

But the EU's arcane budget rules are actually providing the Commission - and Spain and Portugal alongside it - with a lifeline here.

While the Commission is legally obliged to impose fines if finance ministers agree with their "no effective action" assessment - which they are more than likely to do - Spain and Portugal can make an appeal to reduce or scrap the fines blaming "exceptional circumstances."

And in the post-Brexit landscape, no one will be keen to rock the economic boat.

"These are complex but intelligent rules that must be applied in an intelligent way," said EU economic affairs chief Pierre Moscovici this week. "There is no will to punish at all."

One well-placed EU official said this week that the results of the UK referendum will cause "increased uncertainty, not only for the next couple of weeks and months", hitting investment next.

He also warned that Brexit is "the downside risk that everybody would identify" in terms of Ireland's economy.

"The repercussions don't just kick in on the day when the UK may leave the European Union, they are here with us now," said the EU official, who did not wish to be named. "Outside the UK, Ireland, of course, stands to be impacted."

While there is awe in EU circles at Ireland's economic growth rate - which outpaced even China's last year, one official noted - there are lingering concerns about the banks and the property market, which the Brexit vote could yet impact.

The fact that EU officials are worried about Ireland's economy is a plus for the Government in seeking special consideration in the looming British divorce proceedings.

But Taoiseach Enda Kenny will have to be careful about hammering the point home too hard, or risk alienating their European partners in the process.

Other EU countries - Cyprus, for example, which is in the Commonwealth - also claim their own close ties to Britain.

Sarah Collins


Irish Independent

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