Wednesday 26 October 2016

A 'Brexit' will not answer the old British Question

Published 11/02/2016 | 02:30

David Cameron
David Cameron

LETTERS to the Editor are the very place to think the unthinkable and say the otherwise unsayable. That is why they have so many readers ( a lot more than this poor column).

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It is also why this column reads them. A recent one said the well-nigh unsayable about 'Brexit' (the possibility that Britain might leave the EU). That is: might it be better for the EU, even for Ireland, if the Brits did depart?

It must be admitted that the writer, from the Irish Political Review Group, was the staunchest of staunch Europhiles. He is worried that the attempts to keep the UK in the union will damage the traditional Irish policy of support "for deepening EU and Eurozone integration".

That is indeed Ireland's traditional official stance but the degree to which it is a central plank of policy, or even a popular one, is open to question.

The unthinkable has been put more delicately in other ways; in particular that Ireland might get more foreign investment if Britain were no longer a member. The ESRI study - based on pretty bleak assumptions - concluded that this would not be the case, but the foreign investment question neatly pulls together the two great intertwined issues - British membership and eurozone integration.

At the moment all the big countries, and some smaller ones, are united in their proclaimed desire to make major multi-nationals pay more corporation tax - as long as it is to their own exchequers. But a Britain outside the EU might take a very different attitude to taxation than an integrating eurozone, where history suggests that harmonisation will be the key driver and not the US motto, "Out of many, one."

Ireland, so very different in its economic model and trading patterns, will find a more integrated Eurozone an uncomfortable place. It will be all the more uncomfortable if Britain becomes more detached. And it does not even have to exit the EU to become more detached.

The recent book, 'Britain and Europe: The Endgame', from the Institute for International and European Affairs in Dublin, suggested that the best which can be hoped for is that the UK becomes a "half-in" member of the EU, after the referendum is passed, rather than the "half-out" it has appeared to be until now.

The key dynamic, it argues, will be the relationship between the Eurozone and the rest, and how sustainable such a two-tier Europe will be.

That problem was supposed to be avoided by making it compulsory to join the euro once some fairly arbitrary conditions were met, but few believe that is sustainable any longer.

The prime minister presented his case as making sure the euro majority did not discriminate against the non-euro minority but it can just as plausibly be seen as a pre-emptive attempt to protect the role of the City of London financial centre.

Dublin would be interested in any scraps which might fall from a damaged Square Mile table, but so too would Frankfurt, Paris, Luxembourg and Amsterdam. This is why the referendum result matters to the City: it would be easier for the rivals to pick at London if Britain ceases to be a member state than if it stays inside with new arrangements.

There is also the banking union, which some non-euro countries have joined, but not Britain. The Cameron plan, as drafted, is that, if some as yet undecided number of "outs" members believe they are being discriminated by a piece of legislation, they can request further discussion of the issue, although they would not have a veto.

Financial supervision of banks will remain under the UK's control, whereas euro countries have ECB oversight. Some analysts say the proposals could allow some differences in banking rules inside and outside the banking union.

This is the important stuff but there will be more potential Yes votes for Mr Cameron in the idea that the UK will not be involved in any future bailouts. Equally, that is bound to grate with those eurozone members which are a lot poorer than Britain.

Countries with financial centres - Ireland included - will wonder if London could end up benefiting from scraps falling from less digestible banking regulation in the Eurozone.

One possible solution would be for Britain to join the banking union, while remaining outside the euro. There is no practical reason why this could not be done, but it would be a loss of the precious UK sovereignty.

That might be acceptable if it were the end of the matter, but it is not. It is already agreed in principle that, if the euro is to survive in its present form, as well as the banking union, there will have to be a fiscal union, an economic union, a single regulator for capital markets and more labour mobility between countries not less.

All of which would be intolerable without some kind of political union. It is already clear that a system which relies on one bunch of governments telling others what to do - as in the euro crisis and now the refugee crisis - will eventually destroy the whole project. But no one knows what a workable political union would look like.

They do know it will be a slow business and every step will run into the British Question - and by inference the Irish Question - as ways have to be found to maintain the single market, UK included, while changing the rules inside the Eurozone.

This will be the case whether Britain stays in the EU or leaves. Indeed, the letter-writer may be correct that it could be easier to negotiate with a UK outside the tent, because its bargaining power would be less than that of a member state.

To what extent do Irish politicians and business leaders understand it? The election campaign, now in full swing, seems based on the belief that nothing fundamental will change, or event that the 1990s will return.

All the signs are that the fundamentals will change, even assuming no new euro crisis - which can be no more than a working assumption. Ireland looks like being stretched unmercifully between a Eurozone developing in ways which are not to its liking, and a Britain which becoming less and less similar to the monetary union.

Here is an issue for Ireland's creditworthiness well beyond talk of a Chinese-led recession. The political stance seems to be to return to AA status as slowly as possible, which could easily turn out to be too long.

The ups and downs of the business cycle will be always with us but it is already obvious that the country faces far greater challenges that that.

We will need rock-solid financial defences - greater than those currently envisaged - if we are not to be trampled underfoot by the great black oxen of European change.

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