Tuesday 13 November 2018

Brendan Keenan: 'The European can is ready to be kicked further down the road again'

The North’s economy may be structured more like that of a rich EU country, but the level of output per hour worked is much, much lower. Stock photo: PA
The North’s economy may be structured more like that of a rich EU country, but the level of output per hour worked is much, much lower. Stock photo: PA
Brendan Keenan

Brendan Keenan

It is hard to escape the conclusion that there is something very EU about the Irish backstop. Much of the Union's development has been built on the method of establishing an economic reality in the belief that the politics, however difficult, are bound to follow.

This tried and trusted method reached its apogee in the creation of the euro. Except that the politics there are so difficult, they have not followed. And without the politics, the economics look very shaky indeed.

Most analysts agree that a safe single currency would require a full banking union, an EU-wide deposit insurance scheme, a debt-sharing mechanism and some degree of transfers, to countries facing particular economic shocks. Among other things.

Little or none of this has happened. Recent political events in Germany make it look less likely to happen than ever. The resulting economic dangers to the euro were the subject of a recent column: the point of this one is the parallels with the backstop.

We are all in the borderless EU at present but the economies of North and South are very different - and appear to be getting more different. The absence of borders does not guarantee convergence, even if the differences might be even greater were restrictions in place.

Those differences were a major theme in last week's quarterly commentary from the trade union backed Nevin Economic Research Institute (NERI). The Irish Congress of Trade Unions is an all-island body and the institute makes a point of having an all-island dimension to its reports.

The authors' theme this time is that the island has three economies; the Republic's (ROI) foreign sector, its domestic sector and the Northern Ireland (NI) economy. Statistics usually combine the foreign and domestic sectors in the South but the scale of multinational corporations has become so enormous that the search is on for more realistic assessments.

Enormous has become grotesque in the last 10 years with a 60pc increase in gross value added per hour compared with the rich countries of the EU15, much of it thought to relate to aircraft leasing. Over the same period, the NI figure has declined from 80pc of the EU15 to 70pc.

This is despite the fact that it has proportionately more foreign direct investment (FDI) than the EU - although nothing like figure in the South. But there has been little spillover from the foreign firms to the domestic economy. Productivity in the entire economy, foreign and domestic, is below the EU15 level.

Employment has been growing faster than output in Northern Ireland in recent years, especially in manufacturing, but because output was not even keeping pace with these extra workers, there could be no increase in income per person.

This is of particular concern because three-quarters of all NI productivity growth over the last 10 years has come from manufacturing.

NERI has been flagging that concern for some time - seeing it as a symptom of the poor quality of the Northern workforce in terms of skill and training, which in turn deters firms from upgrading their own products for fear of being unable to find suitable staff.

Looked at it in terms of proportionate size, and excluding foreign firms, manufacturing share in the ROI economy is significantly smaller than in NI, and smaller than the EU15 average.

At what one might call the other extreme, in the services sector, Accommodation and Food accounts for a much larger share of ROI output than is the case in NI, and is also notably significantly larger than the EU15 average.

NERI says the data appears to show that the ROI domestic sector is relatively concentrated in lower productivity sectors, while NI is much closer to the EU15 average. That is an unexpected finding but it is only percentage shares. When it comes to actual performance, the Republic is well ahead.

The North's economy may be structured more like that of a rich EU country, but the level of output per hour worked is much, much lower. Hence the need for the large transfers from London to Belfast to maintain UK living standards. These now amount to a quarter of the economy. There is some evidence that they are generous enough to support living standards which are higher than in some other UK regions.

Now that it has no foreign borrowing, the Republic's living standards, which are on a par with those in NI, are based entirely on its own earnings, but those earnings depend to an uncomfortable degree on the earnings of a small number of foreign companies.

Perhaps the whole thing is about foreign companies. Back in happier times, when the Northern executive was functioning and Brexit was unimaginable, great hopes were raised at the prospect of' NI getting a lower rate of corporation tax, to rival that of ROI.

The argument was that more FDI was the only thing which could improve the economy's poor productive capacity. The NERI analysts argue that there is more to it than that. The necessary spillovers from foreign companies to domestic ones depend both on the nature of the outside firms, and the ability of the local ones to raise themselves towards those standards.

This has not been a roaring success in the Republic either. In particular, spillovers from the glamorous, dominant Information and Communication sector have been less than would have been hoped. NI may have proportionately more FDI than the EU-15 but there has been disappointingly little absorption of skills and productivity by domestic firms.

This could be because the multinationals established there are not the kind which generate spillovers, or because local companies are not able to absorb them, or a bit of both. Either way, it raises a question mark over the effectiveness of FDI policy in the North.

To make matters worse, those lower corporation taxes may not now be forthcoming and a devolved administration in Belfast (even if one is restored) will never have the range of policies to attract FDI which is available to government in Dublin.

Both administrations could, and should, do more to improve human capital. The South has shamefully allowed slippage in some key areas, such as information technology, but the North lags badly across the board. But these are long-term policies which, even if implemented, will have little effect in the immediate future.

The immediate question is what would be the effect detaching the vulnerable NI economy from the UK in general under the backstop. The short-term losses would seem to exceed the short-term gains but the long run could see a more damaging gap emerge between economic reality and what was politically possible.

There can be no doubt about the detachment which would come from Northern Ireland retaining full regulatory alignment with the EU on its own; a detachment which would increase as time went by.

To take just one of many examples, but a startling one: if the UK does end up with a free trade agreement with the EU, however close, Northern Ireland would be represented in the negotiations by Brussels, not London. The range of new free trade agreements which the Brexiteers dream about would each add new complications between the UK, the EU and the strange bit of the UK which was de facto in the EU.

The best hope is that we may be spared all this for some time to come. The famous European can is being taken off the shelf for more kicking down the road. There will probably be a fudged agreement on a prolonged transition period.

Westminster will face a choice between of voting it through or facing Armageddon in the morning. (Remember the US Senate rejection of the bank rescue plan and the panic to reverse it when the consequences were seen).

Whether such hope proves justified or not, one can see what the EU-style politics of the Irish backstop mean. If implemented, the only rational consequence is for Northern Ireland eventually to join the EU in some strange guise, like Greenland without the glaciers.

The next stage, joining with the rest of Ireland, would be equally obvious. Just as obvious as Germans agreeing to stand over Greeks' debts. Pity about the Hesse election, though.

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