Business Irish

Wednesday 16 January 2019

Brendan Keenan: 'As analysts fear for policies, a recession would expose Ireland's budget balance'

There’s little enthusiasm for the pact between Enda Kenny’s successor, Leo Varadkar, and Fianna Fail, under Micheal Martin, going into extra time
There’s little enthusiasm for the pact between Enda Kenny’s successor, Leo Varadkar, and Fianna Fail, under Micheal Martin, going into extra time
Brendan Keenan

Brendan Keenan

THAT was it right enough: 2018 - the year of living dangerously. And next year could be the year when many of those dangers crystallise.

Brexit loomed over everything. Yet there is only one real danger - that of a no-deal Brexit - where the UK becomes a third country with no free trade deal with the EU, or anyone else for that matter.

Events are moving too quickly for a weekly column but it is tantalising, to put it mildly, that a withdrawal agreement was reached which would maintain peace and buy time - the very definition of political success - yet will probably not be implemented.

It is possible that a couple of years of experience of the regulatory alignment under the deal, while not being in the EU, might persuade a clear majority in Britain that this was a satisfactory situation and the final deal (still to be negotiated, don't forget) might forge closer links still.

Then there would be no need for the border backstop, which is what Mrs May has insisted all along will happen.

Living dangerously as well this year were those disgruntled Remain Tories whose desire for more cake to keep and eat, in the form of closer economic links and less regulation - Norway plus Fairyland - threatens to make Boris Johnson look sensible.

The pure Brexiteers believe Mrs May, which is why they are so determined to stop this deal and make the UK a purely third country in its dealings with the EU.

One shudders to think of the intervening years before that free trade deal was signed, if there is no withdrawal agreement first. Shudders were certainly in order with that ESRI analysis of a no-deal exit.

With agriculture subject to the heaviest tariffs under international trade rules, sales to the UK will be virtually wiped out - completely so in the case of beef. The same is true of imports from Britain to Ireland, worth €4bn and an essential part of everyday life here.

Everyone is now relying on the British government delaying exit in order to have a second referendum. The troubling question is whether Ireland's stance was more dangerous than it needed to be, making a deal more difficult and increasing the possibility of a catastrophic outcome.

Historians will debate whether Ireland's government could have found a less risky path, given the exceptional damage to Ireland of failure to reach a deal. In the short run, though, there will be little debate, just recrimination across the newly erected land and sea borders.

There is less uncertainty about another government decision to take risks by adopting the minimalist approach to strengthening the public finances. After everything that has happened, there is surprise approaching despair among nearly all economic analysts at the politicians' unshakeable belief that the fiscal policies of the past 20 years are still the only politically feasible.

If there is a lurking belief that a grateful EU will cover the deficits which a Brexit or general recession would almost certainly trigger, that too is a dangerous approach. Nor would it do any more than postpone the need for stronger action on public debt reduction.

A recession, even of the ordinary decent kind, would soon expose the wobbly nature of Ireland's long delayed budget balance. There is much talk of such a recession, with some popular pointers indicating one is on the way. Investors are particularly interested in the arrival of an 'inverted yield curve' on interest rates but another pointer - how often the 'r' word is used - is also flashing amber.

This may not be a financial crash like last time. But it could be a public debt crisis, of a kind previously associated with Asia and South America. There are a lot more contenders for that now.

In that context, it could be argued that we are living a bit dangerously with our membership of the informal 'New Hanseatic League'. This group of northern EU countries, headed by the Netherlands, is attractive because it is wary of further integration and harmonisation - including of taxation.

But the integration which worries the group most is financial. It does not want risk-sharing on public finances. Two of the most hawkish countries when it came to Ireland's bailout, Finland and the Netherlands, are members. Ireland needs to do better than it has in the past, or risk being expelled from the league with the buttons torn off its epaulette.

Into the arms of France perhaps. There are attractions there too. The demands of the yellow vests can always be heard across Irish politics. Much more comforting than the once-fancied Danish model, until it was realised her demands include compulsory training or benefit cuts for the unemployed, and equal pay for public and private workers.

More importantly, the French plans for burden-sharing are of most benefit to countries at risk from outside forces, even when they keep their domestic affairs in order.

Ireland is the extreme example of such a country, but there would be a price to pay for the solidarity in terms of harmonisation, especially corporation tax.

In that area, there is no choice but to live dangerously. Ireland must try to eliminate the most egregious tax avoidance from its system, while remaining attractive to foreign companies despite its disadvantage of geography, small size, high prices and shortage of both houses and specific skills.

So far, it is doing a good job. There was a classic case in the October Budget, with the new exit tax on capital profits taken out of the country, even if the profits have not been realised in hard cash.

This was part of an EU anti-avoidance law which comes into force in 2020. Pascal Donohoe showed how keen we are, bringing the new rule into force from next month. No tax avoidance here, sir. But he imposed it at the 12.5pc corporation tax rate, rather than the general 33pc capital gains rate. They won't like it over there, but you have to admire it.

This kind of tightrope walking will continue, but the danger may have abated somewhat. Commissioner Phil Hogan noted recently that, given the threat of a trade war between the EU and President Trump's USA, this might not be the best time to come down hard on US multinationals.

As the old proverb has it, he who lands you in the mire is not always your enemy. The world itself is looking particularly dangerous at present and a full-scale transatlantic trade war would produce lots of mire. But Europe is not China, and Mr Trump already has a record of stepping back from real brinks.

Indeed, watching Europe looking harder at intra-EU trade, and musing about its paltry defence budgets, the thought occurs that, while Mr Trump may do everything the wrong way, that does not mean he is wrong about everything. More sophisticated leaders had a decade to fix the global system which produced the Great Recession, and failed. They can hardly blame people voting for someone who promised to abolish it altogether.

If he does get re-elected it will be because, unlike his predecessors, in the US and elsewhere, at least he tried. Back home, though, we may be seeing the truth of the old adage that it is politically more dangerous to try to fix something than abolish it.

There seems little enthusiasm for the new Fine Gael-Fianna Fáil agreement, whose avowed purpose is to make the next 12 months less dangerous than they probably will be. The pervasive cynicism in modern democratic politics is reflected in the view that this could not be the real reason - the parties are just afraid of an election.

They are right to be afraid, and not just about elections. The list of possible crises in 2019 is an awesome one. Almost by definition, one at least of them seem bound to erupt. One of Ireland's least-noticed advantage is its remarkable political stability and almost executive continuity of policy.

This new grand coalition, in all but name, will be a useful reminder of that stability for the rest of the world, if things get truly nasty. Yet one senses disappointment that the national sport of choosing between Tweedledum and Tweedledee will be postponed. Perhaps we have got so used to living dangerously that we do not recognises a rescue craft when we see one.

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