Friday 23 February 2018

It's in our interest not to rush May on Britain's future outside the EU

Forcing the new PM's hand will only lead to hasty decisions that will scupper future relations

DOING BUSINESS: Italian premier Matteo Renzi and new British prime minister Theresa May pictured at a meeting in Rome last month
DOING BUSINESS: Italian premier Matteo Renzi and new British prime minister Theresa May pictured at a meeting in Rome last month
Dan O'Brien

Dan O'Brien

The dust is settling. Europe is coming to terms with the first major reversal in a process of integration that has defined the post-Second World War era. In Dublin and in capitals across the continent, officials are opening new files by the day on the great many aspects of the long and incredibly complex task ahead.

Things will be toughest for London's politicians and mandarins. A former British civil servant has described Brexit as his country's greatest political and administrative challenge outside a world war. It will dominate the agenda of the new government and, most probably, its successor.

But what sort of relationship Britain wants with Europe is still very far from clear. At the core of the decision for the new Prime Minister, Theresa May, is a trade-off: the closer Britain remains to Europe economically, the less power it will take back from Brussels.

Given that what unites those who support Brexit - from the most viscerally minded to the most cerebral types - is a desire "to take back control", the trade-off is more likely to favour the repatriation of powers over economic integration. That is all the more so given how small May's majority is in parliament and how dependent she is on Tory MPs who want a hard and fast Brexit.

All this augurs awfully for Ireland - the harder the Brexit, the more barriers to trade that will be erected between Britain and all EU member countries.

And as Ireland's exports of goods and services to Britain relative to the size of our economy are five times greater than countries such as Germany and France, the trade destruction effects of new barriers will be much greater here than elsewhere (among the 27 remaining EU members, only Luxembourg's exports to the UK amount to a greater share of its GDP than do Ireland's).

The ill effects of this on Irish prosperity won't be felt until closer to the time Britain actually leaves the EU, but in the meantime there will also be shorter-term negative effects.

Already there's been a big fall in the value of sterling since the referendum has taken place.

This has made Irish exports more expensive when priced in sterling and will discourage Brits from visiting (numbers, incidentally, have never recovered to their peak of almost a decade ago after another even bigger depreciation of sterling vis a vis the euro took place when the financial crisis began in 2007).

On top of this, the weakening of demand for Irish goods and services caused by the slowdown/recession in the British economy is only beginning to be felt.

While it is clear from multiple surveys that British businesses are retrenching, the bigger question - of how British consumers react to the uncertainty around Brexit - is still much less clear. Retail sales figures for July, to be released by UK statisticians in 10 days, will give the first hard data on that important question.

The unfolding nightmare of Brexit underscores how little any Irish Government can do to insulate the economy from the effects of the decision, current and future. But it is not entirely powerless.

Among the most immediate priorities must be to support London in taking as much time as is possible before the clock formally starts ticking on exit negotiations (that happens when Britain invokes the article 50 exit mechanism that was written into the EU's Lisbon Treaty). There are at least two very good reasons why this is in Ireland's interests.

The most immediate reason is that a rushed invoking of article 50 would mean more scope for hasty judgments and less time to find resolutions to the many difficulties that will inevitably arise between the two sides as the negotiations take place.

As there is a two-year time limit on those negotiations (unless all 27 EU countries agree unanimously to extend it), it is surely in the interests of all to ensure that the ground is as well prepared as possible before the clock starts ticking formally.

Another reason to support the British in taking as much time as is necessary is to increase the chances of negotiations on exiting the EU being run in parallel, or even along with, negotiations on what the new relationship will be.

Jean Claude Junker, the head of the European Commission, has said that EU law dictates that the exit negotiations must be completed before discussions on a new relationship start.

He is by no means unchallenged in his interpretation of the law, but it can be in nobody's interests to proceed as he suggests. That is because there would then be not one huge and wrenching change, but two - the first when Britain leaves and engages with Europe on some sort of interim basis, and the second upon the coming into force of the new deal, whenever that may be.

That would increase costs and uncertainty for all companies involved in trading with the UK, both British and European. It is harder to imagine a more perfect case of a lose-lose situation.

If there is still enormous uncertainty about the future of Britain's relations with Europe, the direction of Theresa May's new government is only a little less cloudy.

Will she lead Britain down a path of less regulation and lower tax - what has been described as the Singapore model - or will she, as she has intimated, take the path of one-nation conservatism?

This question matters a great deal for Ireland because, if she chooses the former, Britain will become a more serious rival for the kind of investment that is the cornerstone of the Irish economy.

As things currently stand, Britain is a much less attractive place to do business than it was before the June 23 referendum.

Most of that has to do with uncertainty, something that is loathed by anyone who wants to put their money to productive use.

Not knowing what trading relationship Britain will have with its neighbours and the rest of the world causes uncertainty for all companies involved in international commerce.

It also causes uncertainty for British companies which import goods and services that they use in their own business. In a modern economy that includes almost every company down to the smallest of micro-enterprises.

Then there is the regulatory uncertainty. The mythical rules on straight bananas, so beloved of the English Eurosceptic media, have at least one element of truth - most regulation of product standards have been set collectively for decades in Europe. If Britain is to put tens of thousands of pages of EU regulations on a bonfire, what will replace them?

Even if new regulations that are eventually enacted in Westminster are deemed by businesses to be less onerous for them than current made-in-Europe rules, there will be a considerable amount of time before they come into place, adding further to the uncertainty.

And then there is tax. Currently, Britain's rate of corporation tax stands at 20pc, with a detailed commitment to reduce it to 19pc next year and to 18pc in 2020.

George Osborne, the chancellor whom May fired as soon as she moved into Downing Street, had raised the possibility of bringing that rate below 15pc in the aftermath of the Brexit vote.

His successor, Philip Hammond, has not taken that position.

But with tax policy, and the many other policy choices the new British government makes, there is unlikely to be much ideological purity.

The eternally messy nature of government means that elements of both the Singapore model and the one- nation Tory (and others in between) model will in all probability, be adopted.

There is still a long way to go before anything much is clearer, either in terms of Britain's future relationship with Europe or of Britain's own future.

Sunday Independent

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