I spent November 2018 in Sydney visiting the University of Sydney. While there, I competed my latest briefing paper for the European Parliament’s ECON committee “Monetary Policy in an Era of Low Average Growth Rates“. I also gave a seminar on the related topic of The Euro Area’s Long-Term Growth Prospects: With and Without Structural Reforms.
My latest briefing paper for the European Parliament’s Economic and Monetary Affairs committee is titled “Should central banks be concerned about virtual currencies?”
This is part of a collection of papers delivered to the committee prior to their meeting on July 9 with ECB President Draghi. The papers can be found by clicking here and expanding on where it says “Monetary Dialogue – 9 July 2018″.
Here is a presentation titled “The Lender of Last Resort in the Euro Area: Where Do We Stand?” which I gave in March at a workshop on financial stability at University College Cork.
The Eurosystem’s often-misunderstood TARGET2 balances have again become a topic featured in op-eds and bank briefing documents. I’m posting this a bit late but here is a briefing paper I did on these balances that was submitted to the European Parliament in November 2017. For those interested in a longer explanation of how the mechanics of how these balances come about, my 2013 paper covers a lot of different issues.
The past week has been the most fraught yet in the Brexit negotiations. The EU and UK have not agreed on how the “Irish backstop” proposed in December should operate. The UK government and the DUP are unhappy that the EU believes the “backstop” arrangement should only apply to Northern Ireland. The EU backstop would essentially keep Northern Ireland (but explicitly not the rest of the UK) in the EU customs union and single market unless other arrangements are agreed that would also rule out the need for a hard Irish border.
In Westminster and Northern Ireland, there is a lot of concern about the EU’s proposal, with many viewing it as implying a “border in the Irish sea” and Theresa May arguing that it would “threaten the constitutional integrity of the UK” and that “no UK prime minster could ever agree to it”. In Northern Ireland, unionists have argued this approach is inconsistent with UK’s commitment in the December agreement that there would be “unfettered access for Northern Ireland’s businesses to the whole of the United Kingdom internal market”. Arlene Foster has repeatedly insisted that this arrangement would be “catastrophic” for the Northern Ireland economy and, in a notable upping of the ante, said on Friday that the EU’s approach would amount to Northern Ireland being “annexed” from the UK.
I believe these concerns are fundamentally misplaced. Rather than being threatened economically, Northern Ireland would gain from the implementation of the EU’s backstop. To understand why, let’s look at how the backstop would work in practice.
Let’s start with the most obvious objection to the EU’s backstop: the idea that a “sea border” would make it harder for Northern Irish firms to sell into Great Britain. The DUP’s Arlene Foster has emphasised this repeatedly in recent months. Consider, for example, this statement from Foster in March
“What was there, in the [EU draft agreement] legal text, is around creating a border down the Irish Sea,” she said.
“And of course that’s not something we in Northern Ireland could allow from a constitutional point of view, but also in terms of economics, it would be catastrophic to have a border down the Irish Sea.”
“56% of our goods from Northern Ireland go to Great Britain, so it is incredibly important that that border does not exist.
This probably sounds like a reasonable concern but it is without foundation. Firms in Northern Ireland will remain within the UK, so there will not be and cannot legally be customs checks for goods produced in Northern Ireland when travelling to the rest of the UK. In addition, the UK itself promised in the December agreement that unfettered access would be maintained for Northern Irish firms and that “no new regulatory barriers” would affect these firms. Together, these points mean Northern Irish firms will have unfettered access to the rest of the UK under the EU backstop.
If you’re surprised by this and perhaps think I’m making it up, you might not know the UK civil service has already worked out how this backstop would work and they have said there would be unfettered access for Northern Ireland firms for the rest of the UK market. The document describing how this would work was part of a series of UK civil service documents leaked to politicians in the European Parliament and was discussed in various press stories in May.
This “customs channel” proposal implies no land border checks on the island of Ireland but some checks at the small number of ports in Northern Ireland that transport goods to Great Britain. Goods would either go through a “green channel” with no checks or a “red channel” which has checks. Crucially, goods from firms in Northern Ireland would go through the green channel. Goods coming from the Republic of Ireland to the Great Britain via Northern Ireland’s ports would probably have to go through the red channel if the UK required customs or regulatory checks on goods from the EU.
Viewed this way, the “border in the Irish sea” terminology is misleading because it will not affect firms from Northern Ireland. A better terminology would be “enforcing the land border at Northern Ireland’s ports.” With a small number of ports in Northern Ireland, all of whom are already checking shipping documentation of some sort, the implications for trade frictions for Irish firms would be far less severe than the alternative of enforcing customs and regulatory checks on a meandering 310 mile border with about 200 different crossing points.
Over time, various issues would need to be sorted out about how this arrangement would evolve. These issues are not trivial but they would be would not be too difficult to work out between the EU and UK. A few examples.
- Most likely, Northern Ireland would be given a “special economic zone” status, so that the free movement of goods from its firms to both the rest of the UK and EU is agreed and accepted internationally by all members of the WTO.
- Assurances may be required that the UK will discourage tariff-hopping via “name plate” firms setting up in Northern Ireland just to label products as a way to avoid tariffs that the UK may charge on EU goods (though these tariffs should be minimal if the EU and UK agree a sensible free trade deal).
- Some goods moving from Great Britain to Northern Ireland may need to be checked to make sure they meet EU regulatory requirements. Goods that are heading on towards the Republic of Ireland would also need to have EU customs procedures applied.
- The UK has promised there would be no new regulatory barriers affecting Northern Irish firms accessing the market in Great Britain. If the UK starts passing new product regulations that deviate from the EU’s, any new regulatory bill passing parliament could include a clause stating that Northern Ireland’s products (produced according to EU rules) are also allowed to be sold throughout the UK, i.e. that there is a form of regulatory equivalence. Ultimately, it is up to the UK government to honour its promise to allow Northern Irish firms unfettered access to markets in Great Britain and there should be little difficulty in implementing this.
Economic Impact on Northern Ireland
So the EU backstop isn’t going to turn Northern Ireland into an economic dystopia. It is far more likely to have a positive economic effect. Northern Ireland would become the only place where firms could export freely to both the EU and the UK. One could easily imagine Northern Ireland obtaining new foreign direct investment because of this unique selling point. Business leaders in other regions of the UK (for example Scotland) would view this kind of special status as a great opportunity if they could attain it but the EU has made clear that this can only apply to Northern Ireland.
Northern Ireland’s agriculture and food sector is also likely to do better under this regime than under any alternative approach. If the UK decides to pursue trade deals that allow cheap food from outside the EU into the UK, then Northern Irish farmers would have to compete with these imports in the Great Britain market (most likely in an environment with less generous state-funded agricultural subsidies). However, regulatory alignment with the EU would mean produce like chlorinated chicken and hormone-injected beef could not be sold in Northern Ireland, providing some protection for local producers. Northern Irish farmers would still also have full access to the European Union market without facing tariffs or quotas, which would provide some opportunity to diversify their sales.
Most importantly, the EU’s backstop keeps the land border open and allows the all-island Irish economy to continue to operate freely. Contrary to Boris Johnson’s uninformed sneering, the reality is that more firms in Northern Ireland sell goods to the Republic than to Great Britain and integrated all-Ireland supply chains are of huge importance to many firms, North and South. Northern Ireland would keep this important element of its economy, without losing anything.
Constitutional Integrity? Annexation?
But what about the constitutional integrity of the United Kingdom which is supposedly a great concern to Theresa May? Well the UK’s constitutional integrity is a complicated thing, not least because it doesn’t actually have a constitution.
The reality is the UK has a patchwork of different governance arrangement across its regions. Northern Ireland, in particular, already differs sharply from the rest of the UK in lots of ways, including its form of government, rules on gay marriage and abortion and the plethora of ways in which the Good Friday agreement has introduced North-South co-operation. In truth, the DUP’s desire for Northern Ireland to have a different corporate tax rate from the rest of the UK is probably a more substantive difference in economic policy than anything new that would emerge from the proposed backstop.
Is this Northern Ireland getting annexed by the EU or Republic? Clearly not. Northern Ireland would still send MPs to Westminster. Its people would still pay UK tax, hold British passports (if they wish), have access to the NHS and the UK social welfare system, and be subject to UK laws in most areas. The people of Northern Ireland would probably barely notice their new status. By contrast, they would certainly notice the return of a hard border, which is the most likely alternative option if the EU’s backstop offer is rejected.
The Politics: Still Time (Just About) for a Broader Discussion
It now looks like nothing will be settled between the UK and EU until the Autumn. This still leaves some time for an informed debate in Northern Ireland and Westminster about the consequences of the EU backstop proposal. For a number of reasons, this debate has not taken place so far and there is a general lack of understanding about how the EU backstop would work. These reasons include:
- Northern Ireland does not have an assembly operating. The assembly would certainly have held extensive committee meetings to discuss the various options and this would have helped to debunk the scaremongering about the so-called “border in the sea”.
- Many in the UK government probably know the EU backstop would work well for Northern Ireland. Under other circumstances, they could give assurances to everyone in region that the backstop would work well for them – it is not the EU’s job to explain how unfettered access to the UK market could be maintained. However, the Conservatives are reliant on a hard-line unionist party for their majority at Westminster and do not want to upset the party keeping them in power by asking them to consider a proposal they are so uncomfortable with.
- The last UK general election meant the DUP and Sinn Fein were the only parties in Nothern Ireland with MPs and Sinn Fein do not attend parliament. This has left the Westminster debate without nationalist or non-sectarian voices (such as the Alliance Party) who could have argued for the EU’s backstop. It is also seems likely that the current DUP leadership has handled these issues in a more aggressive manner than, for example, Peter Robinson would have (see for example Robinson’s speech last week imploring leaders on both sides of the community to compromise to get the Assembly up and running again.)
- Finally, the Irish government appears to have outsourced most of the communication on Brexit to Michel Barnier (who has a lot on his hands) rather than working hard to publicly explain the benefits of the EU backstop to all sides of Northern Ireland’s community.
Northern Ireland may not have a functioning assembly but the MLAs that were elected last year must surely understand they have a political responsibility for what happens next. Even if the assembly does not formally convene again this year, it must be possible for the MLAs to meet to debate the options and perhaps hold a “consultative vote” on the EU backstop. The DUP do not speak for all of Northern Ireland (they received 29% of the vote in the 2017 assembly elections) and they should not be the only party with an influence on the final outcome. Even if it had little legal standing, a vote by a majority of assembly members registering approval for a form of the EU backstop would have a profound political impact.
A final word on the long-term political implications. The DUP clearly believe that Northern Ireland remaining in the EU’s customs union and single market is a step towards a united Ireland. I doubt if this outcome would actually change perceptions of a united Ireland by much since it would mainly involve a continuation of the status quo for most people in Northern Ireland. Indeed, a special economic zone status within the UK but with full access to the EU could be popular even with some nationalists. However, the alternative outcome – the return of a hard land border with Northern Ireland firms having poorer access to the EU – may convince many nationalists that they are better off to re-join the EU via unification. With a border poll sufficient to trigger unification, a rejection of the backstop may turn out to be a crucial stop on the road towards (rather than away from) a united Ireland.