The three most pressing issues that will top new government's to-do list

Tel: +353 1 853 7000

The three most pressing issues that will top new government's to-do list

Wednesday, March 2, 2016 - 12:15

No matter who forms the next government, three major external issues are likely to dictate the economic agenda for the next few years. All these issues challenge Irish conventional wisdom and they will be difficult to tackle. 

The first is the implication for Ireland of Brexit. The second is the implication for Ireland of the crisis in the EU, which will get worse. The third is the implication for Ireland of the EU's moves to close off our favourable corporate tax rate and what that means for the Irish industrial model. These are three enormous economic challenges and they demand a once-in-a-generation shift in the attitudes of our top civil servants as much as our politicians.

The political in-tray is full.

Unfortunately, the ability of Irish policymakers to question conventional wisdom is not something you would bet on.

Let's deal with each challenge in turn. First, we will see a dramatic change in our relations with the EU. At its most basic, the point is that no Irish policymaker seriously imagined being in a union with Germany and France, never mind Italy or Spain, without Britain.

The working assumption was always that Britain would join the euro, but that didn't work out, leaving Ireland in the ridiculous position of using a German currency but remaining firmly in an Anglo - or, at least, Anglo/American - economic cycle. This inappropriate currency arrangement has resulted in massive economic instability. In the 15 years of using the euro, Ireland experienced a massive boom and a massive bust, the polar opposite to stability.

If the British leave the EU, Ireland can't allow itself to be bullied by the rest of the EU in the EU's consequent dealing with Britain. If the EU reacts to a 'British Out' vote by imposing trade or investment barriers with Britain or barriers to the free movement of people with Britain, we will simply have to veto these moves or negotiate an opt-out.

It is not feasible that we treat our biggest trading partner in the same way as Lithuania or Poland might treat the UK. Ireland and Britain are intertwined, with a land border and a shared island. It is not feasible for us to go along with continental reactions to a 'British Out' if those reactions are not in our national interest. If the EU gets vindictive, Ireland will have to get assertive. Whether we like it our not, Ireland's national interest regarding Brexit is not the same as Italy's or Spain's, never mind Poland's or Germany's.

Our national interest is a special relationship with the UK; end of story. That's the first piece of realpolitik our 1916 celebrants will have to digest.

The second bit is that without the UK, the very character of the EU will change. The flexible, Anglo/American arguments, which were made by the UK, will fade. The UK did much of the heavy lifting on behalf of corporate Ireland when it came to the EU.

This influence could well be gone by July. It will imply that we will have to adopt a more muscular approach within the EU and find new allies.

The third aspect of our relationship with the EU that will change is if the UK goes, the reaction of the main EU players will be more, not less, integration.

This isn't good for us. It will come at a time when the entire IDA and, to an extent, Enterprise Ireland, strategy has never been more America- focused. The biggest and most conspicuous casualty of a new, more integrationist EU will be our corporation tax rate. There is simply no way the EU will accept that Ireland deploys what it sees as "beggar-my-neighbour" tax tactics when the EU is seeking closer political and economic union.

Tax harmonisation will be the order of the day. When the British were on side, they argued for tax harmonisation but "downward tax harmonisation" where the lowest jurisdiction was the target. With France calling the shots, the target will clearly be upward harmonisation - a totally different ballgame.

Another change that would result from a Brexit depends on what the UK is likely to do once it leaves the EU. It is likely to compete more aggressively for inward corporate investment. It will offer packages that are similar or even better to Ireland's. This will mean that just when we are coming under bureaucratic EU pressure to raise our taxes and make the place less attractive, the British will be lowering taxes and making the UK more attractive.

Ireland's only way of surviving this assault would be to side with the EU in vindictive trade restrictions against Britain in an effort to make being inside the EU, with access to its markets, a marketing/industrial selling point.

But this would immediately mean clobbering the €1bn euro a week trade we currently do with the UK and all the jobs, prosperity and wealth that goes with it.

The implication is that to protect the multinationals, Ireland would have to endanger the domestic economy. Not pretty.

Any sort of EU restriction with trade, the movement of people or the free movement of capital with the UK will have to be challenged by the new Irish government.

If there is a hint of any barriers, we will have to opt out and the more we opt out the more semi-detached we would become.

That's absolutely fine with me because I believe the EU is a legacy project that has lost any real meaning or focus.

However, that's not the way the people who run Ireland see things. At the top of our civil service, the judiciary, the media, corporate Ireland and the political class, there is a virulent, unthinking strain of Europhilia.

All things European are seen as good, progressive and self-evidently positive. When views like this become so ubiquitous they morph into self-evident truths.

History tells us that views can become entrenched and if enough people - particularly those who describe themselves as 'serious people' - believe them, they become 'conventional wisdom'.

Once ideas become conventional wisdom, they are hard to shift. Conventional people (who like to think of themselves as serious people, not frivolous people) find it difficult to admit that they might be wrong. We see this stubborn behaviour at the top of many organisations because conventional people tend to promote those who have the same views as themselves and this reinforces the conventional wisdom.

In time, only 'cranks' question the conventional wisdom and this is how intellectual conformity solidifies in the commanding height of society, leading yet again to "groupthink".

Watch the Irish establishment uncover proof at every turn in the next few months.

Irish Independent