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Life is based on many assumptions (until they prove false)

Posted on June 09, 2017 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Economists are no more equipped than others to predict the future. That’s because economies are embedded in societies, institutions and human relationships. These work to confound the simplest assumptions and most refined of econometrical modelling.  While few could believe what was plainly emerging in British politics in recent times and is now very apparent following last week’s General Election result, this is a special time to pause, reflect and reconsider.

Nothing can be ruled in or ruled out.  The official position is that Article 50 of the Lisbon Treaty has been triggered and Brexit will proceed. Yet Article 50(3) of the same Treaty states:

The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

If opinion polls can be so volatile in the space of a few weeks in the case of the UK, then the opinion poll (aka referendum) of 23rd June 2016 relating to a general proposition about a very broad and complex topic is only one such opinion poll. There are many types of Brexit and many types of potential long-term relationships between the UK (if the UK survives in the long run) and the EU (if the EU survives in the long run). At this point, the assumption of a conservative minority Government with a Confidence and Supply (C&S) arrangement with an Irish political party lasting beyond Christmas is just that – an assumption.

The assumption of a ‘hard Brexit’ is surely up for consideration.  A majority of UK political parties, as judged by the popular vote, endorse some form of Brexit-softening.  And, clear generational fault lines have opened up undermining traditional political analysis and assumed behaviour. For example, the notion that younger people will not vote in significant numbers or that traditional broadsheet or tabloid media is necessarily connected to a new generation must be challenged. Economists and others can live in our own intellectual bubbles extrapolating from the past and, worse still, believing our perfect models of an imperfect world. Compounding that error, many in the commentariat may take tabloid journalism of a particular kind too seriously along with mainstream ‘authoritative’ punditry.

Politics matter and people including workers as well.

Where to now?  Now is an opportunity to consider the question: what sort of a UK or Ireland do we want?  What sorts of social and economic rights are valued?  How do we see the future of the European Union itself?  One thing is sure – if the UK comes out of the EU you can’t have a hard border running alongside the cliffs of Dover without, also, running just under Slieve Gullion in South Armagh.

It is a question of timing.

Eventually, if Brexit goes ahead, Argentinian beef producers will have much greater access to the Northern Ireland market and controls will be needed on the Irish border while producers south of the border will be very serious trouble if, in the meantime, they have not found new markets in the EU27 or elsewhere.

There is more at stake, here than customs unions and physical borders. It might be possible to devise a customs union between the UK and the EU with a harmonisation of tariffs and a single external tariff regime. It might even be possible to conceive a non-customs union with a type of VAT Information Exchange System (VIES) extending to all goods and services to avoid visible physical borders. VIES already exists to levy VAT not at borders but at a recipient importing firm (in the case of goods) or an exporting firm (in the case of services).  The burdensome Country of Origin Certificates required when goods cross the Norwegian-Swedish border could be waivered in the case of trade between the UK and the EU (of which Ireland or the Republic of Ireland is a member). There is about as much chance of a hard customs border being drawn down the Irish sea separating Northern Ireland from the rest of the UK anytime soon (in order to facilitate open borders on the island of Ireland) as there is of drawing one around the two entire islands of the North Atlantic).

However, we are still left with the challenge of non-tariff barriers and a thousand regulations governing freedom of movement to reside and work across jurisdictions not to mention the status of particular bilateral historical agreements involving the Irish and British Governments that we take for granted at this time (with agreements in relation to education, pensions, voting and other matters).

Ultimately, it is jobs in Northern Ireland and the Republic of Ireland that will be lost if a hard Brexit goes through.  In these circumstances, the Irish Government could reserve, exceptionally, the option of blocking a  particular Agreement relating to Brexit if the risks of adopting were judged to be catastrophic compared to some counter-factual scenario. The extent of potential English and Welsh opposition to the negative (as distinct from any claimed positive) consequences of Brexit outside particular demographic and social pockets should not be under-estimated. In others words, the ‘English Question’ is far from resolved and a few years of rough economic experience with stagnant living standards and job losses could dramatically change popular sentiment. Then again, Brexit could be seen as an economic and political success in which case the EU would likely be in very serious trouble. The latter scenario is less likely than the former.

This Monday it is a case of back to the drawing board while it appears that the UK might rush into Brexit negotiations as planned in the next few days. With a temporary unstable political arrangement likely to be put in place the notion of starting talks with the EU seems premature. In any case, we have the German elections to get through this Autumn. A 20-month negotiating horizon looks increasingly problematic given political instability and uncertainty in the UK.

The softest of Brexits is the least that might be considered: including maintenance of the Single European Market and the Customs Union until such time as a sustainable alternative can be put in place. The EU27 has too much to lose politically as well as economically in allowing a crash-out and World Trade Organisation default rules in the spring of 2019. The UK has too much to lose including its own internal cohesion if it presses too hard and too fast. There is no reason why Article 50(3) could not be invoked at midnight on 29th March 2019. Consideration could be given to a transition where the UK joins Iceland, Liechtenstein, Norway, and Switzerland as part of the European Free Trade Area (EFTA). Just as EFTA was a ladder to EU membership for some States it could be a reverse ladder for an exiting Member State.

Given the importance of all-island trade (let alone East-West trade between the Republic of Ireland and Great Britain which is far more significant in scale and impact than that of North-South) and the maintenance of political stability on the whole island of Ireland, there is no reason why the Brexit transition should be rushed. A transition of 10 years could be envisaged in which many existing provisions and entitlements are secured for citizens on the island of Ireland and after which people could be afforded the opportunity to make up their own minds on where to go assuming – that is – that the UK still would want to leave the EU. By that stage, many of the 20-30 something-year-olds who defied authoritative and respectable political analysis in June 2017 will become 30-40-year-olds to be joined by a new cohort of 20-30-year-olds possibly even more disruptive of the existing order than the previous one.

Life is based on many assumptions and uncertainties. It is important to remain calm and focussed.

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