Wednesday, August 28, 2019

Ireland's transactional membership of the European Union

The Treaty of Accession 1972 was the international agreement which provided for the accession of Denmark, Ireland, Norway and the United Kingdom to the European Communities. Norway did not ratify the treaty after it was rejected in a referendum held in September 1972.
Here Jack Lynch, taoiseach/ prime minister, signs for Ireland. Ireland was the poorest country in Western Europe in 1972 with a GDP per capita at 50% of new EEC member Denmark, which was the richest. The 3 new members formally joined on January 1, 1973.
When Ireland joined the European Economic Community in 1973, the Iron Curtain hemmed in millions in the vast prison that was the Soviet Union and its satellite states while military juntas ruled Spain, Portugal and Greece. By any measure, the enlargement to 28 countries and the development of the European Union from the wasteland in the aftermath of World War II, has been a remarkable success of gigantic proportions. Ireland has benefited enormously and compromise is the essence of such a huge project.

Since the UK Brexit vote in June 2016 support in Ireland for European Union membership as reflected in opinion polls has risen to highs of over 90%. However, there has always been a significant transactional aspect to membership including the cute hoorism that has been a perennial factor in domestic politics.

For most of the 45 years of membership of the European Economic Community/European Union since 1973 Ireland was a net cash beneficiary of what was foreign aid, which peaked in the 1990s. The net contribution will rise from just €200m in 2017 to almost €3bn this year — in effect for the first time Ireland will be funding the public subsidies/ welfare that is paid to farmers.

Cute hoorism is a euphemism for political corruption, lack of transparency, a system where the buck stops nowhere or choosing the path of running with the hares and hunting with the hounds when it suits. The cute hoor is essentially Irish slang (not to be confused with ‘a right hoor’ or ‘whore’ — although the Wycliffe series of English translations of the Bible in the 14th century did use ‘hoor’) for the crafty scoundrel that can be a pejorative or a compliment in politics and business.

Before self-rule, big US cities such as New York and Boston were run by the Irish and in 'The Americans: The Democratic Experience' (1973), Daniel Boorstin wrote, "Although the Irish were quickly and spectacularly successful in politics…they did not prove masters of the arts of good government." He added in the third of his American history trilogy, that the Irish politician made himself into "a social service or more precisely a personal service agency."

Times have changed in the home country but in some areas at a glacial pace.

Cute hoorism was reflected in the way Ireland could not only provide American companies a headline corporation tax rate of 12.5% from the early 2000s but also facilitate them in reducing the effective rate to low single digits. Special deals were agreed with companies such as Apple.  

It was a taboo issue that the Irish media steered clear of and every major story or revelation on the issue came from overseas. 

EU at 60 - the longest period of peace in Europe in over 2,000 years

Arrogance of the nouveau riche

In the 1990's Ireland had received cash aid from Europe of over €20bn in then-current values, that boosted roadbuilding and business grants in the early years of the period of the Celtic Tiger. It was also a decade of a significant spike in American foreign direct investment (FDI) and in the period 1999-2002 Ireland became the most profitable country for US multinationals as tax avoidance took off while reported profits of Irish affiliates (including in Irish shell companies) doubled in the period.

In July 2000, Mary Harney, then enterprise minister, in a speech famously put Ireland in the American orbit. It was fine that Germany financed road building and provided EU Common Agricultural Policy (CAP) welfare to Irish farmers at a rate of 6% of annual GDP a few years before.

However, the alchemists thought they had found a formula that would create a permanent prosperity!

 "What really makes Ireland attractive to corporate America is the type of economy we have created here. When Americans come here they find a country that believes in the incentive power of low taxation. They find a country that believes in economic liberalisation. They find a country that believes in essential regulation but not over-regulation. On looking further afield in Europe they find also that not every European country believes in all of these things...Geographically we are closer to Berlin than Boston. Spiritually we are probably a lot closer to Boston than Berlin."

What was unsaid was that membership of the EU in general and the new single market, in particular, were important attractions for US companies.

In January 2001 when the European Central Bank and the European Commission criticised the December 2000 Budget for 2001, Charlie McCreevy, finance minister, accused the EU officials of being jealous of Ireland's success. He said that there have been some "green eyes" cast upon the prosperity of the Irish economy and that the State's success in securing low rates of corporation tax to attract foreign investment was a particular bone of contention for other member-states.

"We have no friends in Brussels regarding our corporate tax regime or in any EU capital and this is creating the background music for what we are hearing now."

The Irish Business and Employers' Confederation (Ibec) called the Commission's criticism "excessive and alarmist" while Peter Cassells, general secretary of the Irish Congress of Trade Unions (Ictu) said there should be more investment in housing, transport and childcare.

Crucially, an MRBI political opinion poll in the Irish Times showed that more than seven out of ten voters believed the 2001 Budget was good for the country.

The poll, the first since the Budget, showed a significant increase in the popularity of the Government and a big rise in satisfaction with the coalition leaders. Some 58% were satisfied with the Government's performance, up 15 points since September 2000.

Facing down the EU paid political dividends!

Months later, when the Organisation for Economic Cooperation and Development (OECD) said Ireland’s social partnership pay framework needed to evolve towards setting general principles and guiding pay determination rather than committing the Government to delivering specific tax cuts, Joe O'Toole, the then-incoming Ictu president, criticised “academic bean counters” and said they speak from Paris “with an air of authority that is utterly undeserved,” when different governments and groups were queuing up to find out how we earned our economic success.

In June 2001 Irish voters rejected the Treaty of Nice which provided for enlargement of the EU.

Le Monde, the French newspaper called Ireland “l'enfant terrible“ while Corriere della Sera of Italy wrote that Ireland was suffering from the syndrome of the selfish “full stomach.“   

In October 2002 with ministerial Euroscepticism muted, a second referendum approved the Treaty of Nice.

In 2005 German unemployment hit a postwar high of over 5m at a 12% jobless rate, above rates in France and Italy. Germany was called the “sick man of Europe.”   

Also in 2005, at the height of the property bubble, Thomas Friedman, a columnist at The New York Times, wrote in a piece from Dublin titled ‘The end of the rainbow,’ “Here's something you probably didn't know: Ireland today is the richest country in the European Union after Luxembourg.”

In the real world neither were.

The allusion to the Leprechaun's pot of gold would be coined as "Leprechaun economics" by Paul Krugman, the New York Times columnist and Nobel laureate, a decade later.

"It wasn't a miracle, we didn't find gold," Harney told Friedman. "It was the right domestic policies and embracing globalization."

There were lots of cheerleaders in business, media, lobby groups and the general public who supported delusionists like Harney. Three years later and months before the beginning of the economic bust, a referendum on the EU's Lisbon Treaty, which proposed to streamline some operating procedures in the Union, was held in June 2008.

In a shameless stunt, the Irish Farmers Association refused to call for a "yes" vote because of the World Trade Organisation's Doha Round of trade talks, despite the years of generosity by the EU to its members. 

Days before the vote the Irish Government issued a statement:

"The taoiseach (prime minister) assured the IFA that he was prepared to use the veto if a deal that is unacceptable to Ireland is put to a vote."

Opponents of the Lisbon Treaty bemoaned the "democratic deficit" in Brussels and lack of accountability but these were features that characterised the political system of clientelism in Ireland, that has been unreformed for decades. 

Irish voters rejected the Lisbon Treaty.

President Stipe Mesic of then aspiring member Croatia, commented sardonically:

"Now that they have used the accession and structural funds, when they have developed enormously, I'm a little surprised that the solidarity is at an end."  

This data are from the Department of Finance. Data published elsewhere can slightly differ. The outcome for 2017 was a net €200m paid. Data are at current prices in the relevant year and Horizon research grant payments are not included. According to European Commission figures, Ireland's net gain from EU budgets has been €44.6bn since 1976.

Solidarity?

On September 30, 2008, Ireland woke up to cataclysmic economic news. The Celtic Tiger fairy tale that a free lunch had been invented had spectacularly blown up overnight when the Government unilaterally guaranteed for 2 years an estimated €400bn (£315bn, $567bn) of liabilities of domestic banks, covering retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt.  

On that fateful Tuesday, Anglo Irish Bank, the buccaneering builders' bank had €73bn in customer deposits including loans of €7bn from Irish Life & Permanent, booked as deposits.

According to the Central Bank, foreign borrowing by Irish domestic banks trebled between 2002 and 2008. "Over the same time horizon, domestic credit to the nonfinancial private sector grew at a similarly rapid pace, rising from 80% of GDP at end-2002, to 177% of GDP by September 2008."

The funding mainly came from British and American entities and little had come from other Euro Area countries. For example, Germany's exposure to Irish domestic banks was below €1bn or 1% by end-2007.

The value of outstanding bonds held by the covered banks was €97bn in September 2008 and €17bn were held by Euro Area residents.

The European Central Bank (ECB) said that the State bank guarantee "triggered an intense negative spiralling effect between the banking sector and the sovereign. The guarantee was introduced by the Irish government without any coordination with European partners." 

In 2009 with the exception of Poland every other member country of the then EU-27 dipped into recession. Several countries had to support banks and Germany bailed out 2 units of its banks based in the Dublin International Financial Services Centre.

The ECB noted that as the September 2010 expiry date of the State bank guarantee drew closer, the Irish banks were increasingly dependent on central bank support: 

"In January 2010 the Euro System was providing approximately €90bn — including Emergency Liquidity Assistance (ELA) — to Irish banks. This support began to accelerate rapidly in the latter part of the third quarter of 2010 and had reached about €140bn (including ELA), or around 85% of Irish GDP, by November 2010. This represented around one fourth of the ECB’s total lending – an unprecedented level of exposure to a country such as Ireland, whose share in the capital of the ECB was less than 1%."

This was solidarity to the ECB.

Last November at a meeting of the Joint Committee on Finance, Public Expenditure and Reform of the Oireachtas (Parliament), Mario Draghi, ECB president, responded to a member: “You want us to provide unlimited, unconditional, eternal liquidity? That’s not consistent with our rules." He also said in response to a charge that the ECB acts on behalf of the big banks, “Please ask them. Or read any German newspaper.”

John McGuinness, the committee chairman and a member of the Fianna Fáil party, said: “The social devastation in Ireland caused by the crash and by the vulture funds was horrific. It is wrong to say that we are experiencing a recovery. We are not.

This was a resort to hypocrisy on a grand scale. Twice in a generation, McGuinness' party had recklessly brought the Irish economy to the brink of ruin.

McGuinness did not lose his job in the most recent conflagration but about 350,000 did while Harney and her fellow arsonists live in superannuated bliss on special public pensions.  

Coverage of occupational pensions in the Irish private sector is 29% compared with about 85% in Denmark.

The blame game

In deciding to join the Euro System the Irish Central Bank would lose its interest rate-setting role and therefore prudent management of the economy would have to rely on budgetary policy.

However in 1999 the year the euro was launched the seeds of disaster were already germinating.

Charlie McCreevy, finance minister, was stoking the emerging property boom with income and capital tax cuts coupled with a massive expansion of property tax incentives.

In April 1999, Maurice O'Connell, the Central Bank governor, issued a letter to financial institutions stating that an analysis of practices had shown that some lenders had no evidence as to how borrowers came by the balance of their money. The governor criticised what he called, the particularly disturbing practice of allowing large amounts of the borrowers after-tax income to go towards paying off a mortgage.

The 1999 annual report noted: "Institutions were...advised that it remains vitally important for them to take a medium-term perspective and to reckon with the potential consequences of rising interest rates and a return to lower rates of growth in the economy. All institutions gave assurances that there would be no slackening in prudential lending standards." 

O'Connell's successor and the financial regulator were utterly incapable of taking control of the runaway credit train.

By the end of the State's bank guarantee in 2010 the majority of bank bonds by value were held by Irish residents with some of them issued by banks to themselves.

The EU/IMF bailout was inevitable.

The ECB has acknowledged that the incomplete Euro System had been a factor in the crisis :

"Undoubtedly, there were also external aggravating factors which contributed to the crisis in Ireland, including the fact that the crisis prevention framework in the Euro Area was neither complete nor sufficiently effective. The reforms to EU governance introduced during the crisis will help to prevent future crises." 

By 2013 Irish banks had repaid €26bn of junior bonds at a value of €14bn or an average 55% haircut. The ECB prohibited the burning of senior bondholders.

See here for details on the State bail-outs of Irish banks.  

The State has received about €5bn from sale of stakes and the remaining stakes in AIB, Bank of Ireland and Permanent TSB are valued at about €9bn.

About half the remaining cost of €40bn was used to bail-out Anglo depositors.

The spike in the national debt mainly relates to non-bank budget deficits in 2008-2017.

The agreement of a rescue package worth €85bn that involved the European Union, the International Monetary Fund, European bilateral lenders, and financing from Ireland’s own cash reserves, was of course one of the historical low points for the State since its founding in 1922.

Fintan O’Toole, the chief political and arts commentator of the Irish Times newspaper, called the deal “the longest ransom note in history” and in an opinion piece titled 'Abysmal deal ransoms us and disgraces Europe,' he invoked the post-World War 1's vengeful Treaty of Versailles. See here.

The rescue package was wrongly seen as a bail-out of German and French banks but as stated above, they had no significant exposure to Irish domestic banks. There was a clamour for burden-sharing, debt default and burning bank bondholders.

There were also calls to quit the euro led by David McWilliams, the economics commentator. A 40% devaluation of a new punt against the euro was argued as a potential boost to exports but when most Irish trade was through multinational supply chains,  it would not have offset the chaos that would follow the introduction of a new currency. Besides about 400,000 people on tracker mortgages tied to low ECB rates would have faced spikes in interest rates.

The Blame Game and its Irish connections
In 2007 59% of Irish in a Eurobarometer poll wanted to be called Irish only, not Irish and European; 63% of Brits wanted to be called British only.

Irish only or Irish and European?

The Eurobarometer of public opinion that has face to face interviews with more than 1,000 Irish people, in the Autumn of 2007, asked "In the near future do you see yourself as Irish only, Irish and European, European and Irish, or European only?" Taking ‘Irish only’ as the crucial indicator, Figure 10 shows Ireland occupying quite an extreme position on this dimension. Despite 74% of the Irish polled saying EU membership was a good thing, 59% rejected the proffered degrees of European identity and opted for an exclusive Irish identity, second in frequency in this respect only to Britain (63%); 46% said they had little or no sense of attachment to the EU while only 6% felt this way about attachment to Ireland.

Eurobarometer commented after the rejection of the Lisbon Treaty referendum:

"Taken together, these two measures of identity suggest that running an integrationist referendum in a political culture in which almost two-thirds of the electorate feel themselves to belong exclusively to a certain national identity (in this case Irish) and less than half of people feel an attachment to the EU was never going to be a walkover."

In November/December 2012 the survey found that 65% considered themselves Irish only and 25% viewed themselves as Irish and European. In Autumn 2014 the rates were 47%/48% and in the Spring of 2018 the rates were 37%/59%.

Even though 85% saw membership of the EU as a benefit to Ireland in the Spring of 2018, 18% felt very attached to the EU; 45% fairly attached; 29% were not very attached; 7% were not at all attached and 1% didn't know.  The UK rates were 11%; 33%; 31%; 21% and 3% didn't know. 

In recent times Eurobarometer has introduced this statement/ question "You feel you are a citizen of the EU?" 

In both Autumn 2018 and Spring 2019 (first results) the Irish level was 85%.

Yes definitely 43%; Yes to some extent 42%; No not really 12% and not definitely 3%.

"Yes to some extent" is a lukewarm response. 

Conclusions

  • There would have been an economic fallout from the Great Recession but the severity in Ireland was the overwhelming responsibility of local policymakers and their many cheerleaders in the establishment and elsewhere including the media;
  • As noted above, Ireland joined the Euro System as a founding member in 1998 (launch was in 1999) but its government wasn't prepared for prudent fiscal management — when a low ECB rate of 2%, for example, helped a struggling German economy, Ireland should have taken some counter-cyclical measures during the property bubble;
  • On burden-sharing/ debt forgiveness, it has been estimated that if Euro Area member countries had forgiven a quarter of the public debts of France, Spain, Italy Portugal, Ireland and Greece it would have resulted in a 30% spike in the debt/GDP ratio of the forgiving countries at a cost of €1.2tn;
  • Germany's gross public debt would have risen to 110% from 81% in 2012 and 64% in 2007;
  • As many Irish bemoaned the apparent lack of solidarity from the EU, cute hoorism was revealed in 2013/2014, of special tax deals given by Ireland to Apple (initially denied by government ministers) and Apple's use of a "stateless" Irish shell company Apple Sales International to book in its Irish entity products like iPhones, Macs, and iPads, sold throughout Europe, the Middle East, Africa, and India
  • In fiscal 2012, Apple had a 2% foreign tax rate thanks to Ireland. Ireland preferred to have the OECD/G-20 rather than the EU handle corporate taxation reform as it hoped for deadlock among the big advanced and emerging economies. However, significant reform at a global level will likely be agreed in 2020;
  • Citizens of the corporate tax havens identified by the European Parliament, the Netherlands, Ireland, Luxembourg, Malta and Cyprus, may think that stealing the tax base of big member countries isn't a big deal but when a purchase of a Microsoft product in Athens is booked as a sale in Dublin, it should be clear that poorer countries are also impacted. Last March the EU Parliament, adopted by 505 votes in favour, 63 against, and 87 abstentions, a report on financial crimes, tax evasion, and tax avoidance. The  European Parliament said it "Deplores the fact that some member states confiscate the tax base of other member states by attracting profits generated elsewhere, thereby allowing companies to artificially lower their tax base; points out that this practice not only harms the principle of EU solidarity but also gives rise to a redistribution of wealth towards MNEs (multinational enterprises) and their shareholders at the expense of EU citizens; supports the important work by academics and journalists who are helping to shed light on these practices;
  • In 2015 Fintan O'Toole declared in the Guardian that the postwar [idea of “Europe”] was dead with no "compassion, solidarity and security." In 2015, around 890,000 asylum seekers came to Germany — the euro crisis and migration triggered the birth of the Alternative for Germany (German: Alternative für Deutschland, AfD) which has been the first far-right party to sit in the Bundestag since the formation of the Federal Republic of Germany in 1949;
  • Also in 2015, David McWilliams wrote in The Sunday Post newspaper 'British prosperity will drive our recovery': "We are an Anglo-American economy with a Franco-German currency grafted onto us...All told, Britain is well placed for the years ahead. For this we should be grateful because – despite the rhetoric of 1916 and all that stuff – our two economies are still profoundly linked. We forget that at our peril";
  • Foreign language proficiency has increased in Ireland in recent times (mainly because of migration) but from a low base. However, indigenous exporters could only sell a paltry €5bn to the 340m Euro Area market in 2018 — about 60% of such exports goes to 4 so-called Anglo-Saxon countries. The Irish culture remains mainly tied to the UK and US;
  • Despite a Brexit-inspired spike of 43% who say they are strongly attached to the EU, it is government policy to continue running with the hares and hunting with the hounds! However, reform of international business taxation may force Ireland to aim higher than being a low innovation entrepôt for Americans firms.