Before 1916, nationalists in Ireland had sought to craft a better future for themselves within the United Kingdom (of Great Britain and Ireland, as it was then). After 1916, independence was the goal. And, after independence was secured a century ago, Ireland consistently availed of every opportunity to further loosen its bonds with Britain.
The 1937 constitution ended the role of the Crown in Irish public life. When Britain faced mortal danger in World War 2, Ireland remained studiously neutral. In 1949, the Republic was declared. In 1973, the state joined the European Economic Community (EEC), the forerunner of the European Union (EU). In 1979, Ireland sacrificed the 1:1 fixed currency rate between the punt and sterling on the altar of membership of the European Exchange Rate Mechanism, the forerunner of the euro. In 1999, Ireland went and joined the single currency, while Britain retained sterling. And, at the end of 2019, the UK departed the European Union while Ireland remained a member.
Ireland’s continuing relationship with the EU can only be properly understood in the context of a century of history that has seen Irish governments, of whatever political hue, consistently opt to reduce our connections with the UK. So, now that Britain has left the EU and formally concluded its Withdrawal Agreement, what does the future hold for Ireland, as an EU member?
A Different Type of European Union
For starters, the EU is likely to be a different entity and to evolve in a different way now that the UK has departed. The founding six members of the EEC had each suffered grievously during World War 2 and wanted to ensure that nothing similar could ever happen again. They saw the new body as something transformational. That’s what the commitment to “ever closer union” signals. They didn’t merely set up a community to pool coal and steel resources. They set up that community as the first step on a long road that would only end with a European federal state. That Germany’s eventual destination after its original components established a customs union in 1834.
The UK’s attitude to the EU was essentially transactional rather than transformational. In response to its own decline from being one of the big winners of World War 2 to becoming an economic basket case by the early 1970s, it belatedly joined “the common market”. It was only able to do this after the departure from power by Charles de Gaulle.
As French president, de Gaulle had blocked Britain’s 1962 application for membership arguing that the UK “is maritime; it is bound by trade, by its markets, to the most diverse array of countries – and often the most far-flung”. He added “It has a lot of industry and commerce but very little agriculture – and its habits and traditions are very different.” Mrs Thatcher underlined Britain’s transactional approach when she proclaimed “we want our money back” in the mid-1980s. As he struggled to win the referendum to keep Britain within the EU, David Cameron secured agreement to exempt the UK from aspiring to “an ever closer union among the peoples of Europe”.
Ireland has never really debated whether she sees her EU membership as transformational. We’ve certainly enjoyed its transactional aspects, no more than when Albert Reynolds returned from a 1992 summit in Edinburgh, having been promised £8 billion in structural funds. Now, rather than hiding behind British intransigence to protect us from hard political choices, we may have to rely on continental political exhaustion to save us from such dilemmas.
Brexit and Northern Ireland
The most extraordinary aspect of Brexit is how it has ended up weakening Northern Ireland’s position within the United Kingdom. The North’s hybrid status whereby it remains part of the UK but is effectively within the EU’s customs area requires checks of goods passing from Britain to Northern Ireland. While this status may boost the North’s economic prospects, it does so by weakening its position within the Union. Furthermore, a majority of people in the six counties voted against Brexit: the quickest way for them to reverse it would be to vote to join the Republic.
The lack of coherent responses to the increased likelihood of a United Ireland is striking. At an economic level, nobody appears to have any idea of how a 32-county state would replace the, roughly £10 billion, annual British subvention to Northern Ireland. At a political level, the nationalist parties in the North may talk the language of reconciliation but expose themselves as practitioners of cultural apartheid when they refuse to take part in ceremonies marking the founding of Northern Ireland, something as dear to the hearts of unionists as 1916 is to nationalists.
In her December 2019 mission letter to Margarethe Vestager (Executive Vice President of the European Commission for A Europe Fit for the Digital Age), Ursula von der Leyen (the Commission President) wrote “You will coordinate the work on digital taxation to find a consensus at international level by the end of 2020 or to propose a fair European tax.” What might a “fair European tax” look like in 2021 and what impact will it have on us? It is hard to see that Ireland will be a net winner from such a development.
Growing financial strains in the common currency area
While the single currency gave the advantage of much greater foreign exchange rate stability, it did so at the expense of importing greater instability into our domestic economy, courtesy of an interest rate likely to be inappropriate to our national circumstances. A second grave fault is that, by locking their currencies together in the euro, countries lose flexibility to devalue their currency to stimulate activity when the economy is doing poorly and revalue when the economy may be overheating.
One consequent area of instability is the rising Target2 balances at the European Central Bank (ECB). These record the financial balances between national central banks and the ECB. Countries suffering deposit outflows from retail banks, such as Spain and Italy, owe money to the ECB. That must be funded by countries with surplus cash, such as Germany and, increasingly, Ireland. The German central bank is currently owed more than €1 trillion, equivalent to more than €13,000 for every man, woman and child living there. Ireland is owed €45.4bn, equivalent to about €9,000 for each of us. Meanwhile, the Italians and Spaniards are both borrowing €9,000-10,000 per person. These balances — or imbalances — have been steadily rising over the years.
We can see a race between economic forces, tending towards disintegration, and political power pushing for integration. A crisis will be needed to force a decision as to the eventual destination.
Author: Cormac Lucey is a chartered accountant based in Dublin who teaches finance in Trinity College Dublin and the Irish Management Institute. He is also a frequent media commentator who contributes a weekly economics column to The Sunday Times (Ireland edition). He previously worked in industry, corporate finance and in government as a ministerial advisor.