October 13, 2002

Underwhelming Yes is best hope

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The main economic debate rests on four immediate issues: trade, tax, investment and immigration. There are at least two medium-term economic factors that may manifest themselves in a few years’ time, not as a direct result of Nice but as a related consequence of the enlargement project.

The central plank of the government’s argument, as Ibec’s posters say, is “Nice equals trade, equals employment”. It suggests that Ireland has enriched itself through trade, that enlargement offers trading opportunities in central Europe and more trade means more jobs.

This appears reasonable and the link between trade and prosperity is irrefutable. Yet there are two problems with the link between the Nice Treaty and trade.

First, Ireland’s free-trade agreements with central Europe will remain in place even if we vote No. Many non-EU countries, such as India, Israel, Russia and Croatia, have free-trade agreements with the central European hopefuls.

Trade is a two-way street and our free-trade agreements with the Poles, Czechs and Hungarians are as much an opportunity for them as for us. A No vote will not change the commercial infrastructure of Europe one iota.

The other weakness in the government’s case is that trade to eastern Europe is minuscule. The average gross domestic product (GDP) per head of the accession countries is about $5,000, as opposed to $30,000 here. It is difficult to see us benefiting dramatically from having open access to the likes of Latvia.

If we are to move up the value-chain supplying the rest of the world with higher value-added and more expensive goods, these markets are much less important than present patterns suggest.

It is easy to see why trade links with Europe were essential when we were a low-cost, peripheral economy which was ideally located as an export hub servicing richer markets. However, today it is clear that, from an Irish perspective, Poland in 2003 is not as attractive a trading partner as Germany in 1973. Thus, the government’s case that Nice will affect the pattern of trade would appear to be overstated.

Another key allegation by the government’s side is that Nice copperfastens our favourable corporate tax stance. Significantly, the state did negotiate a veto of any moves to harmonise taxation. For many business people, this is much more important than the declaration on neutrality.

However, there is a problem here in that almost every other mature economy in Europe wants tax harmonisation. Cynics might argue that over time this “special status” is likely to be eroded, particularly as its maintenance demands at least the acquiescence of other tax regimes.

There is a huge amount of goodwill involved in our partners turning a blind eye to our “beggar thy neighbour” tax policies; in future, goodwill may not be enough even if we do vote Yes.

On balance, there is something in the contention that a Yes vote means we will have more influence in securing future opt-outs. However, the generosity of our increasingly stagnant neighbours is not a very firm basis for concluding that our idiosyncratic tax status is permanent.

Unfortunately, the only way to guarantee the independence of our tax system is to pull out of the EU altogether — that is hardly a runner.

Investment is the third central argument that the government puts forward for a Yes vote. If we vote No, the official line goes, investment will fall. Again, it would appear that this is at best only half right. If trade remains open, and our tax status is not affected, the pull factors for Ireland as a base for American capital remain, whether we vote Yes or No.

However, the push factors drawing capital out of the US are changing by the day. Arguably, with central Europe likely to offer a better, cheaper manufacturing base, the threat to Ireland Inc is significant.

Western Europe is still a key destination for US goods. The question is: where is the best place to locate? Ireland is in the ascendancy today but factors like other countries’ tax rates, the cost of labour, the level of education, demographics and infrastructure will have a greater impact on long-term investment, than whether we are European class swots or not.

There is nothing overwhelmingly persuasive to suggest a Yes to Nice is crucial in determining how much investment we get in the future.

On the other hand, enlargement will cause a rise in immigration, no doubt. All studies show that if you bring down the barriers to travel, people will travel more. Equally, the entire project has a community spirit to it, where travel around the Union is one of the central aspirations. So immigration will rise as long as Irish wages are higher than central European wages and there are jobs here.

This will be good for the economy, but its effects will not be evenly spread across the classes or the country. For example, a huge increase in the number of Latvian carpenters will drive down the cost of construction. This will be good for Irish house-buyers, but bad for Irish carpenters.

Thus immigration will make the economy grow quicker, acting a bit like a tax-cut across the board. But unemployment, or at least a fall in income, will occur in those jobs that central Europeans can do better and cheaper. This is hardly compelling economic stuff.

In the more medium term, two other economic factors will bring themselves to bear. First, much of the positive financial case for enlargement is based on the effect of migration. The argument goes that young Poles, for example, will come here to get jobs and experience, and eventually go home taking their skills with them.

Let’s hope that this process is not too successful, because if much of the talented young labour force leaves central Europe, the economies will be left with older, less skilled people trying to carry them.

Old countries do not grow quickly and, as a result, eastern European countries may not catch up with the west, precisely because their best talent is working in Paris or Dublin.

This has huge implications for the stability of policy. If they do not catch up quickly, the 70 million new EU citizens will become a burden to the rest of us. Money will flow east, ultimately via social welfare payments.

This leads to the second issue: a lasting negative impact on the euro making it weaker than it would otherwise be. Given Ireland’s trade patterns with Britain and the US, a permanently weaker euro implies permanently higher inflation in Ireland than the rest of the Union. Finally, institutional factors will come into play.

The fact that most people who have done business in central Europe have come up against endemic corruption implies that the institutional infrastructure is not yet in place for a wirtschaftswunder. This again argues for medium term sobriety, when forecasting the economic fortunes east of the Oder.

On balance, the government’s economic case just about makes sense. There are no persuasive arguments to suggest that a Yes will be unambiguously positive for our economy. Yet an underwhelming Yes is about the only conclusion one can arrive at, underpinned as it is by a cowardly desire to preserve a reasonably successful status quo. The challenges to our economy are much bigger than Nice, and every issue discussed here will arise with or without a vote on this muddled treaty. On economic grounds, a lukewarm thumbs up to Nice it is, but a thumbs up nonetheless.