February 4, 2016
Why the next government, whoever that is, is on a collision course with a very new, different and extremely fragile EUPosted in Irish Independent · 130 comments ·
In global economics and finance there is a phenomenon called a “super cycle”. This is a large structural shift in the world economy that can go on for a long time. Unlike normal business cycles, which last approximately seven or eight years, super cycles can last decades. A good example of these super cycles is what is happening in world markets right now.
The emergence of China in the 1990s as an economic powerhouse is one super cycle because it is a one-off event that prompted a shift in global production from West to East. China’s ferocious demand for raw materials drove up the prices of commodities all over the world, enriching countries like Russia, Brazil and Chile that supply raw material to China.
This super cycle has now come to an end and the collapse in commodity prices from oil to copper is the result of the end of the super cycle, which has been signaled by China’s economy – eventually after 35 years of growth – slowing down. It’s not likely that the world will experience such a huge shift again for another generation.
In politics there are also super cycles. These are once-in-a-generation events that dictate the pace and direction of politics and policy. We are at the end of two major super cycles right now and our new government, whoever that is, will have to deal with the fallout that will have huge consequences for Ireland.
The first super cycle is the ending of the last 30 years of EU expansion and integration. This project is now fraying at the seams. As the EU comes under threat both from the migrant crisis and Brexit, the natural reaction of the Eurocrats will be to lurch for deeper integration. They always do this.
This reaction will involve more pooling of sovereignty and this means that the ongoing battle between Brussels and Apple over Ireland’s tax policies is likely to become a red line issue for the next government. These moves will bring an end to the other 25-year, super cycle whereby Ireland managed to hold onto its corporate tax polices in the face of further European integration. This is ending now.
During the course of the next Dáil, the relationship between Ireland and Europe is likely to change profoundly from a geo-political and a financial perspective.
Let’s examine first the European political super cycle, which began in 1989 and is now ending. Starting with the fall of the Berlin Wall in 1989, the EU has been in expansion mode. In 1990, we had German unification, followed by the single market in 1992, the EU’s drive to the East in the mid- to late-1990s, the accession of the central European states, the adoption of the euro and, ultimately, the Schengen Agreement allowing for the free movement of people within the EU’s borders.
This super cycle began to fracture in 2008/9 following the collapse of the peripheral banking system, austerity, bailouts and the euro crisis.
By pitting creditor nations against debtor nations, the euro crisis left the EU in the bizarre situation where preserving the euro came at the cost of weakening the EU itself. Remember, the euro was supposed to strengthen the EU.
Successive financial calamities have undermined the unity of the EU. However, these were nothing compared to the combination of the migrant crisis in 2015 and a Brexit vote in 2016.
Germany is at loggerheads with its – up until now – staunch allies in central Europe over the migrant issue. Poland, Hungary and Slovakia are in open revolt against Berlin. Germany wants the rest of the EU countries to take a proportional share of new migrants.
The central Europeans have refused. They see the migrants as a problem that Germany has brought upon itself by opening its borders.
Meanwhile, Brussels is hectoring Greece, a devastated country, on the frontline of the migrant crisis, to process migrants properly. Greece is saying it doesn’t have the resources because it is in a severe EU bailout programme.
The EU has responded by threatening to remove Greece from Schengen. At the same time, Poland is threatening to close its border to migrants, thus tearing up Schengen.
Over in Copenhagen, the government has introduced a “jewellery tax” for migrants who want to come to Denmark. This is a tax on migrants’ valuables in order to cover the costs of their potential deportation if they do not qualify as proper refugees.
The Danes are worried that as the transit nation between Germany and Sweden, Denmark will become a holding centre for migrants – going both north and those who have been kicked out of Sweden, returning south.
On top of all this chaos, the possibility of Brexit seems like small beer.
But yesterday the EU published the bones of an agreement in an attempt to keep the UK in the EU. It contains an understanding that the UK will not have to pay social welfare benefits to East European migrants for the first four years after they arrive in Britain.
This is not going down well in the capital cities east of the Elbe. Unfortunately for the EU, it has to get 28 member states to agree on the UK’s special status. This won’t be easy and already the Eurosceptics in London are suggesting that the special deal between the UK and the EU is a cop-out.
The EU without Britain is a much more integrated, continental EU. Ireland will lose its major economic ally and any new continental EU won’t tolerate one member state going all Anglo/American with low corporation taxes.
If you want to see what the future looks like, examine what is happening at the moment between the EU and Apple. From an Irish perspective you couldn’t make this story up. The EU wants Apple to pay the Ireland exchequer more money and Ireland is actively arguing against this! We – a county with a budget deficit – want Apple to pay us less, not more, money. Is this a first?
The stakes are huge. If the EU ruling goes against Apple, our government could be “forced” to collect between about $8bn and $19bn. Yes you read right: “forced” to collect!
The EU is saying that preferential tax deals are illegal state aids, which give the company an unfair advantage over their rivals.
Apple is worried. Why else would Apple’s CEO Tim Cook make a dash to Brussels two weeks ago? The EU wants multinationals to undertake “country-by-country reporting” where they’d have to make public their revenues, profits and taxes paid in each country where they operate.
This wouldn’t be good news for us at all because obviously our domestic market is tiny in comparison to the declared profits of multinationals operating here.
It’s not hard to see the world we know changing in front of us. The choices before the new government are stark, the issues are complex and the solutions not obvious.
However, one thing is clear: putting our heads in the sand in the hope of carrying on as before is not an option.