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April 14, 2005



I think the first question in response to this is, why would we leave the EU? What would be the motivation for this?

With 10 new member states, the EU looks a far better proposition than having to garner trade as an isolationist on the edge of Europe.

Anyway, we can't just do a smash and grab.

Frank McGahon

why would we leave the EU? What would be the motivation for this?

I suppose creeping federalisation for starters. Then you also have "tax harmonisation". Plus, it's worthwhile reconsidering membership of any organisation every now and then to see if it confers more benefits than costs rather than just let inertia prevail. My contention is that the real benefits currently conferred by EU membership would still be available even if we left. Let's say Ireland did leave, there is no particular benefit to the EU to erect barriers to trade with Ireland so I don't see why the current trading/free movement arrangements can't continue, as they do with non-EU Norway and assorted other territories. The thing is, it's not either or: Integrationist versus Isolationism. You can be opposed to both and leaving the EU doesn't automatically make a country isolationist: I don't argue for some autarkical isolationism, far from it, I am in favour of free trade and free movement. As it happens, so long as the EU gets wider and not deeper - and my hope would be that the "widening" makes the "deepening" ever more difficult and that the constitution will be a dead duck soon enough - it may well revert to the simple trading bloc and it will all be fine but it's still worth considering the question.


My understanding of the EU constitution is that there will be a laissez-faire approach to areas like taxation, national defense and immigration policy. Tax harmonisation is not on the agenda and it never can be. Differing economic climates will dictate that governments can adjust tax rates accordingly and independently from other states.

If Ireland did leave the EU, of course there is nothing to suggest that they'd erect trade barriers. However, not being on the inside would have to hamper trade relationships with existing members.

It'll never happen. Irish political parties are smitten with the EU (except the Greens and Labour on some issues).

Frank McGahon

My understanding of the EU constitution is that there will be a laissez-faire approach to areas like taxation, national defense and immigration policy. Tax harmonisation is not on the agenda and it never can be.

Your confidence is unjustified. This is a vast, camel-is-a-horse-designed-by-a-committee type of document which means to bind together all previous treaties and satisfy various conflicting constituencies. You can be sure that tax harmonisation will rear its head again. France is quite blatant about the "protection" they have secured for the Franco-German "social model" from "ultra-liberalism" and Germany cherishes its high corporation tax rates. What they should do is cut corporation tax but what they will do is try to crush low tax rates in smaller countries like Ireland and Slovakia.

However, not being on the inside would have to hamper trade relationships with existing members.

I don't see why this is so. The EU manages to trade just fine with US, Norway, India without any of those countries "being on the inside"

It'll never happen. Irish political parties are smitten with the EU

That we can agree upon!

Jimmy Sands

I don't think it's quite as clear cut as this. Ireland would indeed retain access to the single market, but would surrender any influence as to the terms on which it did so. This is Norway's trade off. Inevitably counties benefit from free trade with the EU essentially on the EU's terms. This may not be insignificant where our interests do not coincide with those of most EU members (financial services for example). Switzerland has had to bow to EU arm twisting in this area already as the price of access.

Abiola Lapite

"But what about all the EU did for us?, If it wasn't for EU structural funds, we wouldn't have such great roads, bla, bla bla etc."

This is just the inverse of the "sunk costs" fallacy.

"But, you can't trust Irish governments to be fiscally prudent. Membership of the EU has acted as a kind of beneficial fiscal straightjacket"

How long is this likely to last, now that the French and the Germans are busy neutering the Growth and Stability Pact? In any case, EU membership hasn't stopped Greece from spending its way into serious trouble.

Frank McGahon

Fair enough, I take your point and I do remember reading about this in Norway's case, although if you balance it out, given the relative lack of influence Ireland, as a small country and one which bucks the Franco-German consensus on the "social model", has inside the EU anyway, being outside still might not mean surrendering all that much.

Frank McGahon

How long is this likely to last, now that the French and the Germans are busy neutering the Growth and Stability Pact?

Oh, I'd argue that it doesn't "last" at all any more. It's at least a decade since that "straightjacket" has been of any benefit to Ireland.


What are the chances of any of the heavy hitters in the EU going for a truly federal model that leaves certain powers that don't bear on EU-internal trade and foreign policy, to the member nations?

Frank McGahon

In Europe "federalisation" means closer centralisation. It is a strange situation because those who oppose a "United States of Europe" and those who are in favour of it don't seem to realise that in many areas US states have more autonomy than EU. Conversely, many Americans probably assume a closer integration that currently obtains. This "truly federal" model you have in mind doesn't differ all that much from the status quo, except for the fact that regulating "internal" trade is considered to be a matter for the EU.

Incidentally, most (non-xenophobic) "eurosceptics" are opposed to the EU as it is now but would quite happily accept the earlier version of the EU - a glorified trading agreement along the lines of NAFTA.


OK. Thanks for that explanation. It confirmed what i thought I knew.

Odd how one of the truly thorny problems. the common language, is sorting out without any real discussion.

Your point about misnderstanding of the degree of autonomy among the states is true. You often see flat statements of how things are or are not in the US that obviously assume absolute homogeneity.

Even in the US a lot of trade issues are unsettled. California's auto emissions standards were an example of an internal policy that was thought to be a constraint of interstate trade.

Conor Griffin

Despite serious misgivings about the EU "project", the question of leaving the EU, given the position we currently occupy, does raise some problems.

Even assuming we can retain free trade links, the key issue would be the short and long term impact of Ireland withdrawing from the single currency eurozone.

Leaving the eurozone has never been done before so the outcome is not known with any certainty. However, despite the current healthy state of the Irish economy, I would bet on the fixed income and FX markets savaging the (newly reconstituted) Irish punt. This would lead to a devaluation and it is also likely that the credit rating agencies would downgrade the status of our sovereign debt from AAA (only achieved since we joined the eurozone due to the level of our debt ratios but mostly due to the belief that the ECB will control eurozone inflation at all costs).

This would happen given the agencies and the markets views on the long term stability of our inflation rates and debt ratios. This is where they take a view on the likely management of the economy by the political parties (which includes the strong likelihood of some of Labour, Greens or Sinn Fein being in some future coalition governement) and its impact on inflation and, inter alia, interest rates.

Immediately on exit from the eurozone Ireland would need to raise interest rates (as the Central Bank had indicated it would do if it still had control of this instrument) to fend off inflation as the currency devalues.

The nightmare scenario is a house price crash as a result of the hike in interest rates and general fear about the future prospects for the economy. If such a high interest rate induced crash was combined with any form of employment weakening (say, in the construction sector or due to a decline in consumer spending), the financial sector would be in real trouble as borrowers defaulted on debt obligations on car loans, personal loans, mortgages, commercial investment property, buy-to-let etc.

A devaluation of the punt would also feed into increased imported inflation (offset partially by keener export prices), further fuelling the cycle.

I am not saying that Ireland would not get over this and that it could not do a good job of running the economy in a stable and prudent manner. However, the initial shock upon the abandonment of the euro could be something of a carnage that would in itself trip an economic crisis on a number of fronts.

Frank McGahon

Point taken, but I have two observations:

1) Assuming that it would be a boon to remain in the Euro (I'm not so sure about this, see below) It is theoretically possible (though probably politically unlikely) for Ireland to remain in the Euro outside of the EU. Failing that, it would be possible for the newly reconstituted punt to "track" the Euro.

2) My feeling about ECB policy and Ireland is that it just so happens to be (just about) consistent with Ireland's economy now, but this is in a broken clock sort of way. I don't think it's reasonable to assume that this will always be the case. Ireland's interest rates could do with being a little bit higher considering the housing boom/bubble but as higher interest rates would be disastrous for Fance and Germany, they will stay lower. The one-size-fits-all policy is predicated on closer integration and little variation between the eurozone economies. I don't think this is realistic absent closer political integration, which itself is unlikely absent some kind of emergent European-identified nationalism superceding current national identities.

Conor Griffin

To carry the analogy - I agree that the broken clock always being right at least once (not twice) per business cycle just happens to be beneficial for us at the moment. Despite the asset price inflation (house prices) due to EU interest rates being below the rate that an Irish Central Bank would have chosen over the past half decade, our economy is working well.

However, given the fact you point out about the unlikeliness of a harmonised economic bloc sharing the same business cycle, we could as well be on the other side of the interest rate misalignment in years to come.

The depressed German and French economies have resulted in low euro interest rates. However, if events (abandonment of the stability pact, French / German / Italian budget deficits, high inflation in the accession states etc.) lead to a situation where the ECB really hikes up interest rates, Ireland could suffer if our post-boom economy found itself in a lull at that time. Then the pain would really hit and anti-EU feeling would go through the roof.

Its the old Irish cliche of direction-giving: "you'd have been better off not starting from here". Although I think the euro will suffer if fiscal and taxation policy is harmonised (and I most certainly do not want this), the decision to leave it now that we are in it could really have some economically shocking consequences.

PS: I don't think we could track the euro exchange rate once we reverted to the punt (1992-93 currency crisis for both the UK and Ireland springs to mind. 200% overnight interest rates, pirahna-like FX feeding frenzy on individual currencies etc.)

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