"May's deal will leave NI in a damaging mode of dependency, says economist"

Description

Belfast Telegraph article 7 December 2018 based on my presentation to the Better Belfast business breakfast on the same day- consideration of the draft Withdrawal Agreement, Norway plus and Canada plus.

Subject

The full text of the press release on which the Bel. Tel. article based

 

Release: Friday 7 December 2018 00.01am

 

“Better Belfast” and Brexit

Speech to Better Belfast business breakfast, Grand Central Hotel, Belfast 7.30am Friday 7 December

Dr Esmond Birnie, Senior Economist at the Ulster University Business School said;

““Thank you”

 

That this Group exists is very welcome. 4 reasons for that:

 

• The aim of a “Better Belfast” is a good one.

• When business people meet together the outcome usually helps the public good.

• An active regional government is missing so any civic society thinking on economic question is a helpful partial compensation.

• The potential to develop Belfast’s city region economy.

 

Before speaking about Brexit itself, some relevant points about the economic context

 

Undoubtedly, there are good things happening in the economy at the moment- employment at a record high, unemployment back to 1970s rates, Belfast’s must visit status.

 

However, my realistic emphasis it is not just a matter of the glass is half empty rather than half. There are deeply rooted weaknesses:

 

• Productivity (that is output per person in work) has remained substantially less than the GB level for a century now.

   

• The average worker in countries such as America, Germany and France produces 60% more per hour worked than his/her NI counterpart.

 

This context is relevant to Brexit in two ways:

 

• The economy was in trouble before the June 2016 Brexit vote. It was slowing down. Since 2007 growth has been below the UK average and since 2012 well below that in the Republic of Ireland.

   

• Brexit is not our biggest economic problem- the low productivity and the consequent lack of competitiveness is.

 

The Draft Withdrawal Agreement (DWA)

 

Advantages

There are a number of reasons why the business community, broadly defined, seems willing to accept the DWA, even if viewed as the least worst option:

 

• It provides comprehensive legal cover for the process of leaving.

   

• It provides for the “extra time”, the transition period 30 March 2019- 31 December 2020.

   

• In the short term NI and GB remain, in effect, in both the EU’s Customs Union and Single Market. In the longer term NI remains in effect in both.

 

In summary, much of the status quo is retained- along with the stability and continuity that brings. So, at least from a short term point of view, the DWA appears advantageous.

 

Disadvantages

However, a notable economist of the mid 20^th century (John Maynard Keynes) once said the job of an economist was to engage in “ruthless truth telling” however unpalatable.

 

There are substantial disadvantages inherent in the DWA, some of these will come more apparent over time if it is implemented:

 

• UK’s substantial net contribution into the EU Budget continues- £39bn in the transition period.

   

• Could the UK (or even GB) ever leave the EU’s Customs Union? Certainly not unilaterally. Unless UK can offer variations in its external tariffs hard to see how it would be able to strike free trade agreements with the wider world.

   

• IF, big if, the UK did get EU permission to exit the Customs Union the likelihood is that NI would be left behind unless the EU did judge some other way had been found to preserve the frictionless Irish Border. The prospect of a tariff barrier between Belfast and Liverpool is a serious one.

   

• The DWA does provide for regulatory checks  on goods coming from GB to NI (to ensure maintenance of the standards of the EU’s Single Market).

   

• I’d say two things about that: (1.) that flow is worth about £11bn (by comparison NI’s imports from the RoI are worth about £2bn and those from the rest of the EU £2bn, and (2.) checks could lead to higher costs then higher consumer prices.

   

• There is a broader point about the implications of NI becoming a rule-taker from the EU (rules and regulations which would not be subject to any accountability). I have been considering the comparative competitiveness of the economy for about 32 years now.

   

• I believe that since the 1970s the NI economy has been in a damaging mode of passivity and dependency- a mindset developed of hoping that outsiders would make the hard decisions and provide more hard cash. Becoming a special EU zone/protectorate for Single Market purposes might only reinforce that chronic weakness.

 

Economic Forecasts and Brexit

I’d rather not speak about these but feel I must!

 

Two general points:

1. It can be useful to think in terms of scenarios- if certain things happen than other things may follow. If you are presenting scenarios need to be clear about that (was a lot of confusion about the Bank of England’s exercise last Wednesday).

2. What you assume and put into the economic model crucially effects what comes out of the model.

 

Last week, rather like the old compliant about buses, two sets of forecasts arrived at once- HM Treasury and Bank of England.

 

How do I respond to these:

First, do I believe their detailed forecasts? NO. Largely because the assumptions made about how far trade might decline are extreme and implausible.

Secondly, I don’t believe that any form of Brexit is likely to lead to a 9% “hit” to UK GDP in 15 years time.

Thirdly, I accept it is plausible that there will be some reduction in GDP and GDP per head in 15 years but that “reduction” is more likely to be in the range of a couple of % points (and, remember, will be reduction off a growing level of output, NOT reduction compared to our current 2018 level).

 

No Deal

What can I say about that?

Clearly it is still very uncertain whether that is what we might end up with and also uncertainty re. the “content” of No Deal. I do understand that investors don’t like uncertainty. That said, I think- for good or bad, the Dominic Grieve Amendment in Parliament makes No Deal now less likely.

In any case, it would not be as catastrophic as in the Bank of England speculations. Much would depend on how many holding agreements could be made.

 

Norway or Norway plus

Is this a way out? From a process point of view, it at least gives the House of Commons something to vote for. Assuming they do indeed vote down the DWA. Norway, strictly have to be Norway plus, would as in the DWA retain Single Market and Customs Union membership.

It has the advantage of an on the shelf legal structure- become part of the EFTA (although joining would not be entirely straightforward).

I think it would allow a tidier relationship with say the European Court, the CAP and EU fisheries policy (i.e. it would be more obvious that the UK had left the remit of all of these). For the time being the Border remains frictionless.

Amongst many downsides, because of membership of the Customs Union the UK would still be shackled in terms of ability to negotiate trade deals.

 

Could Norway plus over time become Canada plus, personally, I would hope so. I’m talking here about having a very comprehensive free trade agreement between the UK and the EU together with the combination of technology, forbearance and remote checks which would avoid need for a Backstop re. the Border. It might have been better if we had aimed straight for Canada plus, but such is politics.

 

Whatever happens, challenging times, I wish you well.”

Ends

About Ulster University

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For more information please visit ulster.ac.uk or follow us on Twitter @UlsterUniEPC For further information please contact:

Dr Esmond Birnie, Senior Economist, Ulster University Business School, 07703 184459, [email protected]