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The EU as a transformative economic force

by Frank Schnittger Mon Jan 29th, 2018 at 07:01:27 PM EST

John Fitzgerald is the son of former Taoiseach Garret Fitzgerald and a distinguished economist in his own right. Now semi-retired, he writes the occasional commentary of the performance of the Irish economy. He has an interesting take on the transformative effect of EU membership on national economic performance generally.

The economic crisis that began in 2008 affected EU members in many different ways. One of the most important was a loss of confidence among many citizens in the ability of the EU to improve their living standards.

However, even a cursory examination of the data shows that membership of the EU has helped transform the living standards of a huge number of its people.

Beginning with the 1973 accessions of Ireland, the UK and Denmark, successive waves of EU enlargement have shown similar patterns of impact for members. Initially, significant adjustment costs may have arisen. However. in the long run, access to the EU market has allowed new members to grow rapidly and to gradually catch up with the living standards of existing members.


In Ireland's case, positive impacts of EU membership were delayed by the lost decade of the 1980s, which was brought about by domestic policy failures rather than our EU accession.

However Irish incomes, which had long hovered at about 60 per cent of the EU average, rose rapidly from 1990, and brought us to above the EU15 average by the start of the 2000s. Our membership of the EU was vital in supporting this outcome. Our recovery, following the 2008 economic collapse, leaves us about 10 per cent above average living standards for the EU15.

Spain and Portugal joined in 1985. Even after the difficult years of the Great Recession, Spain's living standard has risen from 70 per cent of the EU15 average on accession, to 90 per cent today. For Portugal, pre-accession incomes of 55 per cent of the EU15 average have risen to 70 per cent today. This represents solid progress, if less spectacular than Ireland's performance.

The Central European countries that joined in 2004 and 2007 have replicated Ireland's convergence. For them, adaptation began as soon as the Berlin Wall fell and progress was apparent before they formally joined.

Twenty five years ago, these countries had a standard of living ranging between 25 per cent (Romania) and 65 per cent (Slovenia) of the EU15. Today their living standards ranges between 45 per cent (Bulgaria) and 85 per cent (Czech Republic) of the average. In terms of the distance travelled, Poland has been the star performer of this group.

For these more recent members, the economic crisis did not derail progress. All of them have improved their position relative to the EU15 since 2007.

Greece is the exception to this picture of accelerated growth and the gradual catching-up with EU living standards after countries join. Failure by successive Greek governments to adapt the economy to benefit from the opportunities that EU membership afforded it has led to lacklustre progress.

While EU structural funds have played a role in this convergence process, it has been rather a walk-on part. For Ireland in the 1990s, the EU structural funds were considered a key national interest. However, research shows that their contribution to the rapid convergence in living standards in the 1990s was quite limited relative to the huge progress actually made.

Probably more valuable than the funding itself was the governance attached. This involved guidelines and advice to government on its investment strategy, and accountability for results, which improved domestic decision-making.

For the Central European economies, a crucial factor in their progress has been their integration into the EU supply chain. For example, the more labour-intensive aspects of car manufacturing have moved from Germany to Poland, Slovakia, and Hungary.

This analysis is interesting because it diverges from the more traditional left wing and nationalist criticisms of EU austerity policies and interference in national decision making. The indirect effects of integration into the EU Single Market seem to outweigh the benefits of direct transfers through structural and social funds.

In the case of Ireland, the benefits of tax competition induced FDI and the effects of progressive internal labour market legislation and dispute resolution mechanisms have also been considerable when compared to the decades prior to EU accession. While there have been costs of transition, the prohibition on state aids have forced many semi-state and previously near monopoly local utilities to become much more efficient and cost competitive.

However, there have also been negatives. The privatisation of the previous state monopoly telecommunications business has resulted in a succession of asset striping commercial makeovers and the underdevelopment of the national broadband infrastructure. If there is anything to be learned from that debacle, it is that a private sector monopoly is much worse than a public sector one, and there are some infrastructural services and public goods - such as public housing provision and waste collection and processing - which are better treated as strategic state infrastructural services that should never be privatised.

John Fitzgerald's dismissal of Greece's failure to improve it's economic position relative to the EU average as being due to domestic policy failures is perhaps also too trite and convenient. Certainly, Greece's fraudulent terms of entry and subsequent failure to challenge local monopolistic enterprises and services to become more efficient and competitive contributed to the problem: But the EU's ruinous interest regime on loans and insistence on fire sale disposal of valuable national assets hardly helps.

Those who despair of the anti-democratic, autocratic, and dictatorial tendencies in eastern European member states now would do well to remember the Irish experience of membership: a transformation from a dirt poor economic and social backwater dominated by a reactionary Catholic Church and a local bourgeoisie intent on protecting it's local semi-monopolistic economic franchises from competition to a much more open, economically successful and socially progressive polity now.

Direct transfers from the EU via structural, regional, cohesion and agricultural funds were important, but far more so where the benefits of economic and social development led by EU directives and foreign, mostly US, multinationals locating in Ireland as a means of accessing the single market. These businesses led the development of an internationally focused and globally literate workforce and management cadres which have also spawned the development of many locally owned businesses.

The "domestic sector" of locally owned businesses still lags the success of the foreign own sector and is still disproportionately dependent on the Irish and UK markets - and thus exposed to Brexit. But that dependence has been reducing all the time and Brexit may well force the greater internationalisation of that sector.

Ireland's economic model of dependence on FDI attracted by low corporate tax rates is also now living on borrowed time. While taxation remains a national competence the departure of our biggest ally from the EU will make it increasingly difficult to maintain that policy. At the very least, 12.5% must become the baseline, as opposed to the maximum tax rate. This, combined with corporate tax reductions in the US and UK will make it increasingly difficult for Ireland to maintain its current share of FDI, even with the departure of the UK. A much greater reliance on domestic innovation and entrepreneurship will be required. For many analysts, this is a greater long term challenge for the Irish economy and polity than Brexit itself.

Brexiteers in the UK have often expressed astonishment at what they see as a slavish Irish commitment to continued EU membership. They clearly have not seen the astonishing transformation of the Irish economy and society in the last 40 years of EU membership, particularly when compared to N. Ireland and the rest of the UK. While not all of this can be ascribed to Ireland's enthusiastic embrace of the EU, it has been the major factor.

For most Irish people, the fact that Ireland is now a net contributor to the EU is a source of pride rather than anger or regret. We are more than happy to see newer, less well off, members benefit from membership as we have done. That does, however, require that they embrace the opportunities that EU membership offers, which includes accepting democratic norms and independent checks and balances on autocratic power.

But we must also be patient. It took us more than a generation to achieve average EU living standards and quality of life, and the reform process is ongoing. Current opinion polls indicate an almost 2:1 majority in favour of liberalising Ireland's prohibition on abortion in the teeth of conservative and Church opposition. And this follows on from the resounding victory of the progressive side in the marriage equality referendum.

Sadly, John Fitzgerald does not extend his analysis to the UK's economic experience of EU membership.  My memories of the UK pre-EU is of an empire in terminal decline, rampant industrial disputes, and "the English disease" of poor investment, productivity and product quality. A de-industrialisation only latterly, partially, (and asymmetrically) off-set by a burgeoning services sector benefiting from access to EU markets. While there has been much focus on the UK's net contribution to the EU budget, little attention has been paid to the role of the EU in transforming the UK economy from the basket case of Europe.

It's easy to pick holes in John Fitzgerald's brief analysis here. He makes no mention of increased regional inequalities in many national economies - for instance in rural Greece, Italy, Spain and Portugal. There is also no analysis of income inequalities growing more generally as part of the globalisation and Europeanisation process. The EU still relies too much of national tax, social services, and income redistribution policies to address these issues, and when that fails - as in the UK - it is the EU itself which is put at risk by populists anxious to deflect the blame from national elites.

If there is a bigger long term lesson to draw from Brexit, it is that social, generational, regional and national inequalities are too big an issue to be left to national polities alone. Aggregate national economic growth can be great, but it is growing inequalities which drive political tensions. The EU needs an EU wide policy and redistribution strategy if growing economic inequalities are not to lead to increasingly fissiparous political tensions within the Union - all too easily deflected by populists unto the EU itself.

Display:
a private sector monopoly is much worse than a public sector one
You don't say...
by Bernard on Mon Jan 29th, 2018 at 07:25:49 PM EST
sadly, neo-liberal discourse is blind to the distinction

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jan 29th, 2018 at 07:34:50 PM EST
[ Parent ]
I thought they get the distinction but think it works the other way round.
by gk (gk (gk quattro due due sette @gmail.com)) on Mon Jan 29th, 2018 at 10:46:55 PM EST
[ Parent ]
Well if you are an owner of a private sector monopoly it can work very well for you...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 30th, 2018 at 12:17:15 AM EST
[ Parent ]
That is what they are paid to think. Public interest is so 20th Century. Neoliberalism rules!


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 30th, 2018 at 04:38:24 AM EST
[ Parent ]
In the USA the idea that private sector monopolies are much worse than public monopolies is tantamount to heresy. Only a socialist or communist would say that.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 30th, 2018 at 04:46:39 AM EST
[ Parent ]
A private sector monopoly is impossible anyway, because the magic of the market will make sure it's always disrupted by innovative startups. So, since they are theoretically impossible, it's best to avoid looking for them, lest one's eyes be traumatized by a vision of an Eldritch Horror.
by Zwackus on Wed Jan 31st, 2018 at 01:51:55 AM EST
[ Parent ]
The Unobservable Foot will always kick the monopolists into the dust bins of history.  


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jan 31st, 2018 at 04:14:33 AM EST
[ Parent ]
Wot! Kick Google and Facebook into the internet memory cache? You would need the invisible hand, unobservable foot, and lots of fat-fingered friends and Russian bots to achieve such a feat...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 31st, 2018 at 12:16:29 PM EST
[ Parent ]
Overall I'd argue that this is the main benefit of the EU from anywhere on the (sane) political spectrum: it enforces and/or encourages transparency and standardization of government policy, reducing the power of elites to keep a less beneficial (for the whole population) status quo.

Though Fitzgerald is being a bit misleading comparing the living standard of Ireland, Spain and Portugal at entrance to the EU with the current situation, since the joining of the Eastern European countries significantly reduced the overall average. Still, this is offset by the numbers for those countries.

by Anspen on Tue Jan 30th, 2018 at 12:29:16 AM EST
His comparisons are with the average for the EU15 - i.e. without the eastern European states

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 30th, 2018 at 12:48:22 AM EST
[ Parent ]
D'oh! The article even says so repeatedly. A case of late night reading on my part. I haven't seen much reporting on the comparative rise in income of the new EU members in the last few years. These seem to be fairly good, especially considering the great recession.
by Anspen on Tue Jan 30th, 2018 at 06:02:31 PM EST
[ Parent ]
What would Irish standard of living be now measured by the punt or its pound, fixed or floated to GBP? I wonder idly.

Diversity is the key to economic and political evolution.
by Cat on Tue Jan 30th, 2018 at 03:50:40 AM EST
By the pint... :)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Tue Jan 30th, 2018 at 11:49:34 AM EST
[ Parent ]
You're lucky Switzerland never joined the EU. You'd have to measure beer by the deciliter...
by gk (gk (gk quattro due due sette @gmail.com)) on Tue Jan 30th, 2018 at 03:35:56 PM EST
[ Parent ]
What?
by Colman (colman at eurotrib.com) on Tue Jan 30th, 2018 at 12:18:57 PM EST
[ Parent ]
Goodbye punt, hello Euro! How we changed currency

Then there are the epic verses of Irish bank strikes. A grand tale of ah self-organizing standard of living and financial independence or so. That is rents deferred to BoE's prime dealers either bank of the sea.

pun intended.

The innerboob repository is rather hazy with piddly detail such as precisely how many strikes occurred between 1960 and 1980. Perhaps that is all best forgotten? On account of the transformative power of EU membership.

Diversity is the key to economic and political evolution.

by Cat on Tue Jan 30th, 2018 at 06:39:33 PM EST
[ Parent ]
Interest rates would have been higher (to reflect currency risk), inflation higher (as importers increased prices as the currency fell, but failed to reduce them as it rose), and corporate budgeting would have been much more difficult against the back drop of a fluctuating currency gamed by hedge funds without much regard for economic fundamentals. Banks would have made a lot of money on currency transactions and funding the national debt would have been more expensive as foreign lenders insisted on a currency risk premium.

As against that, a government with some economic foresight (a rare occurrence) would have been able to raise domestic interest rates to dampen the Celtic tiger bubble 2001-9 resulting in less of a crash when that bubble burst. (At the time the ECB was maintaining a policy of interest rates much too low for a booming Irish economy but geared to the needs of a German economy reeling from the costs of German re-unification). It is a moot point as to whether Irish governments of the time would have had the foresight to do so: my guess not so much. Charlie McCreevy, Finance Minister at the time, reflated the economy with tax cuts at a time when it was already booming.  A bit like Trump now.

So the probably answer to your question is that it is doubtful whether Ireland would be any better off now with its own currency, and most probably not. (The UK, on the other hand, has probably just avoided a mild post referendum recession because it has its own floating currency) which has enabled it to adjust to the Brexit vote shock.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 30th, 2018 at 05:12:35 PM EST
[ Parent ]
Speaking of ECB interest rate destruction, poor Mr Draghi's term is close to an end. The press is nominating Weidman as his successor, to terrorize everyone.

Diversity is the key to economic and political evolution.
by Cat on Tue Jan 30th, 2018 at 06:43:43 PM EST
[ Parent ]
It will be interesting to see whether a net creditor or net debtor state get the job.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 30th, 2018 at 07:22:45 PM EST
[ Parent ]
It seems highly ironic that an economist would gloss over the highly problematic economic policy making for the EU, especially the EC and ECB. How can it be justified that economic policy that suits the needs of the wealthiest member has to be accepted by all the rest even when it is highly unsuitable for those members?

Economic governance is the most basic determinant of any society. I know that the neoliberal discourse would like to abdicate economic policy making to some 'invisible hand' and pretend that There Is No Alternative to present policies. But that is patently absurd.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 30th, 2018 at 04:56:11 AM EST
This is a relatively late development, for a start, and Irish governments are quite happy with the ideological background to it. Remember, IE politics consists of choosing which christian centre-right party is going to be in government and (in last few decades) who will be in a position to negotiate coalition with them.
by Colman (colman at eurotrib.com) on Tue Jan 30th, 2018 at 12:20:56 PM EST
[ Parent ]
I think the German government would dispute your analysis of current ECB policies. Draghi's policy of keeping interest rates ultra low - and QE on a massive scale - has much reduced the cost of financing Ireland's (and Greece's') historically high sovereign debt to the chagrin of German savers, who haven't been getting any "return" on their savings.

He has resisted incessant pressure from German Bankers and policymakers to end QE and increase interest rates so long as inflation remains below the ECB target rate as close to but below 2%. As a result, inflation has been rising, ever so slowly, and by doing so also reducing the real cost of financing historic debts.

It may not be much, but that is about all the ECB can do to help net debtor countries vis a vis net creditor countries - absent the issuance of Eurobonds, which Germany absolutely refuses to allow - as it would allow (say) the Greek Government to piggy back on Germany's credit rating and ultra low sovereign debt interest rates.

From a German moral hazard perspective, high interest rates is the penalty highly indebted countries should pay as punishment for past profligacy - both to reflect the higher risk of default and as a deterrence from future profligacy.

Draghi hasn't been playing that game.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 30th, 2018 at 05:29:15 PM EST
[ Parent ]
My criticism is not particularly directed to the ECB, which can only affect monetary policies. It is more to the inability of EU institutions to forge a balance between the needs of the different countries comprising the union and their tolerance of and obtuseness towards the damage done to countries such as Portugal, Ireland, Greece, Spain, Italy, Cyprus, etc. Especially annoying - to the point of being maddening - is the almost universally accepted discourse about all of these problems - which is to ignore them and leave the German myth of the problems being due to lazy/corrupt peripheral countries.

If that be the case, why were they allowed into the EU? Had no one in the upper levels of EU governance ever come across Mundell's papers on 'optimum currency unions'? The costs in human suffering and EU accepted major injustices mocks the very claims of concern for social welfare on which the project was founded. It has been and remains painful to watch, even if it is currently overshadowed by the fiasco of Brexit and the Trumpeting elephant just across the Atlantic. We - all of us - seem resolute in steering directly for the shoals in this political gale.


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 31st, 2018 at 06:02:54 AM EST
[ Parent ]
I would be less concerned about inequalities between member states - which as Fitzgerald shows, have been reducing (Greece excepted) - than growing inequalities within member states, particularly between metropolitan and rural areas, between young and old, and between different occupational groups. All of these issues are still primarily in the policy domain of member state governments, and hence of national elites. Thus personal, wealth and corporate taxation, social welfare, housing, education and health are very largely national competencies.

The EU can serve as a convenient bogeyman for national elites to deflect attention from their own policy failures - hence Brexit - but it would be to fall into the nationalist myth of the big bad Brussels bureaucracy to ascribe the primary blame to the EU. If anything, EU competencies in the areas of competition, agriculture, and regional development have served to reduce such regional/class inequalities by breaking up local oligopolies and introducing competition from other national or international oligopolies - euphemistically referred to as costs of transition - and providing opportunities for the more entrepreneurially minded to seek markets elsewhere.

Of course this has also furthered the cause of globalisation, but the EU has at least attempted to mitigate the monopolistic tendencies of global corporates, something national elites (particularly of smaller states) are completely unable to do. So my suggestion is that we need stronger governance of global corporates by the Commission allied to the transfer of more competencies for health, education, social welfare, infrastructure, energy and taxation from national elites to the EU - both to promote common and more equal standards and services, and to effect economies of scale - as in the case of pharmaceutical procurement.


Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 31st, 2018 at 11:38:29 AM EST
[ Parent ]
I think the biggest concern is a governance structure that enables the very practices we saw by the various EU institutions wrt Ireland, Portugal, Greece, Spain, Cyprus, etc. Establishing a common currency under such circumstances constitutes a massive creation of an attractive public nuisance vastly more damaging than an un-fenced, un-monotored swimming pool during a hot summer.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 1st, 2018 at 03:29:36 PM EST
[ Parent ]
That is limiting the view to the legitimate powers of the ECB. Since the crisis the ECB and the Eurogroup hass also grabbed power with both hands.

It was as far as I understand the ECB that put Greece under economic blockade in the summer of 2015. The advantage is the loweer visibility it gets then sending in ships to blockade the harbours, but the effects were similar. If the ECB wanted to they could stop wielding the stick when it comes to the deficit countries, there is nothing in the treaties that demands that they do so.

by fjallstrom on Wed Jan 31st, 2018 at 03:43:03 PM EST
[ Parent ]
Well, the same goes for basically any central bank (or for that matter Government). What's good for Texas or Paris may be bad for Montana or Bretagne. Of course the Eurozone has the added problem of a unified currency with competing fiscal policies making the (already unlikely) possibility of compensating monetary policy with fiscal and regulatory means even less likely.
by Anspen on Tue Jan 30th, 2018 at 06:11:38 PM EST
[ Parent ]
The economics misses the incredible transformation in Irish society, as usual.

During the period of EU membership IE has moved from being a homogenously white-Irish society dominated by a regressive form of Catholicism where both homosexuality and contraception was illegal to a much more cosmopolitan society that's in the process of rooting out the institutional vestiges of Church control.

Even the most chicken-shit of politicians have decided that the constitutional bar on legalising abortion is going to fall and are trying to get in front of it to claim victory, the education and health system is going to be removed from Church control, bit by bit.

by Colman (colman at eurotrib.com) on Tue Jan 30th, 2018 at 12:25:39 PM EST
Control of the education system is going to be ground zero for the Catholic Church's last stand against "secularising" and "liberalising" tendencies. That battle is still a very long way from being won, if for no other reason than that there is a lot of property and money involved...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 30th, 2018 at 05:56:26 PM EST
[ Parent ]
That war is lost, they just don't know it yet.

They don't even have enough priests for school boards.

It'll take another decade or two, but they'll  be gone.

by Colman (colman at eurotrib.com) on Tue Jan 30th, 2018 at 06:29:17 PM EST
[ Parent ]
There's plenty of wannabe uber-Catholics who will do the Church's bidding and even scare some priests with their puritanical zeal.  Allied to this is a lot of parents who don't practice religion themselves but like the idea of their kids being "socialised"=scared into being "good" kids. In the UK atheistic parents even attend Church so they can get their kids into "good" church schools...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 30th, 2018 at 06:35:08 PM EST
[ Parent ]
My brother and sister-in-law did that. Pretty tacky, but that's why they got the big bucks and I didn't.

Diversity is the key to economic and political evolution.
by Cat on Tue Jan 30th, 2018 at 07:04:26 PM EST
[ Parent ]
Come the day! When it comes please send missionaries to the Irish diaspora in the USA to help them perform a similar task. Were it not for church schools the private school sector would be vastly smaller, and the Catholic schools have twice the number of the next largest group - conservative protestant schools. Nonsectarian private schools are between the catholic and protestant schools in number of enrolments.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 31st, 2018 at 06:14:10 AM EST
[ Parent ]
Quite.
"You don't change an economy simply by changing institutions; attitudes must change first and once that happens institutions will follow."

Fortunately, the Irish Times has a "tool" to correlate prevailing attitudes and political conviction thought to form institutions of civil society.
Abortion Referendum Tracker

Diversity is the key to economic and political evolution.

by Cat on Tue Jan 30th, 2018 at 07:00:38 PM EST
[ Parent ]
The relevance of noting that "John Fitzgerald is the son of former Taoiseach Garret Fitzgerald" is that he notes:
In Ireland's case, positive impacts of EU membership were delayed by the lost decade of the 1980s, which was brought about by domestic policy failures rather than our EU accession.

A period during which his own father was twice Taoiseach from 1981 to 1982 and 1982 to 1987...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 31st, 2018 at 04:30:49 PM EST


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