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.