Wolfgang Münchau :”those in Ireland in favour of EU membership should give some thought to what could go wrong”

Possibly related to my previous post…  The Irish Times republishes an interesting article by Wolfgang Münchau in the FT.  He starts with Brexit, and a necessary new direction of travel for the UK economy…

There is a risk that Brexit and the associated change in model business will go wrong. Brexit is not necessarily a bad decision. But it requires the right kind of policies to work.

The British prime minister is right to balance a hard Brexit with a shift in the direction of the UK economy away from transactional capitalism towards a more inclusive version of a free-market economy. This makes sense. One way to think about this is the theory by Mancur Olson, a 20th-century US political economist, who tried to explain why Germany and Japan did so well after the second World War. In his 1982 book The Rise and Decline of Nations, he notes that powerful lobby groups can hold a country to ransom up to the point when a shock destroys the economic system.

In the case of Germany and Japan, this point was wartime defeat that allowed both countries to reinvent themselves. Brexit could do the same in the UK. This is why a dual strategy of a hard Brexit and a shift in the nature of British capitalism is intriguing. The first constitutes the shock, the second the shift. [Olson] would have liked it.

The City will not perish in this scenario. It might even do well with new fintech-type business models, or as a deregulated financial centre, Singapore-style. But its relative weight within the British economy may well decline.

…before turning his attention elsewhere…

There is another country in Europe with an unsustainable business model: Ireland. It offers low corporate tax rates and legal tax avoidance to foreign investors. The ruling by the European Commission to force Apple to pay €13 billion to the Irish Government in taxes is a sign that this model may not be sustainable for much longer. Brussels is also pushing towards a harmonisation of the corporate tax basis – the rules of what to tax.

Dublin has been resisting such a change, but with the UK out of the EU it will lose an ally in the fight against EU-imposed tax harmonisation. Ireland has done well from its tax haven status. But this model is unsustainable.

Perhaps the confluence of Brexit and the long-term loss of a business model will persuade Ireland to follow the UK out of the EU. This will obviously depend on whether Ireland can find an alternative model inside the EU. It is possible, but not inevitable. An Irish exit will not happen unless and until there is more clarity of the costs of Brexit. It will also depend on whether the euro zone successfully manages the various crises facing it.

If all this develops as I expect – badly – the economic case for an Irish exit would strengthen. Ireland might choose to stay in the EU for political reasons. But those in Ireland in favour of EU membership should give some thought to what could go wrong. They might otherwise end up in the same place as the overconfident Remain supporters in the UK: bitter and without influence.

Read the whole thing.

Pete Baker