Dr Graham Gudgin is Policy Exchange’s Chief Economic Adviser. He is a visiting Professor at the University of Ulster and Chairman of the Advisory Board of the Ulster University Economic Policy Centre.
Hell hath no fury like a Commission scorned. Since the UK is breaking up the European Commission’s cherished Union, the Commission retaliates by supporting those wishing to break up the UK. The first attempt was Jean-Claude Juncker’s wooing of Nicola Sturgeon when she visited Brussels to drum up support for Scottish independence. The hugs and kisses to camera signified EU support for her efforts, but it all came to nought as falling oil prices rendered an independent Scotland financially unviable.
The second attempt will be equally futile but could cause trouble along the way. This is the suggestion in a Commission document – Dialogue on Ireland/Northern Ireland, leaked last week – that ‘it is essential that the UK commits to avoiding a hard border by remaining part of the EU customs union, and continues to abide by the rules of the EU single market and customs union’. Since the UK is committed to leaving both, the suggestion is that Northern Ireland should remain within the Single Market and Customs Union.
The Irish Government is believed to be behind this hardening of the EU position. Leo Varadkar, the Taoiseach, insisted at a meeting of the British Irish Council on 10th November that ‘there should be no physical infrastructure at the border and that the only way this can be achieved is if the UK as a whole, or Northern Ireland, continues to apply the rules of the Customs Union and Single Market. This does not mean that they have to remain members of it, but it would mean continuing to apply the rules of the Single Market and Customs Union’.
A Commission spokesman added that ‘in order to preserve the integrity of the Good Friday peace deal the Brexit divorce deal must respect the integrity of the Single Market and Customs Union’. No explanation was given for this linkage between the Good Friday Agreement and Brexit. The 1998 Belfast Agreement makes no mention of the EU except to note its existence as an organisation of which both Northern Ireland and the Republic were then members.
Varadkar has subsequently repeated these sentiments at the recent EU summit meeting in Stockholm. Although punctuated by more emollient statements, it is now clear that he is taking the toughest of stances on the border issue. His earlier decision to cancel the work on electronic border technology, initiated by his predecessor, signalled his intentions, but his Stockholm threat to use an Irish veto in moving on to stage two of the UK:EU27 negotiations unless the UK puts into writing a promise of no border hardware, is something of a nuclear option.
The idea of Northern Ireland remaining in the Single Market and Customs Union has been doing the rounds for some time. It was given publicity in Dublin in September by the Commission’s representative on the EU Brexit negotiating team, Guy Verhofstadt. On his return to Brussels, Verhofstadt proposed a motion to the EU parliament that includes a presumption that ‘Northern Ireland stays in some form in the internal market and customs union’. Senator Michael McDowall, the Irish former Justice Minister who regards Verhofstadt, and Commission President Jean-Claude Juncker, as ‘clowns’, dismissed the proposal as posturing. They knew as well as he did that the DUP’s opposition would render the idea a non-starter. Given that the DUP were keeping the May Government in power there was no chance that such an idea could survive.
If Northern Ireland were to remain inside the EU Single Market and Customs Union, trade with the Republic and with other EU27 countries could continue unhindered. This would protect around nine per cent of Northern Ireland’s output, although much of this would otherwise face tariffs of only one or two percent. The obvious downside is that there would need to be tariffs and controls between Northern Ireland and Great Britain. The EU border would have been moved to the Irish Sea and in an important sense Northern Ireland would be outside the UK. Since GB markets are twice as important to Northern Ireland than EU27 markets, such a move would make no economic sense.
Last week’s resurrection of the plan by the EU came out of the blue. The EU’s bizarre negotiating priority that the Northern Ireland border issue be dealt with before any trade arrangements were even discussed appeared to have been side-lined. In Commission parlance, it was recognised that although the border had been presented as one of the EU’s three ‘phase one’ priorities, it was really a ‘phase two’ issue in parallel with trade talks. While the Irish Government may have pushed for it to remain in ‘phase one’, it seems likely that the Commission also finds it a useful pressure point to wrongfoot the British in the negotiations.
The suggestion of Northern Ireland remaining within the EU has been swiftly rejected by James Brokenshire and David Davis, who said that there was no question of disrupting the integrity of the UK. The idea will die, living only as long as phase one of the Brexit negotiations where the Commission can use it to delay a move to the trade talks of phase two. This is unlikely to work once the pragmatists among the EU27 governments call time on talks that look increasingly embarrassing for both sides. It is interesting to note that the respected Irish economic journalist Dan O’Brien has advanced a similar argument in Ireland’s Sunday Independent.
Once the trade talks eventually begin, we should begin to see a sensible resolution of the border issue. The UK paper on the Irish border contained an outline of how things might progress. Within Northern Ireland, the key issue is personal travel. No-one from Belfast wants to be held up at the border on their way to Dublin to catch a plane to Marbella. The EU is not objecting to the proposal to keep the almost century-old common travel area.
The other issues in the UK paper relate instead to trade. Practical proposals include exemptions for small traders, and ‘trusted trader’ arrangements for large firms, plus electronic customs checks and computerised record keeping to prevent third country imports sneaking into the EU. These proposals received the usual knee-jerk, undiplomatic, reaction from the Commission, which denounced them as ‘magical thinking’.
The British proposals will need to be refined in light of the eventual UK:EU trade arrangements. To meet Irish objections to hardware at the border, for instance, electronic checks might need to be located back from the border. This would protect PSNI and Garda officers from attack by Republican dissidents. Existing efforts to prevent smuggling (at present against fuel and tobacco smuggling) may need to be strengthened, Most important is to achieve a UK:EU27 free-trade agreement as the UK government wishes. Such an agreement is very much in the interests of the Republic of Ireland whose exporters face a rout if they are required to surmount UK import tariffs as well as the disadvantage of a high Euro following the depreciation of the pound sterling. Free trade is also strongly in the interests of the UK’s other trade partners in the EU.
It is now clear that the EU negotiators are deliberately going slow on trade in an attempt to squeeze more money out of the UK to fill the impending £10 billion per annum black hole in EU finances. This hole will need to be largely filled by Germany but may also involve budget cuts for recipients of EU funds in southern and eastern Europe. Hence the general willingness across the EU27 to back the Commission’s unconstructive negotiating approach.
A mystery is why Dublin has not made more noise about free trade since its firms would gain more than any others. One belief is that the Republic has little leverage on EU trade arrangements and has instead pushed the border issue as a way of getting Irish concerns heard within the EU. Perhaps all this will come together constructively at a late stage in the negotiations, but for the present it is a convoluted and unhelpful approach likely to create tensions in Northern Ireland. Policy Exchange’s Ray Bassett, a senior former Irish diplomat, has warned in the Sunday Business Post that Ireland needs to be careful not to be used by the EU27 in negotiations.
None of this matters terribly much to the Northern Ireland economy. A recent authoritative report on trade, published by InterTradeIreland, calculated that Northern Ireland firms might lose 11 per cent of their exports to the Republic of Ireland in the worst case if there is no trade deal. Total exports to the Republic comprise only five per cent of total output in Northern Ireland, hence the potential loss is not huge, even in this worst case. The projected trade losses are heavily concentrated in the dairy industry, and other sectors stand to gain from Brexit. Even Northern Ireland’s dairy industry might gain if they replace the UK cheese, butter and milk markets lost by the Republic’s producers. Although a hard Brexit would be disruptive, in the end it might only amount to a redistribution of Northern Ireland’s EU exports into GB markets.
Varadkar is a personal friend of the DUP’s Arlene Foster, and it is difficult to understand why he should pursue an aggressive policy which he knows is non-starter. It is perhaps not irrelevant that he has a general election looming, in which Sinn Fein are breathing down his party’s neck. Foster knows this, and may not be taking such talk particularly seriously. The DUP wants an open border and will welcome ways of minimising border disruption. Support for free trade is one obvious way forward. Others are proposals to maintain Northern Ireland’s animal health standards equivalent to those in the EU. The DUP should also agree to animal health checks at the Irish Sea if necessary. In these ways a path might be found through the raucous rhetoric, but probably not until the final weeks of the negotiations.
This article is a cross-post from Policy Exchange’s blog.