Economic balance of advantage tends to a Yes


ANALYSIS:What do independent economists think is in Ireland’s best interest with regard to the Lisbon Treaty?

THE IRISH people are entitled to an independent examination of the impact on the Irish economy of Ireland’s vote on the Lisbon Treaty but this has been difficult to achieve in the context of an adversarial campaign.

There is a danger that groups strongly in favour or against the treaty might respectively overestimate or underplay the importance for Irish economic prospects of how Ireland votes in this referendum.

This is made more difficult by the simplification of debates on the economic issues and by inclusion of matters clearly unrelated to the treaty. The economic implications for Ireland of voting against the treaty are likely to be different to the consequences if the treaty had never been proposed.

There has, until recently, been little input to the debate by independent professional economists. This may be because senior economists in universities and in research and consultancy practices are reluctant to join a debate where their views can so often be misinterpreted. Or this could be because Irish economists have been so focused on attempting to address the extraordinary crises in public finances, in unemployment and in the banking sector, that Lisbon has received less attention than appropriate.

There is a real challenge for voters to decide whether suggestions by the Yes campaign that a No vote would significantly damage an already weakened Irish economy is scaremongering, or whether the view by the No side that we can decide any way we want without economic consequences is simply unrealistic.

A new independent assessment of the effects of the Lisbon Treaty on the Irish economy published by Indecon economic consultants*, incorporates the views of 66 leading non-government economists working in the main academic and research centres in Ireland. This research, while highlighting the difficulties in arriving at definitive conclusions on certain issues, indicated that the overwhelming majority of independent economists believe that Ireland’s best economic interests would be served by a Yes vote.

The reasons for this judgment include an assessment of the implications for foreign investment and on the cost of borrowing and the impact on Ireland’s corporate taxation. Also relevant is how the treaty will influence the workings of the European Union.

If Ireland fails to address the correction of the public finances and the cost competitiveness of the economy, passing the Lisbon Treaty will not, in itself, mean an increase in foreign investment. However, a No vote would result in additional concerns about Ireland’s precise role in Europe at a time when we cannot afford any self-imposed additions to our economic problems. If the Lisbon Treaty had never been considered, I doubt that there would have been any major consequences for investment into Ireland, or for the interest rate on Irish debt of not having a new treaty.

However, this is a very different scenario from the position of Ireland rejecting the treaty.

A No vote would have a negative impact on confidence and add to international concerns about the economy and lead to an increase in the cost of borrowing. The extent to which Ireland’s debt spread is determined by confidence and perceptions by bond traders, is an indication of the vulnerability of a very small regional economy such as Ireland. The view that confidence would be impacted is widely accepted within the economic profession and over 82 per cent of economists believe that the passing of the Lisbon Treaty would help develop confidence.

The competitiveness of different locations for investment will, in part, be influenced by the level of corporate taxation as this will impact on the net after-tax cost of investment. This will be determined by the rate of corporation tax and the tax rules applying in the home country of the investor.

The Irish corporation tax rate is 12.5 per cent for active income and 25 per cent for passive income. Maintaining a competitive corporate tax rate is one element in Ireland’s comparative advantage for foreign investment.

In the previous 2008 referendum, there were various discussions on the impact, if any, of the Lisbon Treaty on Ireland’s corporate tax. While those promoting the treaty argued that the treaty would not impact in any way on Ireland’s corporate tax as setting of taxation levels was exclusively within the competence of individual member states, there were views expressed to the contrary.

Ireland has now secured legal guarantees on taxation and it has been agreed that “nothing in the Treaty of Lisbon makes any change of any kind, for any Member State, to the extent or operation of the competence of the European Union in relation to taxation”. This is reflected in the views of economists where 87.5 per cent indicated that ratification of the Lisbon Treaty would not result in imposed changes in Ireland’s corporate tax rate.

It is clear to me that any independent assessment of the treaty confirms that the suggested threat to Ireland’s corporate tax rate has no basis.

This is not to suggest that there are no vulnerabilities to Ireland’s competitive advantage in this area, but they are unrelated to the Lisbon Treaty.

Indeed our position on this issue may be strengthened by the passing of the treaty because of the relationship and reputational implications.

Some of the available evidence suggests that Ireland’s reputation as a committed member of the European Union has suffered in recent times as a result of Ireland’s No vote. It is also clear that Ireland’s economic reputation has been impacted by the dramatic reversal of Ireland’s economic growth, combined with the banking crisis and the deterioration in the public finances.

While it would be a mistake to believe that Ireland’s economic reputation will not be significantly influenced by the effectiveness of policy decisions and by the overall performance of the economy, one element of Ireland’s international reputation is whether the country is perceived as a committed member of the European Union. This reputational issue is potentially of importance.

Some 75 per cent of economists surveyed believe that a Yes vote would enhance significantly Ireland’s reputation as a committed member of the European Union. The impact of this is hard to measure but it would be incorrect to believe that such factors have no implications.

The Lisbon Treaty represents a new treaty which, if passed, would amend the Treaty on European Union. Supporters of the treaty have argued that it is designed to reform the working of the EU to enable it to respond to current needs of the 27 member states.

In some discussions in Ireland it is forgotten that the objective of the Lisbon Treaty is to enable the enlarged EU to work more effectively and efficiently and to allow the union and all its member states to respond positively to the challenges of globalisation.

While few economists, if any, would suggest that the Lisbon Treaty on its own would be central to solving all the economic challenges, the issue is whether it would help or hinder the delivery of solutions to the economic challenges facing Europe. While some economists surveyed felt it would not impact on the solutions, a majority, 58 per cent, felt it could help deliver solutions.

A feature of the Lisbon Treaty is the insertion into the treaty of principles and objectives for all EU external actions and this would seem to be a sensible way of encouraging greater EU policy coherence on economic and trade matters.

The Common Commercial Policy, which is the European Union’s international trade policy, is one of the small number of areas of exclusive competence or responsibility for the European Commission. This is of key importance to the union’s negotiations on international trade.

One change arising from the Lisbon Treaty, which has not been given much debate in Ireland, concerns the expansion of the scope of the Common Commercial Policy to include explicit reference to outward foreign direct investment. It is, however, important to stress that the Lisbon Treaty requires the commercial policy to act unanimously in areas of trade in services, intellectual property and foreign direct investment where the negotiations cover issues for which unanimity is required internally.

A majority (63.9 per cent) of economists surveyed felt that the expansion of the scope of the Common Commercial Policy would have a positive impact on EU trade and foreign investment.

The Lisbon Treaty will not introduce any changes to the means by which the EU is funded or the size of Ireland’s contribution and this is confirmed in Article 269.

The Lisbon Treaty, however, includes a number of innovations in relation to European Union finances which are detailed in Article 312. Among the important changes are the provision for the first time in the treaty of multi-annual financial planning, which gives a basis to existing practice.

The treaty also sets out principles of financial planning, including a restriction on new measures with significant budgetary implications unless funding is available within the limit of the union’s own resources and is in compliance with the multi-annual financial framework. Some 63.3 per cent of economists surveyed believed that this was likely to have a positive economic and financial impact.

In a book which I edited at the height of the Celtic Tiger growth in 1997 on International Perspectives on the Irish Economy**, I concluded: “Ireland is akin to a very small sailing boat on the turbulent seas of the international economy. If we are blown off course due to swells in the international economy as has happened on previous occasions this would be unfortunate. If, however, we falter due to disagreements among the crew or self-imposed policy mistakes this would be unforgivable.”

Twelve years on everyone is aware of what has happened since and, in my opinion, the evidence suggests that on balance, from an economic perspective, voting No in the Lisbon Treaty would be an additional self-imposed policy mistake.

This judgment appears to be shared by most independent economists and 91 per cent of economists surveyed believed that, taking all factors into account, Ireland’s overall economic interests are best served by a Yes vote.

* Assessment of the Impact of The Lisbon Treaty on the Irish Economyby Gray, AW, Batt, WH, McCloughan, P and Scully, D, Indecon, September 2009,

** International Perspectives on the Irish Economy, edited by Gray, AW, 1997.

Alan Gray is managing partner at Indecon economic consultants