Tag Archives: four freedoms

Article 50- a baked-in recipe for failure.

26 October 2018

JR Max Wheel

When some historian comes to write up the tortured negotiations between the UK and the EU they might like to reflect on the now infamous Article 50. This  was a contentious after-thought to Giscard d’Estaing’s EU “constitution”.  It is a mess almost certainly by design and so it has proved in reality. Since no large member state had ever attempted to leave the Union until now, we were always in uncharted waters and the article’s scant detail totally inadequate for the purposes of reaching a fair agreement, since it gives all the negotiating cards to the remaining member states. Worse its sequencing into a two-phase approach means that many issues which are needed to reach agreement on the withdrawal phase are stupidly left to the definition of the future relationship including trade.

There has been a concerted effort to characterise the talks between both parties as negotiations, when they most clearly are not. EU member states have a rule-book to follow, into which bucket they can put pretty much what they like. Hence “negotiations” are immediately bogged down in endless complexities and little or no progress is possible. For reference this links to the wording: http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/577971/EPRS_BRI(2016)577971_EN.pdf

Leaving aside for a second one’s own prejudices about whether to leave or remain, would anyone have seriously entertained this way of trying to reach any constructive agreement? The answer is likely to be a resounding No! Article 50 is inappropriate, designed only to protect the status quo ante.  It is therefore dysfunctional as a methodology and should have been challenged immediately or never triggered at all. This is not an exercise in flying a kite, Prof, Ingrid Detter de Frankopan, a widely respected international lawyer and Prof. Emeritus at Stockholm University warned back in 2016 that the one critical factor in then forthcoming UK/EU talks was to avoid triggering Article 50. It being so obvious that to do so would merely create a one-sided EU determined process.

This is precisely where we find ourselves in late October 2018, unable to exercise a sensible choice since EU tripwires have been carefully positioned so as to frustrate any progress. Worst of these, but by no means alone is the vexed question of the Irish border. It is fair enough to recognize that most member countries have historical oddities left over from Europe’s turbulent past. Andorra, San Marino, the Grand Duchy of Luxembourg itself, Liechtenstein and a host of others.

Even by EU standards the choice of Ireland is an especially unfortunate (and completely avoidable) one. Not only because of the common travel area between the UK and the Republic, and the major flow of goods between the two countries, but quite obviously because of the potentially fragile Good Friday settlement. There are no good compromises here, only future technological border solutions, mainly way off, but because any sensible negotiations need to be bilaterally determined between the UK and the RoI- not the EU. Hooking themselves to the EU position will not resolve this issue and risks upsetting the delicate balance and trust built up between the communities in the North over the past 20 years as well as violating the sovereign status of the UK. This is massive overreach by the EU and they should drop it before any real damage is done.

I have previously critiqued the 4 freedoms as being aspirational constructs, not fundamentals. Even in a pre-globalized world free trade in goods and services was recognized as an economic benefit. Globalization has supercharged it to the extent that very little is not now tightly integrated. Free movement of capital and people has however become increasingly problematic. At one level technology renders borders as nearly irrelevant, however this is only part of the story, identity, culture and historical context all influence how peoples interact.

Monnet had a profound disillusion with the failure of the inter-war League of Nations and his philosophy was always for European integration and a federal structure, which became enshrined in the EEC and later EU. His was a very different world however and informed by very different experiences.

The current backlash against the inequalities created by the manifest downsides of a globalized world has led to a re-recognition of nationalism. It never really went away, although this is not properly recognized. Now member states are just that, national states. Those so-called freedoms of capital and people allow firms to relocate financial and production resources at will and with little/no consideration for the host country. Freedom of movement for people touted and even enjoyed as a benefit has turned out to be an authentic nightmare. Since a nation state’s first duty is the protection of its citizens neither the precarious nature of migrants, nor the self interest of firms should be allowed to override policy provisions by individual states. To do so is to invite mass uncontrolled movement, exactly what we have been experiencing. The combination of free capital movement and open migration have proved to be double edged swords. The consequences of being economically “left behind” and opening borders to uncontrolled movement are major causes of our decision to leave the EU.

In truth the EU was from inception always a Franco-German project and one where the UK played a reluctant and often marginal role, hence staying in to reform this 1950s project to make it fit for purpose in the 21stC is and remains a fantasy.

 

Cyprus & the Euro- what now- endgame?

JR Max Wheel

26 March 2013

Free movement of capital is an essential condition for the proper functioning of the European Union Single Market. It enables a better allocation of resources within the EU, facilitates trade across borders, favours workers mobility, and makes it easier for businesses to raise the money they need to start and grow. Free movement of capital is at the heart of the Single Market and is one of its ‘four freedoms’. It enables integrated, open, competitive and efficient European financial markets and services – which bring many advantages to us all. 

Source: EUbusiness.com

 

It would be somewhat ironic if the smallest domestic economy signalled the end of the great € experiment. It allegedly accounts for only 0.2% of Euro GDP, yet the bungled attempt at restructuring the Cypriot economy by taxing customer deposits in effect condemning it to years of stagnation, could yet prove the tipping point.

Looking at the four freedoms above one seriously wonders whether any of them make sense in the integrated and conflictive world of the early 21stC.-freedom of movement of capital, people and services. Capital is obviously highly mobile anyway, so barring heavily enforced capital controls, note just introduced in Cyprus, a step that finishes the island’s role as a financial centre for good. Given the unlovely sources of much of the money, this may be highly welcome to some, but it is precipitate and highly destabilizing.  Capital controls can be dodged around, albeit via a somewhat clumsy movement of high value physical assets, gold, diamonds, artworks and so on. Could this seriously happen elsewhere in Euro-land, certainly, most of Southern Europe has been watching anxiously as the Cyprus affair unrolled. The extraordinary idea articulated by Dutch Finance Minister, Mr Dijssellbloem that this is a blueprint for future sovereign restructurings is like Lord Byron ( another Hellenophile)  mad, bad and dangerous. Firstly, this blue print was claimed to be generic, then quickly retracted to be specific to Cyprus as an exception: it cannot be both, this betrays a complete lack of understanding of market sensitivities, creditor seniorities, and of course hits the liability side of the balance sheet, whereas the problems are naturally enough, on the asset side.  It is not because bailing-in creditors is a bad or unwelcome idea, but bailing in depositors is most certainly. Naturally, depositors should choose their bank and jurisdiction with care; unfortunately many have done so on the back of tax wheezes rather than any consideration of sovereign risk, banking solidity and probity. Therefore, there is precious little sympathy there, but creating a collapse to prove a point to separate banking from sovereign debt issues is highly dangerous given the collective weakness and chronic lack of competitiveness evident over a decade in much of Southern Europe and it could easily spread.

Cyprus has, in my view, little choice but to leave the single currency and in doing so; it breaks the mythology around “ever closer union” and the immutable nature of the Euro. If it does so successfully and certainly not without a lot of pain, it will start to grow again with a competitive currency and stand out like a beacon against the stagnant Eurozone.  There are countless examples of such recoveries, Many European countries in the 1930s, the UK leaving the Gold Standard, Latin America in the 1980s, Asian countries and Russia in the 1990s.  This is not arguing for devaluation as an endless policy prescription but a necessary flexibility in a crisis. Regrettably, it has become far too easy to use this tool as means of inflating away debts by unscrupulous or ignorant politicians, but we are not in the land of many choices here. It is the complete inability to adjust currency values, as well as the forced rescue of undercapitalised banks, that has broken many sovereigns. The alternative is a massive downward adjustment in real wages and returns to individuals that forces readjustment. This is both unfair, too slow and in any democratic state a policy that is liable to cause serious civil unrest. Freedom of movement of people is another ambitious construct in a world where, due to conflicts, economic migration, and international terrorism, there is a need to control movement, not fling open the doors. This is not to condemn migration as malign, but it is utterly fanciful to imagine that it cannot, even should not, be controlled in a world of highly integrated economies. Freedom of movement of goods and services is a nod towards the benefits of free trade, it is not without its consequences either, attraction of inward investment, competition in corporate and personal tax rates. Since even shareholders have little or no control over transnational countries, plant and jobs can be moved swiftly, resulting in lopsided and distorted economic development in host countries. Indeed one of the major issues for many deeply indebted countries is how to find a system to tax such highly mobile companies both fairly and to limit tax-engineering between countries. This is a serious issue because as the Cypriots and many other countries have found out rapidly, the tax base of many countries is declining thanks to the ingenuity of international tax mitigation schemes. The Single Market is of course in many areas anything but a level playing field, many industries and services are still closed off to competition, energy, some financial services, communications, and defence to name a few. This is hardly a good score card for the four freedoms and that is because they are lofty ideals and do not correspond to real world problems. Have they contributed to real competition, dynamism, economies of scale and other desirable outcomes?  The short answer is no, cultural factors or national interest issues still dominate.

There is life outside the Eurozone and the quicker most countries realize it and act accordingly the better for them and their long-suffering electorates