Andy: Reluctance to Spend Is Down to Dublin’s Choices, Not Brussels’ Rules

There is a seeming paradox at the heart of European economic governance, and it is one that has important implications for Ireland.

On the one hand, the European Commission has taken umbrage at the Irish government’s claimed conferral of special tax concessions (which they see, not unreasonably, as a form of state aid) on Apple.

Apple and the Irish state are appealing the decision, but, in the meantime, Apple is depositing the €14 billion the commission says it owes in back taxes into an escrow account where, in the unforgettable words of Father Dougal to Father Ted, it will be having a good long rest.

There are many other cases where a vigilant pro-competition policy seems a hallmark of the EU – for example, the €2.42-billion fine imposed on another US tech giant, Google, in June 2017 for abuse of its market-dominant position.

Closer to home, the commission launched a welcome investigation into Irish car insurers last year because of suspicions of cartel-style collusion and abuse of dominant market positions within the sector.

But when I previously noted that case, I also noted that the commission and other wings of European economic governance – especially the European Central Bank – have been much less opposed to governments giving (massive) aid to banks and other market-dominant financial institutions, at particular cost to the Irish taxpayer. In fact, differential support to the financial sector was insisted upon on a scale that must make Apple envious.

This disjunction is especially striking because it is often claimed that European economic decision-making is based on a rigid German economic philosophy called Ordoliberalism, which insists that everyone – governments and all kinds of companies alike – have to consistently follow certain rules.

There was a strong whiff of this apparent Ordoliberal influence in 2015 when the new Syriza government in Greece sought to renegotiate austerity, and German Finance Minister Wolfgang Schauble responded, “Elections change nothing … there are rules.”

When the Syriza Finance Minister Yanis Varoufakis made strong arguments for relaxing those rules, Greece’s European creditors reacted with blank stares; as Varoufakis memorably put it, “I might as well have been singing the Swedish national anthem.”

But, in reality, are the rules always so strictly observed? In 2016, EU deficit fines were not automatically imposed (as they should have been) on Spain and Portugal despite their breach of European Fiscal Treaty rules – realpolitik (in the probable sense of not wishing to boost the electoral prospects of other left-wing parties like Syriza) trumped the rigorous application of the supposedly set-in-stone regulations.

And, as noted above, an apparently rigorous EU attitude to competition law and state aid contains a number of startling contradictions and double-thinks when it comes to tech companies and banks.

There are important lessons from all this in the context of Ireland and the EU, and they arise from our Finance Minister Pascal Donohoe’s insistence that he is going to keep spending in the next budget below even the levels insisted upon by those EU deficit rules.

There may be a good case for not overstimulating an already somewhat overheating Irish economy, but that principally applies to not indulging in unnecessary tax cuts – it should not be used to prevent desperately needed spending increases in areas like health and housing, if necessary financed by tax increases (the Apple money would come in handy here).

The suspicion is that Donohoe is seeking to dampen expectations regarding the kind of public investment his government will sanction, and without which most of our most pressing social problems cannot be resolved.

And it is probable that the EU’s rules (the mysterious concept of “fiscal space”) will ultimately be invoked by the government to argue against significant spending increases.

But this is ultimately a political fig-leaf – the EU’s rules are malleable and they can be challenged by governments with the resolve and backbone to do so. The supposedly immovable barrier of Ordoliberal discipline is, in that sense, a chimera.

In the end it all comes down to politics, not economic law. A more radical Irish government could adopt a more radical political strategy vis-à-vis the EU – if it had the inclination and will to do so.