Apple dispute eclipses all our previous scraps with Europe

THE APPLE FALLOUT Apple, Ireland, and the European Commission Page 20 Colm McCarthy, Eoin O’Malley & Stephen Donnelly Page 22 Michael Noonan’s Week Page 22 Brendan O’Connor & Jody Corcoran Back Page Gene Kerrigan & Business Section, How the decision will

ALL discussion of last Tuesday’s finding by the European Commission on the Apple tax case needs to be prefaced with the statement of an important fact — only Apple, the Irish Government and the European Commission are in possession of Brussels’ detailed reasoning on how it believes laws were broken. That is because the ruling can only be published in full once all three participants have agreed that there is nothing in it that breaches the confidentiality of any party.

It cannot be stressed enough that as no independent analyst has seen the full ruling, no fully independent assessment of that ruling can be made at this juncture. All sides in what has turned into the most serious public dispute between the Irish state and an EU institution in more than 40 years have been spinning their positions furiously. It is not easy to see past the spin without the full findings.

Despite this lack of clarity, what happened last week was of enormous consequence in multiple ways, ranging from how it highlighted the fragility of the current Government to what it says about how global governance is catching up with globalised economic activity.

This column will focus on just two issues: the economic consequences for Ireland; and whether last week’s decision is part of a trend in which EU institutions are becoming less even-handed in their treatment of small countries compared with more powerful countries. The conclusion, in a nutshell, is that there is more to worry about in relation to the second issue than the first.

In assessing how Brussels’ slapping of a multibillion tax bill on Apple will affect inward investment, a good starting point is to stand back and look at US multinationals’ activity in a global and historical context.

Corporate America was the driving force behind the current era of economic globalisation which began more than half a century ago. In the 1990s, that globalisation process became turbo-charged and American companies have been in the vanguard, as their foreign direct investment (FDI) figures show. According to the US Commerce Department, the value of American companies total worldwide FDI has multiplied 10-fold over the past 20 years.

What is crucially important, and not always fully appreciated, is that more US FDI is located in Europe than in the rest of the world combined. What’s more, Europe is becoming ever more important for corporate America, and that is in spite of the rise and rise of Asia. Last year just under 60pc of US FDI was in Europe, up from less than half in the mid-1990s.

Europe dominates the focus of corporate America for two reasons. First, the EU is the world’s largest single market. Second, it is a much safer place to invest than all but a handful of relatively small economies elsewhere — our continent enjoys relative political stability, is comparatively well regulated and nowhere is the rule of law more deeply embedded.

Any international company that has a pretension to be a global actor cannot but have a presence in the EU market. No matter how much American companies and Washington dislike last week’s Commission decision, that hard business reality has not changed.

It is true that the Apple decision, regardless of whether or not the European courts find it to be correct in law, could cause some reduction in eastward flows of investment across the Atlantic. That is because anything that increases uncertainty for investors tends to depress investment. But it is difficult to see a small degree of uncertainty in one aspect of Europe’s business environment causing companies to exclude themselves from the largest market in the world. It is even harder to see companies already here upping sticks and heading home.

This is particularly important from an Irish perspective because this country’s economic model is based on attracting foreign companies to service the giant EU single market.

While it is right to be hyper-alert to anything that threatens the basis of Irish prosperity, the post-Apple choice for US companies when they look to Europe will remain which EU member state to invest in. Relative attractiveness is what counts, as it always has and always will.

Last week’s decision does not in any significant way make Ireland a relatively less attractive place to invest for companies planning on servicing the European market (in my column in the business section of this newspaper, the economic importance of foreign companies and their tax contribution are discussed in greater detail).

If officialdom’s concern about the impact of the Apple tax ruling on investment looks overstated, concerns about the manner in which EU institutions are acting towards smaller countries have a lot more substance.

Friday’s remarks by Enda Kenny, publicly questioning whether the Commission was seeking to ingratiate itself with larger countries, were quite astonishing, and all the more so given that he is leader of the country’s most pro-integrationist political party. The remarks reflect a profound change in the way that the political and administrative system view the EU institutions and the functioning of the European order.

Although there is a long history of the continent’s politicians blaming Brussels for their woes, a considerable body of evidence points to the EU institutions becoming more inclined to allow bigger countries bend the rules, while smaller countries are treated aggressively when differences arise. These trends have emerged since the euro crises erupted in 2010 and can be seen in bailouts, how budget rules are applied and, possibly, in how a recent banking crisis have been dealt with.

Start with bailouts. As few readers will need reminding, it was the rapidly deteriorating position of Irish banks the precipitated this country’s bailout in 2010. In 2013 the bailing out of Cyprus, a tiny country, was for the same reason. Both countries have good reason to feel that their treatment at the hands of EU institutions was, to say the least, high-handed.

In 2012 Spain, the EU’s fifth biggest country, moved to the tipping point of national bankruptcy because of its banks. It sought a bailout of €100bn. But while Madrid got financial support it refused to accept the same intrusive external oversight regime that smaller countries were subject to.

There is no doubt that Spain was treated differently to other bailed out countries. There is plenty of reason to believe its more favourable treatment was because of its size and clout.

Another example of how the EU institutions treat countries differently relates to the stricter budget rules that have been put in place over the past half-decade. Time and again France, the EU’s most influential country after Germany, has pushed the boundaries. Often it has been quite dismissive about the budgetary rules. It has constantly signalled to Brussels that it would respond aggressively if the Commission were to have the temerity to challenge it. Time and again the Commission has backed down and given France additional flexibility on its tax and spending plans.

The third example is more tentative. Italy is experiencing a slow-motion banking crisis. Recently-agreed EU rules forbid the giving of taxpayers’ money to troubled banks before depositors and bondholders have taken losses. These rules have been ignored by the Italian government.

In late June, Margrethe Vestager, the commissioner who found against Ireland and Apple last week, did not raise objections to Rome’s plan to use taxpayers’ money to bail out banks.

As in the Apple case, the Commission’s reasoning as to why it does not believe the plan amounts to a breach of state aid rules has not been published. But one could be forgiven for suspecting that the fact that Italy is one of the EU’s big four may not be irrelevant, and all the more so if one considers the Cyprus case — when Nicosia tried to avoid depositor bail-ins in 2013 the ECB shuttered the island nation’s entire banking system.

As this column has argued before, Ireland enjoyed a golden, best-of-both-worlds era from the mid-1990s to 2008.

During that time the country reaped the upsides of economic globalisation without the sovereigntyconstraining downsides of intrusive supranational governance.

That era couldn’t last. It is now over. It is never coming back.