UK ministers ‘have met just once’ over Irish Border deal

Working group on customs partnership waiting for report despite EU deadline, Liam Fox admits

BRITISH cabinet ministers analysing one of the potential solutions to the post-Brexit Irish Border customs problem have met just once in the month since they were given the task, the country’s International Trade Secretary Liam Fox has admitted.

The working group analysing the “customs partnership” proposal had been waiting for a report to be finished and will meet for a second time this week, Brexit supporter Dr Fox said.

Dr Fox’s group, which includes fellow Leave supporter Michael Gove, the environment secretary, were told to examine what is thought to be the British prime minister’s preferred option and supported by ministers who backed Remain.

A second group is considering Leave-backers’ favoured “maximum facilitation” — or “max fac” — solution.

The British government has been told by EU leaders and Taoiseach Leo Varadkar that they want to see progress over the impasse on the Irish Border by the time the European Council meets at the end of June.

Tanaiste Simon Coveney upped the ante yesterday, saying the UK must produce “written proposals” for the Border within the next two weeks. He also said: “If there is no progress on the backstop, we are in for an uncertain summer.”

Dr Fox defended the sole meeting so far, telling BBC Radio it was important to base decisions on “data, not knee-jerk reaction”.

He said: “We have been waiting for a report coming from experts and officials which we have just received.

“Parliament has of course not been sitting in the last week, we are back this week.

“We have to wait until we get the work done. The whole point of setting up these groups, the prime minister said, was that we got this decision right. We have to wait for the appropriate information coming forward on it.”

The customs partnership idea would see Britain continue to collect tariffs on behalf of the EU. The group looking at the idea saw Dr Fox and Mr Gove joined by cabinet office minister David Lidington, a Remain backer.

The ‘‘max fac’’ idea is based on the use of technology to minimise the need for customs checks post-Brexit and is being analysed by a group made up of Business Secretary Greg Clark and Northern Ireland Secretary Karen Bradley — who were both pro-Remain — and the pro-Leave Brexit Secretary David Davis.

Dr Fox said that he still believed there were “problems” with the customs partnership idea, adding: “I have raised a number of objections to it in terms of our ability to conduct an independent trade policy and I’ll have to be persuaded of the answers to the questions that I have put in to that particular piece of work before I would be able to accept [it].”

Brussels has already rejected both schemes, with chief Brexit negotiator Michel Barnier saying on Friday that neither was “operational or acceptable”.

A third option, dubbed “max fac 2”, is understood to have been suggested by Mr Davis.

It would see the tech options scrapped and replaced by a Liechtenstein model that would allow Northern Ireland to operate under EU and UK regulation.

It would also create a 10mile wide “special economic zone” along the 310-mile Border, within which local traders could operate under Ireland’s trade rules.

But a Downing Street spokesman on Friday said: “The Prime Minister has been absolutely clear that we cannot and will not accept a customs border down the Irish Sea, and that we will preserve the integrity of the UK’s common market.”

WHEN the Irish Government finances became seriously unbalanced in the late 1980s, it took a decade of cautious budgets and steady economic growth to get things back into shape.

Unfortunately, a combination of profligate banks and careless expenditure control produced a bigger crisis in 2008. Recovery from the subsequent recession has been better than many expected but the job is only half-completed. Budgets need to stay cautious for many years to come: likewise the domestic banks and their supervisors.

A re-run of the Eurozone sovereign debt crisis would make things difficult and last week it looked as if Italy had unhinged the markets yet again.

The ECB’s most decisive intervention in stabilising the common currency area, its giant purchase programme in the government bond markets of Eurozone members, commenced three years ago last March and was expected to finish soon. The major beneficiary has been Italy, whose bond yields fell back to affordable levels along with those of other heavily-indebted members including Ireland.

Italy has the largest public debt of any European country and is simultaneously too big to fail and too big to save: if an Italian default threatens, there would be a worldwide financial crisis, and there is inadequate official funding available to finance a bail-out. Italy is too big to be another Greece. The departure, or ejection, of Greece from the common currency was averted but could have been contemplated with equanimity by everybody except the Greeks.

An Italian departure is different but now looks improbable: there is finally a new Italian government, the midweek bond market jitters have subsided and the ECB will defer the wind-down of its bond-buying programme if need be.

However, the episode should serve to remind the Irish authorities that another Eurozone crisis is just one political accident away.

Ten years after the bubble burst, the European banking system has not been decisively restored and there are too many vulnerable banks around, including in Germany where Deutsche Bank suffered another ratings downgrade last Friday. Banks in France and Spain, as well as the domestic lenders, are exposed to the Italian bond market which will weaken again if the new government proceeds to expand government borrowing.

If the Eurozone ever does come apart, the strong favourite to act as the catalyst is Italy, which has suffered from a dismal economic performance since well before the financial crisis of 2008. There has been neither a credit-fuelled property binge nor a recent explosion in the government deficit.

The weakness of the Italian banks is attributable to the pro- longed economic stagnation — borrowers have accumulated non-performing loans by attrition rather than through an asset price bubble. The government deficit in recent years has been modest and public debt, dangerously high at around 130pc of GDP, was already at that level five years ago. The Italian problem is neither reckless banks nor profligate government, but rather an economy that stubbornly refuses to grow.

Despite the dramatic downturn in Ireland from 2007 onwards, the recovery has brought economic activity back above the pre-recession peak and per capita living standards are about 40pc ahead of where they were 20 years ago.

In Italy, after an unbroken record of solid economic growth from the 1960s through to the 1990s, there has remarkably been no growth at all for the last 20 years. Real output per head is stuck at the level it had reached in 1998, the year before Italy joined the Euro. It is this 20 years of economic stagnation which has given Italy its dysfunctional politics and the willingness to blame Euro membership for the country’s ills.

The new government has agreed a joint programme which aggregated rather than averaged the proposals of the component parties, cumulating their competing plans to raise spending and to cut taxes. The result is a set of promises which would add about 6pc of GDP to the budget deficit: it would have been a manageable 1pc next year on unchanged policies.

Without a climbdown, there will be a row with the EU, trouble in the bond market or both. There is no possibility that Italy will be lent this extra money by the markets or by its European partners, starting from the current monster debt ratio. We have seen this movie before in Greece.

Ireland struck it lucky with the easy bond market conditions engineered by the ECB these last few years. The budget deficit would be four billion per annum higher had interest rates not been driven down across the Eurozone. But the flip side is that an early return to higher bond spreads for the more indebted countries is still a danger, and last week’s gyrations affected borrowing costs for Spain and Portugal as the bond traders reassembled the Club Med.

There has as yet been no market tendency to group Ireland with the southern countries and the dreaded p-word (periphery) has yet to re-surface. The National Treasury Management Agency has sold more bonds than it needed to while the going was good and has substituted long for short-term debt. It would take a real meltdown coming from the Italian crisis to create early funding problems for Ireland.

But the state debt has not gone away. In an investor presentation released on Friday, the NTMA gave figures for the ratio of outstanding debt to government revenue for various countries. Greece is off the chart — but the numbers for Ireland, while improved, are still in a bunch with Italy, Spain and Portugal. With the Irish deficit almost eliminated and the economy (and hence government revenue) continuing to expand, Ireland’s graduation northwards in the perception of bond markets is justified on the evidence.

There are two domestic developments which could see that perception drift southwards again. The first is a return to careless budget policy, the second a repeat credit splurge and consequent weakening in bank balance sheets. The two together would be an unforgivable squandering of all that has been achieved these last few years.

Fortunately, Finance Minister Paschal Donohoe has been dampening down expectations of budget giveaways while an OECD report during the week stressed again the risks of over-heating. Last Thursday, Central Bank deputy governor Sharon Donnery hinted that the Regulator might increase the capital ratios required of banks as the top of the cycle nears, noting that some other European central banks have already done so.

If domestic common sense prevails, that leaves Brexit, and things are not getting better. David Davis, the Brexit secretary, has come up with an extraordinary wheeze to solve the Irish border problem.

Beyond satire, he has proposed two borders. There would be a 10mile area in the North coupled with another in the south where special trading rules (or none) would apply, creating a kind of demilitarised zone where chlorinated chickens could roam free, an Irish Free State reincarnate. The lucky inhabitants could call it Saorstat Eireann, with the capital at Crossmaglen.

Bundoran on the Donegal coast would be inside the Saorstat on my calculations, thus separating Donegal completely from the rest of the Republic. This is surely a disproportionate penalty for voting No at the abortion referendum.

‘Italy is too big to fail and too big to save... any default would trigger a worldwide crisis’