Joint Committee on European Union Affairs debate -
Tuesday, 10 Feb 2015

Possible Exit of UK from European Union: Colm McCarthy

Chairman

The committee is now in public session. I remind members to ensure their mobile phones are switched off. It is not sufficient to have them on silent mode because they could cause problems for the broadcasting staff and the sound system.

Today the committee begins a series of meetings considering critical issues for Ireland in the event that our near neighbour, the United Kingdom, decides to exit the European Union. The Prime Minister, Mr. Cameron, has promised a referendum for 2017 if he is returned to power in the general election in May. The committee decided to examine this issue now in view of the potential impact on this country and on the many Irish citizens who live in the UK. Hundreds of thousands of our country men and women live there. The meetings represent a valuable opportunity for the committee to hear from a range of informed speakers on the complex issues surrounding a potential UK exit from the EU, or what people are starting to call a “Brexit”.

Today we will hear from the economist, Colm McCarthy, who will provide us with the context of the issue and will, we hope, identify some of the critical issues facing Ireland should the referendum go ahead. On behalf of the committee I welcome Mr. McCarthy to the meeting and we look forward to hearing his views on this subject.

Mr. Colm McCarthy

As the Chairman has pointed out, the Conservative Party is committed to holding an in or out referendum on EU membership, if it wins the general election on 7 May. The Conservative Party’s partner in Government, the Liberal Democrat Party, has not gone along with that and neither has the Labour Party. Unless the Conservatives win a clear majority on 7 May it is not certain that the referendum will go ahead. Mr. Cameron indicated on Sunday in a newspaper that he might hold the referendum in 2016. The original commitment had been for 2017. Whether this referendum happens depends on the result of the general election on 7 May. Recent opinion polls put the Conservative and Labour parties level in voter preferences. Each seems to have 32% or 33% support which means that neither would win an overall majority. Most of the political commentators say it will be a hung parliament with possibly another coalition Government or a minority Government. Possible coalitions could involve the Liberal Democrats who are in coalition with the Conservatives but could go into coalition with the Labour Party. The Scottish National Party, SNP, is expected to win a clatter of seats in Scotland. It is a first past the post, winner takes all electoral system. If the SNP gets even 40% of the vote in Scotland it could win almost all the seats and it looks as if that will happen.

Only a Conservative majority would lead automatically to a referendum on EU membership. Neither the Liberal Democrats nor the SNP favours a referendum but it is not inconceivable that they would agree to one as part of a coalition. That is pure speculation. The Labour Party is opposed to a referendum. If one pays attention to bookmakers' odds as a method of predicting the future, they will offer 4/1 or 5/1 against the Conservatives getting a majority and 10/1 against the Labour Party getting a majority, which shows that they expect a hung parliament. That of course could change.

There is no certainty that a referendum on UK membership of the EU will be held. If a referendum were to be held in 2017 or possibly sooner there is no certainty that it would result in a vote to leave the EU.

There is no certainty it would result in a vote to leave the EU. There are opinion polls hypothesising about a referendum and asking people how they would vote. Mr. Cameron is saying that he would renegotiate the terms of membership in respect of immigration and other matters. These hypothetical questions have been put to voters in opinion polls. If a victorious Conservative Party could achieve some concessions in pre-referendum negotiations with the EU partners and if it recommended staying in, the polls suggest the electorate might vote to stay in. A substantial number of people would vote to leave in any circumstances. The conditional question has been put on the basis of David Cameron negotiating a new arrangement and some concessions. When people are asked how they would vote if he recommended it, it is possible people would vote to stay in those circumstances.

Some members may remember a referendum on staying in or leaving held in 1975. The Labour Party was in government at the time and the Conservative Party was keener on Europe than the Labour Party at that time. It has reversed a bit now. The referendum resulted in a clear majority in favour of remaining in the European Union, or the Common Market as it was. A majority, it appears, would vote to stay in if the unspecified and hypothetical deal with the EU was recommended by the Conservative Party. That would presumably mean the deal is recommended by all of the UK political parties, with the exception of UKIP, which will recommend leaving the EU no matter what happens.

There is no certainty that the Conservative Party will win the election. If it does, there will be a referendum. If it does not win, or if there is a coalition, there still might be a referendum depending on the deal done and the coalition that is in place. The chances are there might be a referendum. If there is one, there is no certainty about the result. If some concessions are secured by the UK Prime Minister and the government recommends people vote to remain in it, it is entirely possible that there will be a referendum and that people will vote to remain in the EU.

I want to focus on the issues that this raises for us. A number of them are quite important. When Ireland joined the then EEC in 1973, Britain joined on the same day. Ireland has never been in membership of the European Union without the UK and the UK is still our biggest trading partner. If Britain were to leave and Ireland were to remain, Ireland would end up as the only Atlantic country, so to speak, in what would then be a continental Europe bloc. To most observers, it seems that Britain would draw closer to the US if it ends up outside the European Union. This could lead to pressure in British politics for an Atlantic trade deal between Britain and the US. The US is another important trading partner of ours, as well as being the principal source of foreign direct investment. That is not to say that we do not have a lot of trade with continental Europe, which we do and we have much more than we used to. However, Britain and the US remain big economic partners for Ireland.

If Britain was to vote to quit the EU in 2016 or 2017, which looks unlikely but is not a remote possibility and is not something we could say has zero chance of happening, there would be serious consequences for Ireland under a number of heads. It is worth reminding everybody that we never joined the EU until Britain did. We applied to join in the 1960s, Charles de Gaulle vetoed British membership and we promptly withdrew our membership application on that occasion. We have never been in the EU without the British. Under the terms of the Lisbon treaty, there is a provision for countries to leave the European Union. A British vote to quit would be followed by negotiations on the terms of departure.

There would be something almost like a treaty of departure for the United Kingdom in those circumstances.

Members should note these terms of departure would have been influenced by the pre-referendum negotiations that would have followed a Conservative victory in May. In this scenario, there will be two sets of negotiations. Let us pretend the Conservatives will win on 7 May, as that is the simplest situation. They will win by getting more than 325 seats and while it does not look like this will happen, let us pretend it has happened. There will then be a referendum, as the Conservatives will announce their intention to hold a referendum in one or two years' time or whatever. That government then will seek to renegotiate with its European partners certain terms of the United Kingdom's membership of the European Union and it is pretty clear what those terms would be. They would include Britain's budgetary contribution, about which people are unhappy, and various issues pertaining to immigration. As everyone is aware, there is completely free movement of labour and movement of people throughout the entire membership of the European Union and some people in Britain are not happy about that. There would be various other things like that. There also is a lot of resistance in the United Kingdom to what is seen as excessive European regulation and such like. There is a kind of eurosceptic opposition in the UK to the jurisdiction of the European Court of Justice and issues of that sort.

Consequently, the first thing that would happen following a Conservative victory would be an attempt by the government of the UK to negotiate various new terms under these various headings before the referendum. Depending on the outcome of those discussions, that government would recommend whether people should vote "Yes" or "No" in the referendum. The issues about which Ireland should be concerned will arise immediately after the election - if the Conservatives win and if there is to be a referendum - because whatever arrangement is arrived at prior to the referendum will condition the negotiations under the relevant article of the Lisbon treaty subsequently.

In view of this it is not the case that the Irish Government could wait until the referendum before it starts to take an interest in the matter. The terms of ultimate departure for the UK, if that is what happens, will have been influenced by the pre-referendum negotiations that would follow a Conservative victory in May or the election of a Conservative-led government that opted to hold a referendum. The Irish Government should insist from the outset on close involvement in these negotiations before the referendum. There can be little doubt but that a Tory victory in May would concentrate minds in Europe. I believe that many British demands would be met because nobody wants Britain to leave the EU. I rather suspect the leadership of the Conservative Party does not really want to do so either but has been forced into promising this referendum by the rise of the UK Independence Party, UKIP, and eurosceptic sentiment. Irish interests will be affected in both the pre-referendum and post-referendum discussions and the former are bound to influence the eventual divorce deal - if there is one - since the electorate's verdict will have been delivered on the terms put before it.

It appears to me there are three areas in which important issues will arise for Ireland. There may be others. The first is the free movement of people. Ireland is the only EU member state which shares a land frontier with the UK. Were this frontier to become the external border of the EU it could become difficult to maintain free movement without visas or passports. It is worth reminding oneself that Ireland has never faced - either pre-1922 or post-1922 - immigration or passport controls of any kind with the UK. Indeed, under the Government of Ireland Act, Irish citizens in the United Kingdom are called "non-foreign aliens". I used to live there and used to be very proud of being a non-foreign alien, whatever that is, but the impact in this regard is that there have been free movement of labour, free rights to reside and all the rest between Ireland and Britain. We were part of the UK until 1922 and the free movement arrangements, which are close enough to common citizenship, have prevailed ever since.

This reciprocal arrangement between Ireland and Britain goes beyond the free movement enshrined in the European treaties and predates our membership of the EU. If an external border of the EU were to exist between Dundalk and Newry, people would need to be very careful to negotiate arrangements which would permit our current situation to survive, if it is possible. The current arrangement is a more intimate relationship even than the Schengen Agreement between continental EU countries. It is clear that immigration is a political issue in the UK, including immigration from countries already in the EU. The issue of free movement will feature in the pre-referendum negotiations between a victorious Conservative Party, if that is what happens, and their European partners. It is a very important issue for Ireland.

The second issue is the free movement of goods. Ireland-UK trade is free of tariffs, quotas and customs inspections and delays. Britain remains Ireland's key trading partner, particularly in labour-intensive sectors, and Ireland has a special interest in the details of whatever free-trade arrangements the UK might negotiate were it to depart the EU. The post-referendum negotiations under the relevant article of the Lisbon treaty would be about such matters and the UK would try to negotiate a free-trade area deal with Europe. A number of non-EU countries, such as Switzerland and Norway, have detailed free-trade arrangements with the EU. We had a free-trade agreement with the UK in 1965, before we joined the EU. We have completely free trade between Ireland and the UK. There are no tariffs or quotas and, by and large, we have common standards and specifications. The Irish economy is more integrated with the UK economy than those of the continental European countries. It is also a matter of geography. Ireland, therefore, would have a very special interest whatever free-trade arrangements the UK might negotiate.

Free trade in agricultural products could be difficult to maintain with Britain outside the EU. The British have never taken to the CAP. They think it is too costly and constantly grumble about it. Agriculture would be a significant element of the post-referendum negotiations if exit from the EU is chosen. There could be issues concerning GM foods, to which opposition in the UK is weaker than in continental Europe and which are accepted in the USA. This is one of the bones of contention in the current negotiations on a free-trade agreement between Europe and the US. If the UK were to leave the EU, it might regard the ability to depart the CAP as a bonus and seek to negotiate arrangements on agricultural trade that might not suit Ireland.

Free trade in services is another issue, and for the UK it means financial services. Despite the UK's non-membership of the eurozone, the City of London remains Europe's financial capital. London and New York are the two great financial centres of the world.

It is still the case that most wholesale financial markets are built around London. This status is likely to come under threat should Britain depart the EU. Both the French and the Germans have always been jealous of London's status as the financial capital in this part of the world and there have been attempts to wrest away some of the financial business from London to Paris and Frankfurt. It is not an accident that the European Central Bank is headquartered in Frankfurt. Germany has always wanted to build that city as a financial centre, while the French have wanted to do the same with Paris. There are fears in the City of London that if Britain quits the European Union, it will be used as an excuse to screw the city's competitive position as a financial centre through various European regulatory oversight mechanisms. Many people in the City are keen on Britain staying in the European Union for that reason.

Members may ask what that has to do with us. The IFSC is partly a satellite of the London financial market, although many other activities are independent of London. Ireland has persuaded people to locate satellite activities here for operations based in London. Most people in the industry would agree that if the City of London gets screwed, it will not be good news for the IFSC.

At this stage it seems unlikely that the Conservatives will win the election. One can get odds of 4/1 or 5/1 against that proposition in the bookies. However, the election is nearly three months away and who knows what will happen in the interim? Even if the Conservatives win and hold a referendum, voters might decide to stay in the EU. Overall, a British exit from the EU is not the most likely outcome but stranger things have happened.

The Irish authorities should seek to get involved in pre-referendum discussions on the deal the UK might be offered, as well as in post-referendum negotiations should Britain opt to depart from the EU. Ireland has more at stake in this matter than any other EU member state.

Chairman

As I have to leave the meeting temporarily, I ask the Vice Chairman to take my place.

Deputy Seán Kyne took the Chair.

Vice Chairman

I thank Mr. McCarthy for his comments on an important topic for Ireland, the UK and the future of Europe. I call Senator Reilly, who is a Border Senator.

Senator Kathryn Reilly

I welcome Mr. McCarthy. In an article he wrote in June last year, he described the response of the Irish Government as a familiar sleep walking routine, with no urgency brought to preparing for contingencies. He suggested today that it should seek to be involved in pre-referendum discussions as well as post-referendum negotiations. In terms of contingency planning, what would he like to see? He said that he does not want to see a repeat of the bank guarantee approach to policy making.

As the Vice Chairman noted, I am from County Cavan in the Border region and for this reason I am very interested in the issue. If a referendum on leaving the EU is carried, what would it mean to the Border region, including the local economy and people's daily lives in the North of Ireland? What would it mean for the North-South dimension and the relationships in political, economic and cultural spheres? Would there be implications in terms of replacing structural funding to allow the Border region to deal with legacy issues?

The removal of border controls in Ireland has been recognised as a key facilitator in increasing all-Ireland trade and tourism, therefore, if these controls are reintroduced, what does Mr. McCarthy believe would be the impact?

Deputy Eric Byrne

I thank Colm McCarthy for his contribution. As if we in Europe did not have enough trouble with Greece, now we have to consider all the "ifs" and "buts" and look at the worst case scenario that is Britain opting out of the European Union. They have had to go through a huge number of hoops but if Britain decided to opt out it would be a disaster for Europe.

Leaving that aside, we are currently in the middle of a debate on the Transatlantic Trade and Investment Partnership, TTIP, the European agreement that is being negotiated. What is Mr. McCarthy's view of the following scenario: Britain outside the loop on the deal that ultimately would be negotiated with our partners in North America? Would it be so scary if Britain were to pull out when, for example, European countries such as Switzerland and Norway are not full members? If we can live happily alongside the Swiss and the Norwegians, who partake in a European capacity, could it evolve that Britain would somehow or other retain that type of relationship?

From reading Mr. McCarthy's paper I believe it would be of vital importance that we are involved in any potential negotiations at the earliest stages because-----

Mr. Colm McCarthy

Before they are suspended.

Deputy Eric Byrne

Yes. In terms of the referendum, who knows? It is an "if" and "but" situation. The Conservatives might recommend staying in Europe, on foot of a referendum and after whatever negotiations were concluded. Those are my three points.

Mr. Colm McCarthy

If I may take Senator Reilly's questions first, clearly there would be a particular impact in the Border counties. The Border, for trade purposes, has more or less disappeared. There is no customs, and there are not that many taxation differentials North and South either now so the Border, as an economic barrier, has disappeared except for washing diesel and such practices. For legal activities, however, it has more or less disappeared.

If the British leave the European Union an option for us would be to say, "We are off with them". That is an option that should not be entirely dismissed but if the British leave and the Border becomes the external frontier of the European Union, that could be very awkward for the Border counties because we could end up with passport controls, customs inspections and so on at that frontier.

I spent a good deal of time in Croatia in recent years. Croatia joined the European Union last year. That has created a lot of hassle for small rural communities on the border between Croatia and Bosnia, which is not part of the European Union, and the border between Croatia and Montenegro, which is not part of the European Union either. There were suddenly many more people marching around in uniforms and peaked caps making life awkward, collecting statistics and so on. That is an issue, and we need to be alert to it.

Deputy Byrne raised the important question of the transatlantic free trade and partnership deal being negotiated. That will take years. One consequence, particularly if Cameron wins and accelerates the referendum to 2016, which is next year, is that the British might decide to be outside the European Union and negotiate their own transatlantic free trade agreement, not just with the United States but with Canada, with which Britain has traditional relationships.

We could also negotiate our own Atlantic free trade agreement, not just with the United States but also with Canada and Great Britain as part of traditional relationships. It could move in odd directions in the event that the British leave. The point was rightly made that Norway, Switzerland, Iceland and a number of other countries were not members of the European Union but that they had free trade access and that in some cases there was also free labour movement. It varies case by case. Countries outside the European Union would, I am sure, negotiate precisely these arrangements.

This does raise the issue of how bad it would be for a European country that was not a member of the European Union. The answer is that it would not necessarily be that bad with the right trade deal and the right deals on the free movement of capital and labour. Such a country would not have much of a voice at the table when decisions were being made, but a lot of people argue that we do not have much of a voice anyhow. Perhaps that might not be true in the case of Britain, but it certainly is true in the case of a small country such as Norway. What does Norway lose in not being a member of the European Union? One could argue that it does not lose very much. It means that people do not have to fly to Brussels all the time, which is not a big issue.

It seems that the transatlantic trade deal will not be concluded by the time the referendum is held, if it is held at all. The British could go off on a completely different tangent as regards transatlantic trade arrangements if they were to see a future outside the European Union.

Deputy Bernard J. Durkan

I congratulate the Vice Chairman and wish him success on his accession to the throne.

I compliment Mr. McCarthy on his address and paper. He paints a very grim picture, about which there is no doubt. A few issues remain that worry me a little. To what extent does he think the outcome of the next British general election might be affected by the decision to hold a referendum? It will have a considerable impact one way or the other. This has not been included in the equation in any of the discussions I have heard.

I note Mr. McCarthy's speculation about Ireland and the United Kingdom ultimately removing themselves from the European Union. That would be a disaster following on a disaster. It would have huge negative consequences for Ireland, the United Kingdom and the European Union. In terms of European unity, it would have a huge detrimental impact in that we would be reversing the concept of the European Union devised in the 1950s.

I do not agree with Mr. McCarthy's assessment of some other European countries, Norway for instance. It had other reasons for remaining aloof from the European Union - mainly to do with resources - and it was a shrewd decision on their part not to do so, but, of course, everything does not stay the same forever. Even though it will have very considerable resources long into the future, fossil fuels may not be as useful, vital or pivotal as they are in the future. That forms another part of the issue.

I am certain that if we see a slow fragmentation of what we have come to know as the European Union, we will see its disappearance. That is the only logical conclusion one can come to. That is why some members of the committee have advocated holding a series of meetings to address the issue of euroscepticism which means different things to different people? What does it mean to the United Kingdom? Usually we hear the words, "we want less of Europe and more national input and influence." How do we do this in a union of 28 countries? Does every country wish to superimpose its own will on the European Union and does every country have to agree with this? Things do not work that way in the real world - unfortunately.

One of the things we must keep in mind is that Switzerland, which is much in the news in regard to other matters at the present time, happens to be almost in the centre of Europe. Unlike Ireland, it is not on the periphery, so there were compelling reasons as to why it should have certain concessions that were almost equal to membership of the EU, with the exception of not being able to influence decisions at the centre. They have got that and they lobbied hard for it. Some of us were here when they did that and it was seen as a concession. I cannot see the same thing happening in this case. I have a very sad feeling of late that a conclusion has been reached in the minds of some people across Europe that we do not want that kind of Europe anymore, we want a different, re-nationalised Europe. If that happens, it will also be a political disaster. Mr. McCarthy painted the picture of two political disasters - a disaster from this country's point of view, a disaster from Britain's point of view and ultimately a disaster from a European point of view. Where does Europe go and why do we not address what appear to be fundamental concerns expressed by people across Europe?

Everybody wants more freedom of expression. When one is in a union, one cannot have the same freedom one had before. Do we now agree with the concept of a union at all? Do not forget that the fact that we do not have a single currency across Europe is an indication on the part of some in the Union. Some may not qualify and some may not have the fiscal stability and stamina to enter the eurozone but, as I have pointed out before, I would like to see how it would work if the United States had a multiplicity of currencies. It could never and would never work. I strongly urge that sane people across Europe will do two things: address the consequences of an exit of some of the major players and address the fundamental issues - real issues, not imaginary ones - of European scepticism across the European Union, including in this country.

Deputy Joe O'Reilly

I join my colleague, Deputy Durkan, in congratulating the Vice Chairman on his elevation, wishing him well in the role, and expressing my complete belief that he will distinguish himself in that role as he has in others. I welcome Mr. McCarthy. We have met on a number of occasions and he has good connections with the Breffni county.

Mr. McCarthy did not talk much about the role of UKIP, although I know there is now an expectation that it will not do overly well. It just occurred to me and I would like him to comment on this: if UKIP got a number of seats, it would be very aggressive supporters of the referendum and of exit. That could queer the pitch a bit, if it were to become partners in government, particularly with the Conservatives. He might comment on how he would evaluate that.

This is a quirky question. Mr. McCarthy is very much aware that there is a huge opportunity for traders in the Border counties - Cavan, Monaghan and across Donegal and Louth - for retailers and all kinds of manufacturers and small traders. It would be no harm if he said it on the record here as we are in public session, because it is something we need to exhort traders along the Border to avail of. As the euro is at its lowest level in a long time, there is huge potential to sell into Northern Ireland and to increase sales. There is a huge opening for Internet sales. While not completely germane to this meeting, it would be good to have Mr. McCarthy accept that point in public, because I would like to exhort traders in the Border area to grasp this opportunity, particularly in Internet sales. There is a huge opening there, and it could be done by small traders. It has a very low capital input.

If the UK were outside of the EU and sterling were weaker than the euro - that may not seem a reasonable hypothesis at the moment - that could have a significant impact in terms of UK tourists coming into our country. Could one argue, in a perverse way, that if sterling were strong relative to the euro, we would have more tourism from the UK, as well as a greater potential for trade? There would also be the converse, of course. Is there a possibility that it may not all be negative and opportunities could be presented by the UK leaving the EU?

I share Senator Kathryn Reilly's concern over the customs issue. We have spent years achieving normalisation in this regard. To go back to a whole bureaucratic apparatus around the Border would be a great disimprovement in the lives of people there. As we are an agricultural country, the GM foods issue and the difference in emphasis in that regard is another important consideration.

Could we stand alone with the IFSC? Could we hold the jobs we have there or would there be much displacement of jobs? While I am a layperson in this area, it makes sense to me that many areas of specialisation are satellites of London, the financial capital of the world. How would we stand jobs wise in that regard?

I accept Mr. McCarthy’s basic conclusion that we should be proactive in negotiating with the UK if it negotiates with the EU. I am happy the Minister for Foreign Affairs and Trade is taking an initiative in this regard. We should be proactive at the diplomatic level, using the Irish communities in the UK and our connections there to thwart the referendum in the first instance. Failing to do so, we must ensure a deal would be negotiated that would work. This discussion is very interesting. Living where I live, the whole community stands to suffer if the UK leaves the EU.

Mr. Colm McCarthy

Deputy Durkan is right in that there has been a fracturing of cohesion in Europe over the past several years. Eurosceptic parties of various types are on the rise in several European countries. UKIP is the one that is relevant in this context but there are other eurosceptic parties in other countries such as the Front National in France. There will be a presidential election in France in 2017 and current opinion polls put the Front National as the largest party. While it might not win because of the run-off second stage in the presidential election, it must be remembered the Front National came second in 2002. It then lost to President Chirac in the run-offs. Clearly, the party is more popular than it was before. It is not inconceivable that Marine Le Pen might win the presidential election. One might get good odds against that but stranger things have happened. She has said that the day she wins the presidential election, France will leave the euro, never mind the European Union.

One of the reasons for the rise of these eurosceptic parties across Europe is the euro. The single currency was a premature project, badly designed and badly managed.

It has given rise to feeling in this and other countries, notably in Greece, that countries are getting screwed by Europe, a generalised notion which may not be reasonable but people feel it. People have been attracted more to national sentiment rather than a European vision these past few years. I think the common currency has done damage to the European project and if it comes apart, and that is still possible, it could do serious damage to the European project. Let us leave that to one side.

If the British were to leave it would be a significant blow to Europe. It is not as if Britain is a small country on the edge, it is one of the three important countries in Europe, along with France and Germany. If Britain were to leave, it would be a huge blow to the European project. I hope it does not happen.

On the question of how many seats UKIP might get, it is possible that UKIP could poll very well and win no seats. The winner is the first past the post. It is a very strange system. It looks like the Scottish National Party will win a large number of seats and it will not stand candidates except in Scotland. If one gets a large vote in a small geographical area one wins seats under the system of first past the post. In reading up on the topic over the weekend I saw projections by people in the University of Essex based on their model of all 650 constituencies, having fed in the voting patterns in the most recent opinion poll as well as local elections results, and in one scenario, UKIP wins 15% of the vote throughout the United Kingdom and gets no seat. That could happen. It is not what they think will happen, but it is not inconceivable.

Let me address what will happen if there is a referendum. People should resist the temptation to offer free advice to the British electorate as to what way they should vote. As they will pay no attention to it anyway one is wasting one's sweetness. We should focus on the fine print of the issues, how the external frontier of the EU is to be policed in counties Cavan and Monaghan and such places. That is what we should focus on and the British electorate will reach a decision regardless of what we say.

Deputy O'Reilly raised the issue of the sterling exchange rate. There is nothing we can do about it. We decided in 1999 that we would use the euro and have no Irish currency. The British decided that they would not do that. Ever since the exchange rate between the euro and sterling is something that happens. It is like the weather. We have absolutely no influence over it, good, bad or indifferent. There have been times when retailers on the northern side of the Border were doing fine and there may well be occasions in future when it is the other way around. It is entirely outside of our control.

Deputy O'Reilly also raised the question of whether the IFSC could stand alone if there were problems in the City of London. That is entirely possible and there are many good businesses in the IFSC that are independent of what happens in London and hopefully would survive and prosper. The demise of the City of London has been predicted regularly down the years. It was predicted that when the British decided to stay outside the euro this would be the death knell for London's financial business and that it would all migrate to Paris. That was the fashionable view 20 years ago but it did not happen. These businesses are sticky in the sense that the City of London has a big business in very technical areas, one such example is the reinsurance market. The reason that business will always be there is because it has the infrastructure of the markets, companies and human capital that is devoted to these things.

London has survived and prospered as a financial centre against a lot of gloomy predictions made during the years. That might even be true here, too. Dublin has a lot of technical infrastructure in the financial services centre that is not easy for others to replicate. Some of the businesses located there would certainly survive. However, if there are ongoing operations, as there are, that provide support and back office services for companies in London and if these companies were to get into trouble, there would be a ripple effect here. That would be inevitable.

Senator Terry Leyden

Mr. McCarthy is very welcome. I also welcome the members of the public and the public servants in attendance. I am sure they are here to hear Mr. McCarthy's words of wisdom, rather than the words of committee members. I note that they are taking detailed notes on his contribution. He is regarded as the sage of Ireland; the wise man who brought forward an bord snip nua and so forth, all of which we have survived and are still around.

The British would be absolutely mad to leave the European Union. If that country wants to self-destruct, all it has to do is sign an order to leave the European Union. The European Union is a massive market of over 500 million people, but, quite frankly, I do not think that will happen. The British had a very narrow escape in the Scottish referendum, which possibly could have led to the break-up of the United Kingdom. Surely they learned a lesson from it. Now, however, they are proposing the break-up of the European Union, of which Britain has been very proud to be a member for a very long time and from which it benefited. It has benefited enormously from its proximity and links with the Union.

I agree with Mr. McCarthy on the question of interference. I argue that the Department of Foreign Affairs and Trade and other Departments should desist from becoming involved in the campaign because such involvement would only be viewed as acting in self-interest. It is in our interests that Britain stay in the European Union and it is tempting to go and canvass. However, we know only too well how much we resented others becoming involved in the Lisbon treaty and other campaigns here. We resented British parliamentarians and politicians coming here and telling us what to do. That said, we could certainly try to be persuasive on a one-to-one basis in discussions through our embassies, business connections and so forth.

There is, however, a positive side to all of this; it is not all negative. If the British were to pull out - may God be good to them and I would wish them well - this would be the last remaining country in the European Union in which people spoke English in the context of inward investment. Even the fact that there is a proposal for Britain to pull out of the European Union has affected investment decisions in board rooms in the United States of America. The Americans are very wary because the way they see it is that if they were to build a plant in Britain and Britain then pulled out of the European Union, they would not have direct access to EU markets. We have such access which we are guaranteeing. Britain can do what it likes, but we are not pulling out. As far as I know, that is the policy of all parties in this country. I certainly subscribe to the view, as does Fianna Fáil, that under no circumstances should Ireland leave the European Union. We would negotiate an agreement with the British, in the event that Britain pulls out, which would be favourable to both sides. Ireland is Britain's fifth biggest customer and we would not jeopardise this. Ireland is a very big customer relative to its size.

Frankly, it is useful to plan ahead. One should never fatten the pig on the day of the fair. People like Mr. Mc Carthy and other academics should be brought in by the Government to examine all possible scenarios. We must decide where we would stand if this scenario were to come to pass. It might not happen; for now it is hypothetical. However, the fact that it has been proposed means that we must be alert. That is why I am glad to see officials from several Departments and the Taoiseach's office here. They are watching the situation closely and I presume there are officials in the Departments of Foreign Affairs and Trade and the Taoiseach who are gearing up and assessing our position and objectives. They are bringing in people like Mr. McCarthy to discuss the issues involved. In that context, the committee is playing an important role in looking ahead.

Its role is to look ahead and provide a forum for people like Mr. McCarthy who holds an academic position to outline how they feel at this point.

Deputy Seán Crowe

I welcome Mr. McCarthy. We are usually accused of navel gazing but today we are gazing into a crystal ball. The debate is interesting. If Britain were to leave the European Union, it would be a disaster for Ireland. Senator Terry Leyden says the British would be mad to do so, but there is also the expression about mad dogs and Englishmen out in the midday sun. Britain might well take that route. If that scenario were to happen, we must focus on what we should be doing in the run-up to it. Mr. McCarthy says Ireland should be involved in negotiations on its exit. Is there anything else we could do? As Britain is Ireland's largest trading partner, should we line up a free trade agreement similar to the one we had in the past? There is synergy and also, as Mr. McCarthy pointed out, an historical aspect to the relationship, as well as a trade aspect.

It would be a disaster for the peace process in the sense that we are selling the island as an all-island economy. What impact would it have in that regard? It would have an impact on ordinary people's lives. At the height of the Troubles people were crossing back and forth. It would change the dynamic if we were talking about an external border as happened in the early days of the State when there was more of a frontier mentality.

Mr. McCarthy referred to the negotiations. There is almost an arrogance among the Tories that they will come out with a good deal, as they are talking about getting a favourable deal. If a decision is made, will it strengthen or weaken their hand? An element will say Britain was never really part of Europe. Mr. McCarthy referred to the City of London. At one stage the Germans would have loved to have had the City based in Germany.

With regard to fortress Ireland, dealing with foot and mouth disease and animal health issues, we sell the island of Ireland from the aspect of tourism. This is because Ireland is a small country and there would be ramifications. We must sell it on the basis of the impact it would have on Ireland and Britain, rather than on the wider European Union. Does Mr. McCarthy agree that this is the way to sell it? There would be a major impact in places such as Lifford, Strabane, Blacklion, Belcoo, Newry and Dundalk.

Does Mr. McCarthy think it was a mistake for the then President of the European Commission, José Manuel Barroso, to become involved in the Scottish referendum? Mr. Juncker has become involved in the Greek issue. Did it sour things in Scotland with the pro-independence parties? What would be the impact on the EU budget if Britain were to leave? We argue that the budget is not big enough to deal with current problems. Britain moving closer to America makes sense, but I am more interested in what the impact would be on our small country.

It is understandable that people in Europe are sceptical about the way Europe is developing. That is a legitimate concern for people in Britain and anywhere else. We need to take those concerns about its development as a union on board. Does Mr. McCarthy think the model that is developing is part of the problem?

Mr. Colm McCarthy

Senator Leyden made a reasonable point, which I omitted to mention, namely, if Britain left the EU and we remained in it there might be some opportunities. He made the point that we would then be the only English-speaking country left in the EU. The others are catching up very quickly and English has become the business language not only of Europe but of the world. It is worth thinking about whether in the event that Britain did leave, that would throw up some positive possibilities.

Deputy Crowe wondered if the British left would we be able to negotiate a separate free trade type of arrangement. The fast answer is "No" because the EU is a single negotiating body for commercial policy. Economists use the phrase "commercial policy" to describe anything to do with tariffs or quotas and so on. The commercial policy of each member state of the EU is no more. It is all done at Community level. The divorce settlement would include the terms of trade access for Britain to the EU markets and vice versa. Our position I guess would just fall out as a by-product of that. It is not open to an individual country such as Ireland to have a trade agreement with somebody. Ireland cannot negotiate tariffs or quotas with Bolivia or Mongolia or anywhere like that. That is all done at EU level.

Deputy Seán Crowe

That was my point. Would it be possible to line up people for the idea of Ireland’s unique situation, not just historical but also the impact on trade as part of the divorce settlement?

Mr. Colm McCarthy

That is why I attach so much importance to getting involved before the referendum if the Tories win the election. If they do not win, the problem is solved and the issue may never arise. If they do we need to get involved quickly.

On the nuts and bolts, it seems to me that creating afresh a serious frontier between the North and South of Ireland is unique to us. No other EU country has a land frontier with Britain. We are quite entitled to draw that to people’s attention and make it clear that this is a big issue for us and that we need to get involved early.

I am not an expert in agricultural policy but GM foods are featuring in the transatlantic discussions and the scientific evidence lines up with the United States. There is no evidence that GM foods do any harm to anybody. If they did one would have to bring one’s own grub to New York.

If the British outside the European Union decided to take a different path in that regard, it would have serious implications for Irish agriculture. Britain is a big customer for the Irish agribusiness sector.

Vice Chairman

Before Deputy Durkan comes in again, I have a couple of questions. I remind the committee that as we progress through these meetings the focus of the discussions must be on the implication for Ireland not on the decision of a sovereign country. We are not here to tell anybody how to vote in the forthcoming election. That is not the remit of the committee.

If the UK left and its economy improved - and the sky did not fall in - would other countries feel that they also would be better off outside the EU? Could there be a knock-on effect on countries such as France and Germany?

On the free movement of people, if the UK left, would the EU or even the UK allow our existing relationships? Obviously considering that we would have more liberal movement of people within the EU, people would be able to come into Ireland and they would deem that to be an easy route into the UK thereby meaning that the migration problem would not be solved.

Mr. Colm McCarthy

There are many such nuts-and-bolts problems that will have to be addressed. They will arise in the negotiations if the Conservatives win the election prior to the referendum. So if we did not get involved prior to the referendum, the game could be over by the time the referendum got carried in the sense that commitments would have been made about some of these things.

The big European countries, particularly France and Germany, will go to some lengths to try to keep the United Kingdom in. Everybody knows it would be an extraordinary blow to the Union if one of the three big countries were to leave. Many efforts will be made to try to meet whatever grievances they may feel they have.

The Chairman asked if other countries would follow if the United Kingdom were to leave. I cannot think of one that wants to. Certainly euroscepticism is pretty strong in some parts of eastern Europe. Hungary for example is not as europhile a country as it used to be. There is some irritation with aspects of European policy.

The eurozone has a greater capacity to fracture European unity. Greece is the obvious example. Cyprus also feels it was badly done by and mistreated. There is some unhappiness in this country about things the ECB did and so on. The eurozone has the potential to be a source of political fragmentation in Europe, more so than the European Union itself.

I do not know of any country that is contemplating exit in the way the United Kingdom is. There are two major political parties in Britain - the Conservative Party is one of them. If one of the main political parties in the country is committed publicly to an "in or out" referendum, that is a pretty serious development. I do not think that is the case elsewhere. Even in France where the Front National is eurosceptic, it is talking about leaving the euro but not leaving the European Union - not at this stage anyway.

Deputy Bernard J. Durkan

Mr. McCarthy is right about the fears about GM food. There is no scientific evidence, but there is a lot of emotion, which creates its own impetus. There was also the fear that certain brand names would achieve a world monopoly in respect of certain products which would have an impact on poorer countries and developing countries in particular. The scientific evidence is not there to support that. However, we know of cases where multinational corporations for their own particular reasons exploit such situations and have always done so.

I do not agree with the tendency in this country to downgrade the euro's importance. The UK is not in the euro and it had its own economic downturn. It had all the advantages that we profess we should have had and would have had in the economic downturn, and still could not avert its own economic downturn.

It had the advantage of size in terms of economies of scale. Ireland or other small countries would not have that.

I may be slow to understand these issues but I worry when people pick at the euro generally and wonder what would happen if we did not have it. If there were more currencies and the euro was in a smaller space there would be wide-scale speculation in the financial markets among the various currencies, which always takes place but would take place to a much greater extent. In the 1960s, I remember Harold Wilson, God rest him, speculating about what would happen next when there was a run on the pound; Mr. McCarthy might even remember that far back. It was a serious situation and the Prime Minister of the country was virtually helpless to do anything about it. Once the run started and it was perceived that the currency was relatively weak, immediately it went into a roll and it was effectively the end of a particular administration at that time. I bring that to people's memories because that can happen, and will happen, if we continue to pick at the euro to the extent that it falters.

I will make a final important point. The banking sector here, and across Europe, was strongly opposed to the euro at its inception and speculated grimly as to what the consequences would be for the banking sector. It did not happen that way. It self-destructed in a totally different fashion because of what I regarded was the lack of responsible controls.

I could go on forever but the Vice Chairman would not like that. I am sure Mr. McCarthy is fed up listening to fellows like me as well.

The number of eurosceptics is growing. Sweden and the Netherlands have their share of eurosceptics. It was pointed out at a meeting of this committee not long ago that other countries are of similar thinking and, when pressed on that subject, the identity of those other countries was disclosed. I would have serious concerns, as do many other people, both politically and economically, for the countries within Europe in the event of one country leaving or that starting an avalanche would end up reversing the entire European concept. It would be a disaster for Europe, a disaster for the United Kingdom, a disaster for this country and possibly a disaster globally.

Mr. Colm McCarthy

I think the Deputy is right that nobody should be attributing all of this country's problems or those of other countries solely to the euro. On the other hand, most people understand now that it was not designed as a proper monetary union. It is only a common currency area and common currency areas are less stable than monetary unions. The United States is a proper monetary union. Nobody expects the Governor of Texas to sort out the banks in Texas. The "Feds" do it in Washington. Europe was not set up as a thoroughgoing monetary union. Perhaps we will construct that in the next few years with more centralised bank supervision and bank resolution, and a centralised macroeconomic policy, but right now we do not have those things and in that sense I believe the experiment was premature.

It is certainly not the case that if we had stayed out of the euro everything would have been fine. If we had stayed out of the euro we would have had a bubble, and we would have got into trouble. The bubble might not have been as big but countries outside the euro had bubbles also. Denmark, for example, is outside the euro and they had a bit of a banking bubble, and a housing bubble, although not as bad as here. That is a complicated issue.

The more immediate threat to cohesion in Europe is not the possibility that the British might vote themselves out, although they might, but that some country might fall off the edge of the eurozone. It nearly happened in Cyprus where there were capital controls and the currency was rendered inconvertible inside Cyprus, never mind externally, for a while. That is no longer the case but an accident can happen.

It could happen that Greece exits the eurozone during the current poker game. This is a dangerous game because it could result in a lack of confidence in the ability of Portugal and other countries to survive in the eurozone. In regard to Britain, the committee is correct to be discussing the issue. Chances are it will not happen, however. If one was betting, one would bet that Britain will still be a member of the European Union in ten years' time but it is important to be alert to the dangers. Given that a referendum is likely if the Tories win the election, it is important to get involved in the discussions prior to any such referendum because those discussions will determine the shape of the divorce settlement. We have a legitimate reason for getting involved, namely, because it matters more to us than to any other country in Europe. If our neighbour and biggest trading partner quits the European Union, we will be in the situation of being in the EU without it for the first time ever. We would not have joined the EU if it had not. We should remind ourselves of the practical reasons for that. This is a vital national interest and we need to get involved at the earliest opportunity if a referendum appears likely.

Vice Chairman

I thank Mr. McCarthy for his comments on an important topic which we will be pursuing in the coming weeks and months. I propose that the committee go into private session to deal with private agenda items. Is that agreed? Agreed.

The joint committee went into private session at 3.25 p.m. and adjourned at 3.30 p.m. until 2 p.m. on Thursday, 12 February 2015.