Hamish McRae: Britain, Ireland, and a case of mutual benefit

Economic Studies

The Queen's visit to Ireland is of course principally a political event, not an economic one, but if it reminds both countries of the economic dividend from closer co-operation then, well, there is a benefit there too. There are at least three elements to the economic relationship, two of which have attracted a lot of attention, the third and perhaps most interesting, less so.

The basic point that the trade relationship is hugely important has been often made. Britain exports more to Ireland than to the four largest emerging economies – Brazil, Russia, India and China – combined. It is our fifth largest export market. Ireland, for its part, exports more to the UK than anywhere else. This trade of itself warrants the UK taking part in the Irish financial rescue, for it is in our self-interest that the economy recovers as swiftly as possible.

The second element to the economic story is UK debts on Irish property. One of the huge errors of both the Royal Bank of Scotland and the Bank of Scotland arm of HBOS was that they plunged in Irish property lending. The Bank of Scotland's Irish subsidiary was lending money in such cheap terms that it undercut the Irish banks and forced them to lend at similarly suicidal rates. The result is that both Royal Bank and Lloyds (which of course took over HBOS) are sitting on piles of bad debts. There is nothing much they can do at the moment except write off much of this stuff but obviously the swifter the recovery in Irish property prices the better the chance that some of these bad debts will eventually come good. Since these two banks are part-owned by the UK taxpayer, it is very much in the self-interest of all of us that the Irish property market does recover.

But there is another broader element to the relationship that seems to me more interesting, which is the benefit the two countries gain from having different competing jurisdictions. You can see what works and what doesn't. For example, the Irish policy of cutting corporate tax rates has been extremely successful at attracting inward investment. A handful of UK companies have moved their headquarters to Ireland as a result, and UK rates have tended to fall too, albeit much more slowly. You could say that this is a case of the Irish tail wagging the British dog.

There are other social policies that originated in Ireland that have been adopted in Britain. These include the smoking ban in public places, followed first by Scotland. And there are economic initiatives followed by Ireland that have not been taken up in the UK, notably joining the eurozone. That is a particularly interesting one as you can argue that had Ireland had an independent monetary policy it would have been better able to control the excessive lending that lead to the property boom and subsequent bust.

My point here is not that one country gets things right and the other wrong. It is simply that healthy competition between two countries that speak the same language, are part of the same economic grouping, and have a shaped past and a land border, has the potential to lift the game of both.

And that is a pointer to the future. There will and should be continuing competition on things such as corporate tax policy, even if this particular issue creates tensions. But there is great scope for more cooperation too. I was astounded to learn that until this month there was no British Irish Chamber of Commerce – there has been an American Irish one for 50 years and a German one for 30. Now one is being formed. True, you don't boost trade just by big top-down initiatives but by lots of small bottom-up detailed negotiations. But there is surely a case for a road-block-clearing body – so it deserves a fair wind.

There is a natural tendency for anyone familiar with Ireland (I was brought up there) to see this royal visit as ending a century of difficulties. But I was talking to an Irish diplomat the other evening who made a much more positive reflection on it. It was, he suggested, the start of something new: the beginning of a period of much closer co-operation to the two countries mutual benefit. Economics are at the core of that. We both need more trade, more jobs, more prosperity.

Silver lining to the inflation cloud

With the announcement of the latest, disturbing inflation figures yesterday, the Groundhog Day routine duly began. The Governor of Bank of England wrote yet another letter to the Chancellor about how the trouble was only temporary and how the Bank was confident that it would come down, and sterling rose on the exchanges in the expectation of an earlier rise in interest rates.

Yet if you look into these figures, you can detect some tiny glimmers of hope that inflation will indeed come back into the target range next year. While the rise in the consumer price index was dreadful, the retail price index came down a little, as did the retail index less mortgage interest payments. If housing costs continue to nudge down, that will bring down the RPI. The recent fall in the oil price is helpful too. Indeed one economist, Simon Ward at Henderson, has suggested that the Bank may be being too pessimistic about inflation next year and that as a result real incomes may start to rise again.

Interest rates will still have to go up of course and some of us expect that before the autumn. Some of us also feel the Bank has been too complacent in the past. But economic numbers don't consistently turn out worse than expected, and it is just possible that by the end of the year inflation will be better than expected.