Where now for the peace process?(UK/Ireland)

The British prime minister, Tony Blair, and Ireland's taoiseach, Bertie Ahern, will meet in London on February 1st to discuss ways to safeguard the Northern Ireland peace process in the wake of the collapse of the latest round of talks at the end of 2004. The meeting comes just days after Mr Blair issued a stark warning to Northern Ireland's largest nationalist party, Sinn Fein, that it would be excluded from future peace talks unless its paramilitary wing, the Irish Republican Army (IRA), ceases all criminal activity. Following the breakdown in December of the latest round of talks aimed at restoring Northern Ireland's devolved power-sharing government, the warning is a reminder that the prospects for a normalisation of the politics of Northern Ireland seem more remote now than at any time in at least a decade.

The British and Irish governments' patience with Sinn Fein and the IRA is being severely tested by the latter's continued involvement in criminality. Immediately following the breakdown of talks between Northern Ireland's political parties in December, news emerged of a £26.5m (US$50m) bank robbery in the UK-ruled province, believed by all those involved in the talks, including the Irish government, to have been carried out by the IRA with the knowledge of Sinn Fein. The robbery has raised the most serious questions yet about the democratic credentials of Sinn Fein, and hence the prospects for the peace process. Along with a series of other events in recent months, this has led the Economist Intelligence Unit to re-evaluate its assessment of the efficacy of the peace process, with implications for our political forecast for both the Irish Republic and Northern Ireland.

While attempts to restore the 1998 Good Friday Agreement deal have been intense, the process has been beset by crisis after crisis. The most recent suspension of Northern Ireland's executive and legislative assembly occurred in October 2002, after allegations were made that the IRA had been spying on Northern Ireland Office ministers and other parties at the Stormont regional assembly in Belfast. Direct rule from London was re-imposed. Efforts by the Irish and British governments to restore the institutions failed (yet again) in December 2004, when Northern Ireland's two largest political parties—the Democratic Unionist Party (DUP) and Sinn Fein—failed to reach agreement on a number of issues, including an end to IRA involvement in criminal activity and photographic verification of the decommissioning of the organisation's illegally held weapons.

The latest hiatus is indicative of a wider failure of Northern Ireland's political movements to embrace the opportunities for normalisation offered by the 1998 agreement. When the agreement was signed, a central assumption was that the creation of well-designed democratic institutions in which the political parties would operate could bring about a change in Northern Ireland's dysfunctional political culture. As the seventh anniversary of the agreement approaches, however, it has become increasingly clear that the de-radicalisation of the political extremes has not materialised as envisaged.

In particular, the evolution of the DUP and Sinn Fein away from extremism and towards exclusively democratic methods and values has been glacially slow. The DUP remains fundamentalist in its outlook and continues to see the power-sharing structures in Northern Ireland as something to be tolerated rather than welcomed. More serious in terms of political stability in both Northern Ireland and the Irish Republic, however, is the unreformed nature of Sinn Fein (now the largest party representing the nationalist community) and the IRA. (As there is a high level of dual membership between the organisations, where necessary they are described here collectively as the "provisional movement".) Allegations that the IRA is heavily involved in criminality are believed by all the political parties in Ireland and Northern Ireland.

Recent events brought these concerns into sharp relief. Immediately after the current round of political negotiations ended in late December, a bank robbery took place in Belfast that resulted in the theft of an estimated £26.5m. Given the sophistication of the crime and the protracted period of surveillance that was required to execute the raid, suspicion immediately fell on the IRA as the only paramilitary organisation thought to have the logistical capability to carry out such a complex operation. Despite repeated denials of involvement by both wings of the provisional movement, the Police Service of Northern Ireland (PSNI) stated in early January that all evidence pointed to IRA involvement, a conclusion accepted by all other parties to the agreement, including the Irish government. The result, among others, has been a serious erosion of faith in Sinn Fein leaders.

The robbery seemed to confirm the findings of the third report by the independent body established to monitor the ceasefires of Northern Ireland's paramilitary organisations. Delivering its latest verdict in November, the International Monitoring Commission (IMC) found that there has been no discernible winding down of the IRA and that it has continued to engage in a wide range of criminal activities. While it stated that IRA involvement in violent activity had decreased since its second report, it also noted that the organisation is "alert to the political consequences of demonstrable involvement in organised crime and at sensitive times can rein things back". These words seem prescient in light of the December bank raid, which took place just days after political negotiations had collapsed.

The IMC is now in the process of preparing a special report into the robbery, which is due to be published in early February. The report is likely to back the PSNI's verdict over the IRA's involvement, and recommend financial sanctions be taken against Sinn Fein. However, this alone will do little to restore confidence in the peace process. The British and Irish governments appear to be united in believing that without moves by Sinn Fein and the IRA to create a more positive political atmosphere—possibly including a decision unilaterally to decommission their weapons—further progress will be impossible.

Other recent developments—this time in the Irish Republic itself—give even more cause for concern. In November Niall Binneid, a prominent member of Sinn Fein in Dublin and election worker of a Sinn Fein member of the Dail (the lower house of the Irish parliament), was convicted of covert surveillance of elected representatives of other political parties. These activities, dating from the time of his arrest in 2002, raise the question of whether politicians and/or public servants were ever, or are currently being manipulated or blackmailed by the provisional movement. It also suggests that whatever gains have been made in Northern Ireland as a result of the peace process, these are being offset by the undermining of the Republic's democracy.

This, and other recent events, have been damaging for the Irish government, which increasingly appears to have been duped by Sinn Fein—most damagingly in relation to concessions it was prepared to offer the provisional movement during negotiations on the restoration of Northern Ireland's institutions of devolved government. Believing that further concessions would bring about a breakthrough, it offered to reverse a decision not to grant early release to four IRA members convicted of killing a member of the Irish police in 1996, despite repeated promises that the convicted men would not be released. The government decision to acquiesce to the demand is all the more notable given strong evidence that witnesses in the trial of the men were intimidated, resulting in the dropping of murder charges and their conviction of the lesser crime of manslaughter.

The taoiseach (prime minister), Bertie Ahern, appears to have underestimated the strength of public feeling against the release and the degree to which the decision is seen as a breach of trust. Enda Kenny, the leader of the main opposition party, Fine Gael, made clear his difference of opinion with Mr Ahern and his government on the conduct of the peace process and, in particular, dealings with the provisional movement. Breaking the long-standing bipartisan approach to the peace process, Mr Kenny has criticised the proposed release of those convicted of the killing, a position that appeared all the more astute in the wake of the December bank robbery.

The government's reversal of its previous decision has raised doubts among the electorate about Fianna Fail's frequently reiterated commitment that it would not do any deal with Sinn Fein after the next election (due by mid-2007 at the latest). Sinn Fein has made significant gains in the Republic in recent years, which may leave it holding the balance of power after the next general election. With Fine Gael now likely to stress its more hardline approach towards the provisional movement it is likely to gain votes from those who are unwilling to countenance any involvement of Sinn Fein in the government of Ireland.

Quick Overview of the UK:

OVERVIEW: Although he is now widely mistrusted by voters, the prime minister, Tony Blair, is still likely to lead the governing Labour Party to victory at the next general election, which the Economist Intelligence Unit expects to be held in May 2005. Mr Blair has signalled his intention to serve a full third term in office, but he could be forced to stand down in 2006 if, as seems inevitable, British voters choose to reject the EU constitution in the planned referendum.

With the public finances deteriorating despite strong economic growth, the government will be forced to raise taxes further if it is to fund increases in public expenditure on health and education and still meet its fiscal "golden rule" (which prohibits it, over the course of a cycle, from borrowing to fund current spending). Official interest rates will remain on hold at 4.75% for most of 2005, but should start falling late in the year and into 2006. Real GDP growth is forecast to slow from 3.2% in 2004 to 2.3% in 2005 and 1.8% in 2006. The main domestic risk to our forecast is the possibility of a sharp fall in house prices provoking a more abrupt consumer retrenchment than we are projecting. Inflation will edge up slightly in 2005-06, but will remain below the government's central target of 2%. Sterling will soften slightly against the euro in 2005, but should strengthen against a weak US dollar. We expect the current-account deficit to peak at 2.6% of GDP in 2005.

DOMESTIC POLITICS: Mr Blair has been durably weakened by the widespread public perception that he exaggerated the threat posed by Iraq to justify British participation in the US-led war in 2003. Although he is now widely mistrusted, Mr Blair is still likely to lead the governing Labour Party to victory at the next general election, which we expect to be held in May 2005. The Labour government will owe its re-election to two factors: a solid economic record marked by strong growth, falling unemployment and low inflation; and the continued failure of the main opposition party, the Conservative Party, to re-establish itself as a credible alternative in the eyes of voters. However, Labour's parliamentary majority will be cut as the broad coalition of interests that has underpinned the party's political hegemony since 1997 unravels. With the Liberal Democrats likely to pick up support from traditional Labour voters angered by the government's stance on Iraq (and by Mr Blair's continued alignment with the administration of George W Bush), Labour's majority is likely to be whittled down from 165 (at the last general election) to well under 100.

INTERNATIONAL RELATIONS: As president of the EU in the second half of the year and chair of the eight leading industrialised countries (G8) throughout it, the UK's international profile in 2005 will be particularly high. The prime minister's loss of authority at home, however, could frustrate his objectives abroad. His long-standing ambition to place the UK "at the heart of Europe", for example, looks increasingly forlorn. Not only is there no prospect of the UK joining economic and monetary union (EMU) over the outlook period, but the referendum on the proposed EU constitution risks plunging the UK's relations with the EU into their deepest crisis since the country's accession in 1973 if, as we expect, British voters reject the EU constitution (and other EU member states ratify it). Mr Blair will also have trouble restoring his domestic and European standing unless he can demonstrate that his support for the US over Iraq has brought him tangible influence over the US administration. A litmus test will be the Bush administration's willingness to make greater efforts than it did during its first term to help find a solution to the Israeli-Palestinian conflict.

POLICY TRENDS: The government's domestic priority during its second term has been to deliver visible improvements to key public services such as health, education and transport. Since 2000 large increases in public spending have been earmarked for this purpose. Although some of these have inevitably been absorbed by higher public-sector salaries, improvements are slowly beginning to emerge in some of these services, particularly healthcare. However, the tax burden has been trending steadily upwards since Labour entered office in 1997 and may need to rise further during its third term if the government is to reconcile its commitments on public services with its self-imposed budgetary rules. There is no prospect of the UK holding a referendum to join the single currency over the outlook period, but the government is likely to continue launching microeconomic initiatives aimed at improving rates of innovation in the wider economy and closing the UK's productivity gap with the best-performing EU countries.

INTERNATIONAL ASSUMPTIONS: The world economy in 2004 enjoyed its strongest period of growth in 20 years, but it is set to slow in 2005-06. Having accelerated from 3.8% in 2003 to 5% in 2004, we expect world GDP growth (on a purchasing power parity basis) to slow to 4.2% in 2005 and 4% in 2006. Measured using GDP at market exchange rates (which give greater emphasis to the OECD countries and reflect the exchange rates at which firms trade and repatriate profits), world GDP growth will slow from 4% in 2004 to 3.1% in 2005 and 3% in 2006. Although the projected rates of world economic growth in 2005-06 are respectable by historical standards, the balance of risks to our baseline forecast is weighted firmly on the downside.

ECONOMIC GROWTH: Having grown by an estimated 3.2% in 2004--its fastest rate of growth since 2000--the UK economy is set to slow in 2005-06, as the international economic environment weakens and domestic demand loses steam. Real GDP is forecast to grow by 2.3% in 2005 and by 1.8% in 2006. Although activity in the service sector will slow in 2005-06, it will continue to provide the main impetus to real GDP growth.

INFLATION: Despite the buoyancy of the economy and rising international prices, inflation has remained low and stood at just 1.2% in October. Over 2004 as a whole we expect inflation (EU harmonised measure) to average just 1.2%. With little spare capacity in the economy and with recent increases in producer prices moving down the supply chain, consumer price inflation is forecast to edge up in 2005. However, competitive pressures on the high street will ensure that increases in producer prices do not feed through fully to consumer prices. Indeed, although inflation will rise in 2005 and 2006, it will remain below the government's central target of 2%.

EXCHANGE RATES: Sterling will continue to trade in an intermediate range between the euro and the US dollar over the forecast period. With UK interest rates at, or close to, their peak, the short-term interest-rate differential that has underpinned sterling's exchange rate since mid-2003 will narrow, weakening sterling's external value against the euro in 2005. However, sterling should still appreciate against the US dollar, whose exchange rate will be undermined by the US's massive current-account deficit. Sterling's exchange-rate path is subject to major uncertainties over the outlook period and represents one of the principal risks to our baseline forecast.

EXTERNAL SECTOR: The trade deficit, which has increased sharply since 1997, is expected to widen further in local currency terms in 2005 before falling in 2006, as total domestic demand growth slows. The UK's current-account deficit, however, will be much smaller than the trade deficit, thanks to substantial surpluses on the services and investment income balances. Measured as a proportion of GDP, we expect the UK's current-account deficit to rise to 2.6% in 2005, before falling back to 2.1% in 2006.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.