Brendan Keenan: Fiscal treaty's complex rules may prove the only way to play
GOLF, I read in one of my Christmas presents, is a simple game with 200 pages of rules. The reason? It is so easy to cheat.
I am not sure how many pages there are in the new fiscal treaty, but there is no doubt about its purpose -- to prevent cheating.
If there was ever any doubt, the remarkable proposal to have an EU representative have the final say over the fiscal decisions of Greece proves the point. It is, in its own way, a tacit admission that even the all-embracing rules and surveillance systems of fiscal 'union' may not be enough.
Proceedings at the European Court of Justice, or fines for countries whose problem, presumably, is budget deficits, are not entirely credible as ways to prevent cheating.
"Cheating" is perhaps a bit unkind. Governments are always bringing in rules to ensure fiscal responsibility and then falling by the wayside, very often with the best of intentions (which sometimes happens to golfers as well).
Gordon Brown had his 'golden rule' to separate current and capital spending, but then splashed out on every conceivable -- and some inconceivable -- kinds of capital spending. As I mentioned last week, most states of the US have laws prohibiting budget deficits, but they still get into trouble.
Spending growth
Believe it or not, after the traumas of the 1980s, Irish governments limited growth in day-to-day spending to 2.5pc a year, but who could stick to that when money was pouring into the Exchequer?
It is, however, a useful reminder, as demands for the people to have their say in a referendum swirl around us, that harsh budget rules always follow budget crises, whether imposed externally or not.
For a time, they may even be followed. The EU's intention, and Germany's intention specifically, is that this time they will be followed permanently.
The fiscal treaty is an enforcement mechanism to prevent backsliding, not a new set of rules. In a working paper for the Institute of International and European Affairs*, economist Pat McArdle argues that the fiscal treaty adds almost nothing to the existing rules.
Quite the most curious aspect of all this is that those rules were signed off just six weeks ago by all 27 member states, Britain and Czech Republic included, with barely a political ripple. Has anyone told Mr Cameron?
The ripples, even some waves, blew up in Ireland almost entirely on the question of whether there will be a referendum.
The possibility arises, not because of the rules themselves, but because they are to have the force of domestic law; preferably of constitutional law, although this will not be the Irish Government's preference.
The rules may not have changed much, but putting them into law is not without significance.
Former Finance Minister Charlie McCreevy did that with the annual contributions to the National Pension Reserve Fund, with the express purpose of preventing his successors simply stopping the payments if it suited them.
Not surprisingly, the law was repealed after the crash, without any serious objections in the Dail. It would be another matter to repeal these new laws without EU approval. Governments could also be challenged in their own courts if they simply ignored them in practice.
Just like the rules of golf, the fiscal restrictions are likely to get attention only when they apply in real situations. That is a pity; especially in Ireland where we have the complication of being in a bailout programme as well.
The point has already been largely missed that the agreement with the troika takes precedence over the fiscal union rules, and that the terms of the agreement are more onerous.
Any referendum would be on a question which theoretically will not arise for a quarter of a century.
This has nothing to do with whether there is a second bailout after 2014. It has everything to do with the size of the national debt.
Irish fiscal policy will be driven by the requirement to reduce national debts to 60pc of GDP, and to do so each year by 5pc of the gap between the actual debt and the 60pc figure.
Official projections see the Irish national debt peaking at 120pc of GDP. Assuming that fairly optimistic forecast is met, Irish tax revenues would have to exceed government spending by 3pc of GDP -- €5bn in 2012 terms -- for some 25 years.
The 'austerity' of which everyone complains will not cease until this 'primary surplus' of 3pc of GDP is achieved, if by austerity one means the situation where each Budget takes more out of citizens' pockets and/or reduces state payments to them.
As the process grinds on, it will be difficult to maintain even the semblance of rational political debate on these issues amid the confused landscape of the EU rules, the bailout programme and the pressures of financial markets.
It is not too soon to start thinking about that last one. The financial system that caused the 2008 disaster has survived remarkably, and disappointingly, intact, but it is still hard to believe that the world can return to pre-crash conditions.
In particular, governments may find it more difficult and expensive to borrow than before. The idea that the bonds of advanced economies are virtually risk-free has been blown.
Small countries with big debts and large future liabilities for things like ageing will be particularly vulnerable.
Who does that sound like?
Germany's tactics during this crisis are open to criticism, but its strategy has to be taken seriously.
The Germans enshrined balanced budgets in their own constitution largely to prepare for the costs of not just an ageing population, but a shrinking one. Every European country faces versions of this problem.
I heard one of our leading specialists say last week that cancer cases were expected to increase by 50pc over the next 20 years, simply because the population would be getting older. Many more such costs are coming our way.
The Fianna Fail-led administrations not only ignored the underlying deterioration in existing public finances but, with the exception of Mr McCreevy's pension fund, refused to take any cognisance of known future costs.
The present Government no doubt would like to, but is piling up new liabilities to make things a bit easier today.
Even by 2014, those liabilities will be looming up. In Ireland's case, it may turn out that these are not just rules, whoever thought them up or enforces them, but the only way to play the game.
*The Euro Crisis: The 'Fiscal Compact' and Fiscal Policy: www.iiea.com
Originally published in
