Business Irish

Sunday 21 January 2018

Voting 'no' to treaty goes hand in hand with a belief in fairies

Chris Johns

In casting our vote we need to carefully weigh up the potential consequences, says Chris Johns

FOR once, it's very simple. Do I choose Yes -- solely to retain some certainty over where we get our next bailout from? Or do I say "No, I have no idea, nor do I care, where our next loan comes from, but it must come from somewhere, surely?"

Are there any facts that can help us make up our mind, or is it all just political posturing? We know, for sure, that we need to borrow a lot of money for many years to come. If somebody doesn't lend us that money, our spending and taxation options deteriorate massively -- and we know how poor they already are.

We don't know who those lenders might be or the terms of such lending. Any prospective lender is going to consider our behaviour in the run-up to any loan negotiation and make an assessment on our creditworthiness. If our collective madness got us into a debt crisis, have we perpetuated that lunacy or have we learned any lessons?

The arguments of the No camp seem to revolve around a belief that the next bailout will come from "somewhere". Some political parties assert an entitlement to many things, including unlimited access to borrowing. Others are more specific: a professor of economics argued that if we put the frighteners on the rest of Europe -- threaten to blow ourselves up, fiscally speaking -- we could improve our negotiating position.

Such tactics can, indeed, be effective. But the effects may not be good ones. And we are unlikely to endear ourselves to our supposed partners. Anger is not a strategy. There is a world of difference between asking for a loan and demanding one. Sure, we can ask anybody, but they don't have to say yes -- and they, not us, will set the terms. How we behave between now and the next bailout will determine the answer to the question and the terms of any loan if that answer is "yes".

Beliefs in fairies and pots at the end of rainbows characterise our debates. That's how we got the house-price bubble, the bank guarantee and the still-prevalent conviction that it's all somebody else's fault. A wonderful example of such thinking is the assertion that if international lenders do not grant our loan demands, we can just close the budget deficit painlessly by raising taxes on the rich. At 52 per cent, our effective marginal rate of income tax is high, both in absolute terms and relative to the rest of the world. And the tax system here is in fact among the most progressive in the OECD.

Income taxes (including the USC) will amount to about €15bn this year, and that's after all the tax hikes of the past few years. The recent assertion by one TD that a further €10bn could be easily raised from taxpayers is up there with the belief that house prices can never fall.

Anyway, €10bn isn't what it used to be: the State is forecast to need to fund more than twice that this year alone. Even if we raise income taxes by a fanciful two-thirds, spending would still have to be cut by at least €10bn in order to close the remaining gap, roughly 20 per cent of net current expenditure.

That's the austerity that lies in our future if we can't find anyone to lend to us. Fairies and pots of gold are much more fun than facts.

How important is any of this? Actually, not very. A suicide-bomber approach to our relations with the rest of Europe ignores the simple fact that we have endeared ourselves to few, if any, of our partners. The Germans have noticed that some of our law-makers now openly advocate law-breaking. When we assert that "We are not Greece" we need to be aware of how others see us.

Europe may or may not resolve this crisis. If it does not, then our treaty vote, whichever way it goes, will be quickly forgotten amidst the chaos. If the treaty is but a stepping stone to fiscal union -- the only possible solution -- we simply have to decide if we want to take part.

It is looking increasingly likely that some countries are not going to make it and that Europe is getting ready for this.

Are we going to be part of this future? We have a democratic right to choose -- the next phase of the union may not be to our tastes -- but we have no automatic entitlements to hard cash. The referendum on the fiscal treaty does not come close to asking the question explicitly in this way but that's the way of Europe, the way of its construction. We just have to understand the question.

On one level it's an explicit gamble on who will have the privilege of being our next lender. On another, it is an existential issue about our future in Europe. Every decision has its consequences. Well beyond the next bailout, a No vote will have far-reaching implications, few of them good.

Chris Johns is chief investment officer at State Street Global Advisors. The opinions expressed in this article are his and not necessarily those of SSgA

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