Tuesday 20 August 2019

Colm McCarthy: Voting Yes to this flawed treaty

The fiscal compact is a poor attempt to address the sources of Europe's bank crisis, says Colm McCarthy

23/02/2012. Change Nation. The First platform of its kind in the world, Change Nation will commence in Dublin between the 22nd and 24th March 2012 and will be attended by fifty of the worlds leading social innovators. Up to 500 one on one meetings will take place over the three days between social entrepreneurs, philanthropists, buisness and political leaders. Launching the event is An Taoiseach, Enda Kenny TD at Goverment Buildings in Dublin Today. Photo: Sam Boal/Photocall Ireland
23/02/2012. Change Nation. The First platform of its kind in the world, Change Nation will commence in Dublin between the 22nd and 24th March 2012 and will be attended by fifty of the worlds leading social innovators. Up to 500 one on one meetings will take place over the three days between social entrepreneurs, philanthropists, buisness and political leaders. Launching the event is An Taoiseach, Enda Kenny TD at Goverment Buildings in Dublin Today. Photo: Sam Boal/Photocall Ireland

The referendum on the fiscal treaty should be considered solely from a narrow Irish perspective. Forget about being good Europeans and forget about having a popular vote on whether the current situation in Ireland is what people would like.

There cannot be a referendum on whether Ireland is in recession or on whether austerity can be avoided. Nor has the Irish electorate been engaged to offer advice on the proper conduct of European policy.

This is a rotten place to be, enormous mistakes have been made here in Ireland and some of our European partners have helped to compound them. Accept also that they have been doing a poor job in managing the European common currency and accept finally that unthinking Europhilia is no longer a viable policy for Ireland, if it ever was.

ANALYSIS MINISTER JOAN BURTON WRITES, PAGE 30

The treaty itself is a poor attempt to address the sources of Europe's banking crisis and is designed to address political, rather than economic, concerns. If the question posed was 'is this a good treaty for Europe?' -- in the sense of fixing the eurozone's design flaws -- the answer would be no.

The question for Irish voters is narrow. Where precisely do the best interests of this country lie in deciding how to vote in the referendum?

A good place to begin is with an inspection of what the treaty actually contains. Does it place extra constraints on Irish policy in the years ahead? The constraints are serious, anyway. Does this treaty involve additional constraints that could be avoided by voting No?

Ireland is already bound by European budgetary rules. These rules are modified to a degree by the new treaty but the key question is whether adoption of the treaty by Ireland will materially alter the budgetary options actually available to future Irish governments. This does not seem to be the case.

The Irish budget deficit will be zero, or very close to it, four or five years from now, in any plausible scenario.

The country is subject to objective reality, rules or no rules. The objective reality is that the Government is bust, unable to borrow from volunteer lenders and reliant on the goodwill and forbearance of the EU and the IMF.

The banks are also bust and would close tomorrow without the support of their foreign owners or, in the case of the domestic banks, the provision of credit from the European Central Bank.

Objective reality cannot, unfortunately, be suspended through referendum. Nor can the decision to abolish the Irish currency and join Europe's ill-designed and unreformed currency union back in 1999. The bank bondholders, rashly guaranteed in the autumn of 2008, have largely been paid. None of this can be undone by voting against the treaty.

It does not contain an honest plan to create a durable monetary union for Europe. It persists in the fiction that budgetary policy failures are at the heart of the eurozone's travails and that the currency union would have worked out just fine had it not been for the sins of finance ministers in the European periphery.

This is nonsense and it is distressing that Europe has saddled itself with political leaders and a central bank that persist, four years into the crisis, in the unapologetic peddling of this fairy tale.

The fiscal treaty will not fix the dysfunctional architecture of the common currency and it is lamentable that so many people have chosen to evade their responsibility to admit its weaknesses and propose workable reforms.

But the Irish electorate is not being asked for a verdict on the performance of the ECB, the design of the common currency or the adequacy of the fiscal treaty as a response to the European banking and sovereign debt crisis.

The treaty will come into effect if 12 eurozone states out of 17 choose to adopt it. It appears that at least 12 will do so and so the treaty is going to be adopted, whatever the result of the Irish referendum. The net issue is whether Ireland joins the club of states adhering to the treaty.

So what is in the treaty? Essentially, it seeks to tighten the existing regime of European budgetary targets and oversight, but not in a manner likely to impose constraints on Irish policy that are not already in place. In any event, since Ireland is in an emergency funding programme, the provisions of the new treaty do not matter until Ireland graduates, which will take several more years.

In essence, the treaty says that distressed eurozone members with heavy deficits and debt who might wish to continue running large deficits indefinitely will not be allowed do so. But they will be unable to do so anyway, since nobody will lend them the money. The bond market certainly will not, nor will official lenders, such as the EU or the IMF. If nobody will lend, you cannot borrow and a formal borrowing constraint in some treaty or other is beside the point.

There are three material new features in the fiscal regime that is proposed. The first is that countries with a debt level in excess of the Maastricht limit of 60 per cent of GDP will be expected to reduce it gradually to that level. Ireland will be well above the limit whenever we graduate from the official lending programme. However the requirement to get excessive debt down to 60 per cent was always there in the Stability and Growth Pact but was simply ignored in both Greece and Italy. Any sensible country would wish to get a heavy debt burden down, as Ireland did successfully in the 1990s.

The second new feature makes no sense at all. This introduces a target for something called the 'structural' deficit, a concept used in macroeconomics to allow for the fact that the measured deficit rises automatically when the economy is weak but will right itself in a recovery. In a downturn, the 'structural' deficit may not be quite as bad as the measured deficit.

The trouble is that economists and statisticians are not able to measure structural deficits with any accuracy. It is a matter of opinion what the Irish deficit would be (the measured figure is to be 8.6 per cent of GDP in 2012) if the economy was functioning normally. Lower, no doubt, but it is very difficult to say how much lower.

Those who drafted the treaty have specified that structural deficits should in future be pegged at 0.5 per cent of GDP, so the latitude to run a deficit up to the Maastricht limit of three per cent would only be available in recessionary times. Since the structural deficit is too hard to measure, this provision will never be used. It is reckless and irresponsible to specify, with actionable consequences, a precise target level in an international treaty for a concept which is incapable of meaningful measurement.

This provision will, doubtless, be revised in due course, so the wording of the referendum might best leave the details to legislation.

The third important provision concerns access to the permanent EU bailout fund, the ESM (European stability mechanism). Only those countries which adopt the treaty will have access. Ireland will not need another bailout if everything goes well and the country gets back into the market on schedule. But there can be no guarantee of this happy outcome and it is always nice to know that the credit facility is there, even if you hope that it will not be needed.

Opposition parties appear to be limbering up for a referendum on austerity. There can be no referendum on austerity. The Irish budget deficit is far too big and will have to be reduced sharply, and soon, in any plausible scenario. That means more expenditure cuts and more tax increases.

Many voters will see the referendum as an opportunity to register a verdict on the behaviour of the ECB and EU Commission towards Ireland. They have done abysmally, culminating in the insistence by the ECB that a bust Exchequer should pay unguaranteed bondholders in a bank that has already closed.

No central bank has ever imposed such a burden on a bust sovereign anywhere in the world, to my knowledge. Fortunately, this negative verdict is shared by the International Monetary Fund, which called on Friday for a straightforward reversal of this extraordinary ECB policy.

The referendum should be supported. There will be later and better opportunities to reconsider the terms of engagement with the new Europe.

Sunday Independent

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