Wednesday 24 April 2019

Colm McCarthy: A Yes vote is the correct response, unavoidable and in the country's best interests

THE fiscal treaty agreed by almost all EU leaders in Brussels has been spun as a vital component in the strategy to save the euro.

As an exercise in addressing the eurozone's twin banking and sovereign debt crises, the fiscal compact makes no worthwhile contribution. The source of these problems lies in the flawed design of the common currency, and this cannot apparently be admitted by the European political leadership.

So the treaty instead addresses a non-problem: in a nutshell, countries whose public finances are overstretched, and which consequently cannot borrow, will be forbidden from borrowing.

There is a little more to it than that, but not much. Countries with large debt ratios will be required to reduce them steadily over time and all will have to adopt a fiscal rule limiting something called the 'structural deficit'; that is, the deficit which would correspond to normal economic conditions, stripping out recession-induced borrowing. The measurement of structural deficits is more or less impossible and the inclusion of an un-measurable concept in an international treaty is a reckless piece of drafting.

Macroeconomics experts all over Europe have analysed the treaty's provisions and readers deserve to be spared the details. They have concluded that it is essentially an evasion, designed to provide political cover, particularly in Germany, for measures which will have to be contemplated if the crisis persists.

Two reasonable tests to apply are the following. If the new treaty had been in place since the euro's launch in 1999, would it have prevented the crisis? Will the new treaty prevent a second crisis, assuming the common currency survives this one?

The answer in both cases is no: only in the case of Greece, where there was real fiscal misconduct, might the treaty's provisions have made a difference. As to the future, a flawed and incomplete currency union remains vulnerable to destabilising financial flows, regional credit bubbles and sovereign defaults, given the unwillingness to re-engineer the eurozone as a proper monetary union.

The weaknesses which could spark a renewed crisis some time in the future have not been addressed and the pretence is maintained that Europe's problems derive entirely from budgetary excess.

The Irish Government's support for the new treaty has been dismissed as wearily predictable. But it is the correct response, unavoidable and in the country's best interests.

No useful national purpose would be served by opposition. Once the decision was taken to guarantee the bust banking system, the solvency of the state was likely to end up in the hands of our European 'partners'.

Their insistence that the guarantee be honoured, even after its capacity to bankrupt the state became evident and despite the scepticism of the IMF when that actually happened, remains unexplained and will, in time, come to be seen as a watershed in Ireland's relations with Europe.

Irish foreign policy has for 40 years consisted of two words: Trust Europe. The watchword in the Bundesrepublik for even longer has been Nie Wieder (never again), which suggests itself as a successor slogan for Ireland.

The position of pro-European politicians in Ireland has been undermined by the (entirely accurate) perception that the country could have managed its way better out of a mess of its own making had European partners behaved in good faith.

The treaty may eventually have to be put to referendum here. Should that happen, voters should resist the siren calls to 'vote against austerity'. The simple reality is that the Irish Government had chosen to close the budget gap long before the country was delivered into the hands of official lenders, the EU and the IMF.

It is a straightforward lie to pretend that budgetary correction is being imposed by external official lenders and could be avoided if the country had retained the ability to borrow in the markets.

Without the support of the official lenders, the expenditure cuts and tax increases would have been accelerated. Over the next few years, there will be more expenditure cuts, and more tax increases, in any plausible scenario. Those who pretend that there can be a referendum on budgetary restraint are selling snake oil.

If one could enjoy the luxury of voting in a Europe-wide referendum, offering a judgement on whether the Merkozy duo have come up with a credible plan to save the eurozone, the verdict is clear.

This is not a serious effort to re-design a currency union which has failed its first major test -- it is a bad treaty for Europe. A premature and poorly designed currency union has been allowed to derail the otherwise successful European integration project.

That project was moving ahead smoothly enough until the ambitions of the Nineties generation of European politicians out-ran their judgement, and they decided to bet the farm on a common currency project whose design deficiencies were widely criticised at the time.

The current generation of European leaders are in denial about the genesis of the crisis and have failed dismally to acknowledge the scale of reform necessary to create a viable monetary union.

But if there is a referendum only in Ireland it should best be approached from a narrow Irish perspective. The treaty will be adopted anyway and Ireland faces tight budgets for many years in any scenario.

The decision to abolish the independent currency through joining the ill-designed and ill-managed currency union was a mistake, without benefit of hindsight.

However that decision is irreversible. There cannot be a referendum on whether Ireland should have joined the euro.

Opposition deputies in the Dail seem to be gearing up for something else, a referendum on austerity. There can be no referendum on austerity either, in the sense that further expenditure cuts and further tax increases are unavoidable whether or not the referendum passes. This country cannot finance its Government without concessionary lending from the EU and the IMF.

The banks cannot sustain their balance sheets without concessionary funding from the European Central Bank. The country is bust, and rejecting the treaty cannot alter that condition.

It could, however, make things worse. There are treaty provisions which could be interpreted as restricting access to the EU's permanent bailout fund to countries which adopt the treaty.

The Government's official position is that Ireland will not need long-term access to this fund. Indeed, suggestions that it might be needed have been dismissed as 'ludicrous'.

But there is no percentage in running the risk of losing support from official lenders, even if that might not be needed in a benign scenario. Moreover, a rejection of the treaty would antagonise the ECB, whose hostility towards this country has been amply demonstrated.

If there has to be a referendum, the electorate would be well-advised to swallow hard and vote yes, notwithstanding the inadequacies of the proposed treaty.

The priority for the Government is to plot a way out of an appalling situation in a hostile environment. Throwing the rattle out of the pram is poor advice from opposition politicians.

The possibility of a referendum is already beginning to deflect attention from the main task in hand, the elimination of the budget deficit and the ultimate restoration of Exchequer solvency.

The tiresome chanting that 'austerity has failed' invites people to believe that a set of policy options is available that does not involve further expenditure cuts and further tax increases. The reluctance of the Government to abandon austerity, in this make-believe world, can only be due to obtuseness.

The gap between government revenue and government spending is utterly unsustainable. It has persisted only because the EU and IMF have agreed to lend enormous sums to the Irish government when nobody else would do so.

The budget-tightening has proceeded too slowly and the Fine Gael and Labour parties unwisely restricted their budgetary options through unnecessary pre-election promises.

There is no conceivable strategy which involves running large budget deficits indefinitely, and opposition politicians who pretend otherwise are throwing sand in the eyes of the electorate.

Colm McCarthy is a lectured in economics at UCD. This article was originally published in the Sunday Independent on February 5.





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