Thursday, May 24, 2012

Ireland set to vote a grudging yes on Fiscal Treaty

Ireland is set to vote in no less than its ninth European referendum next week. As they have done in the previous eight, the major two parties are supporting the yes vote. But as in the past, this is no guarantee the ayes will have it. This is because like many of the previous ones the issue on the table is obscure and Austere Ireland has long since lost its romance with Europe. Those supporting the treaty have issued dire warnings of a “no” vote. 

The latest vote is on the Treaty on Stability, Coordination and Governance in the Economicand Monetary Union more commonly known as the EU fiscal compact or EU fiscal treaty. The treaty tries to put in place a number of measures to get EU countries to balance their books and put an end to excessive borrowing.  Ireland is one of the worst offenders though is slowly on the mend. The Irish economy has stabilised after three years of contraction. The European Commission forecasts a GDP rise of 0.5% this year and all the quarterly fiscal targets under the bail-out program have been met.

Ireland needs a constitutional change to ratify the compact.  Article 29 of the 1937 Constitution deals with international relations.  Article 29.4 has been modified a number of times to signify the various EU treaties Ireland is a signatory to. If passed, the 10th subsection of Article 29.4 of the Constitution will add a clause to the effect that: “The State may ratify the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union done at Brussels on the 2nd day of March 2012.”

Irish Broadcaster RTE has published a detailed breakdown of the 16 articles of the treaty and how they affect Ireland. The key article is Article 3 which sets out the requirements how to run balanced or surplus budgets and how it will be monitored and reinforced. The article defines an upper structural deficit of 0.5% of GDP where a structural deficit is defined as one where an economy is losing money despite operating at full potential.

Each country must meet a medium term objective which is a program of action to reduce their debt. The original Maastricht Treaty had a Stability and Growth Pact which had targets for public debt which had to be supported by annual programs. It had a 3% rule for budget deficits but it went out the window after both heavyweights Germany and France breached the upper limit in 2003-2004.

That caused a rule change in 2005 to make it more flexible. Many countries hid the true extent of their budget situation – none more so than Greece so that by the time the truth emerged the damage was done. In response, the EU introduced the Six Pack in 2011 of five regulations and one directive and the Fiscal Compact builds on this. The Six Pack has strict enforcement of debt limits with countries subject to monitoring and penalties for breeches. These penalties would kick in earlier before countries could no longer afford to pay them. It also clamps down on property bubbles and makes it easier for countries to vote for sanctions against those who break the rules.

The Six Pack had an upper structural deficit of 1.0% of GDP which the Treaty reduces by half. Those against it such as Sinn Fein have dubbed it the Austerity Treaty. Party president Gerry Adams said it surrendered “significant control of Irish fiscal and budgetary matters to unelected and unaccountable EU officials.”

Those in favour have issued the usual warnings to the consequences of a no vote. Sean O'Driscoll, chairman of the Glen Dimplex manufacturing group said failure to support the treaty would mean Ireland leaving the euro. “Ireland signed up to the currency in 1999 [and] that brought rules – rules which we broke by allowing our economy to become inflated,” he said. “We now need to stay within the system and we need to argue our case within the system.”

The Economist described the referendum as a battle between conflicting emotions among voters. “The fear of many that rejecting the treaty will mean no access to EU finance, potentially sending Ireland hurtling down the Greek path to ruin, against the anger of many about the hardship imposed by four years of austerity,” The Economist said. But in the knowledge that Ireland has grudgingly supported all the other recent Treaties, the Economist was prepared to grant a narrow victory to the “yes” vote. “At the moment it looks as if fear will trump anger,” they said.

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