Where would a No vote for the ‘Fiscal Compact’ leave Ireland?

Apparently, according to economist Jim Power in today’s Irish Examiner, in a very odd place indeed:

It is intended that 12 out of the 17 eurozone member states would be sufficient to ratify the treaty. It appears this will be achieved easily enough. Consequently, unlike the case with the Lisbon Treaty, if Ireland were to reject it in a referendum, that would not be sufficient to prevent it from becoming enshrined in EU law. The big question then is where that would leave Ireland?

Presumably we could remain part of the euro area but would not have access to funding mechanisms and the like. Longer term, we couldn’t remain part of the euro if we do not sign up to the rules governing it.

Unlike in previous referenda, the European political system would not lose too much sleep if Ireland were to hold a referendum on this issue and reject it. Ireland would be placed in a type of limbo situation.

Those who are pressing for a referendum, even it is not legally required, should ask themselves what they would do if such a referendum were to be rejected.

It would ultimately place a serious question mark over Ireland’s continued participation in the single currency. If that is the choice of the people, fine, but they should be made aware of the possible consequences.

Quite so. His point is bolstered somewhat by another of today’s op eds, this time in the Irish Times by lawyer Gavin Barrett (of whom more later):

The treaty’s core consists of debt and deficit rules. However, its preamble provides that the treaty is not to be interpreted in any way as altering the economic policy conditions under which financial assistance is granted to a state (like Ireland) in a stabilisation programme.

Thus the treaty’s deficit and debt requirements simply don’t apply here for the duration of the present bailout (or any second one). Moreover the exemption under existing EU law from the application of debt-reduction provisions for three years after any such programme ends will evidently also continue.

Only after this transitional period will the fiscal treaty’s debt-reduction requirements apply: article four requires an annual reduction of one-20th of the excess of national debt-to-GDP ratios exceeding 60 per cent. However, precisely the same obligation already applies under EU “six-pack” regulations – adopted by EU leaders with little protest last November. The treaty’s debt rules thus involve nothing new.

He continues:

We have just seen that after Ireland’s stabilisation programme exit, existing EU “six-pack” debt rules will require an annual reduction of one-20th of the excess in Ireland’s debt-to-GDP ratio. In other words, Ireland will be required to run structural surpluses rather than deficits for many years. The treaty’s ban on structural deficits of over 0.5 per cent will thus involve no extra burden, because under existing law, we will not legally be entitled to run deficits anyway.[Emphasis added]

It’s been taken as read by some parts of the Dublin establishment that there must be a referendum, and that the AG has no choice in the matter. Ireland has never had monetary sovereignty in any real degree. The crunch point is whether this treaty actually interferes with fiscal sovereignty (an important matter for countries much larger than Ireland).

Barrett believes that the nature of the preamble puts an important break on any sanctions that might be applied, is the deal maker on this matter, which he claims:

…provides that the treaty is not to be interpreted in any way as altering the economic policy conditions under which financial assistance is granted to a state (like Ireland) in a stabilisation programme.

So it’s another promise to be good, not an enforceable treaty. Whether or not that applies the necessary oil to get Irish wheels under it, the country, short of seceding from the Euro, is going to be stuck with the conditions it sets and if not willingly opted-in, may, as Power notes, eventually find the heat is too much to bear.

Which I suspect is part of Frau Bundeskanzlerin’s cunning plan to weed out the fit from the unfit and sustain the Euro as a credible currency on the world markets.

, , ,

  • tuatha

    FREE? To withdraw into penury perhaps but on our feet, not knees.

  • Old Mortality

    Is there any choice? Ireland would have to continue deficit reduction whether within the eurozone or not.

  • Mick Fealty

    No. Unless the No side can come up with one? I’ve just posted another thread on this, pointing out that Ireland’s use of referenda under the Crotty ruling is ripping up that countries capacity to think/talk straight about foreign policy.

  • article four requires an annual reduction of one-20th of the excess of national debt-to-GDP ratios exceeding 60 per cent

    This is both blunt and weak at the same time. It is blunt because it requires surpluses even in times of contraction, and it is weak in that it doesn’t require any reduction past 60%. Servicing a structural debt of 60% GDP is money down the drain – we should be aiming for zero government debt within a generation, and once per cycle thereafter. If we didn’t have to fork out to service old debts we wouldn’t have had to rack up so much new debt. It’s like borrowing on your credit card to pay off your mortgage.

  • thomasw

    Good question. A no vote where 12 other countries ratify the treaty means that Ireland would not be making the commitments Germany is requesting in exchange for its commitment to the Euro. But, as you point out, there is no mechanism to expel Ireland from the Euro. So the most likely outcome is that Ireland is excluded from the new governance structures of the Euro, including the ECB, lifeline, but is free to maintain the Euro unilaterally. In effect, it will be informal Euroization of the economy just as Latin America countries used to have informal dollarization– i.e. they used the dollar without having any relationship with the Fed. The question is whether this is sustainable. Can a country remain within the Euro without receiving the benefits of being officially part of the club. To what extent would the rest of the Eurozone cut Ireland off– either gradually, suddenly, completely, or partly?

  • gendjinn

    Never fear. If the people dare to vote wrong way the government will just re-run the referendum until such time as the people vote the right way.

    The problem isn’t referenda democracy, the problem is (not so) representative democracy. We have the technology and it’s high time we scrap electing dictators every few years and delivering power and responsibility into the hands of citizens. All the elected representatives do is betray their country and people time and again.

  • Alias

    “To what extent would the rest of the Eurozone cut Ireland off– either gradually, suddenly, completely, or partly?”

    Only to the extent that they want to kiss good-bye to several hundred billion of their banks debt that was retrospectively converted into sovereign Irish debt.

    The current EU policy is to control systemic risk by containing debts belonging to banks from a lending state in the borrowing state. In other words, if a bank in country X borrowed from a bank in country Y, then the otherwise debt should be underwritten by country X to prevent the debt from defaulting to country Y.

    The only reason Ireland required EU/IMF funding is because it agreed to implement the above EU policy. Implementing this policy was seen by the bond markets as uterly deranged, and so they decided that they could no longer lend to Ireland because it had taken on more debt than it could ever repay.

    If it did not implement the EU policy, and did not thereby bankrupt itself in service of the EU, then it would not require EU/IMF funding. This EU/IMF funding is not provided for any purpose other than enabling the government to continue to implement the EU policy.

    In short, if they don’t continue to fund Ireland then they realise the systemic risk that they are all desperate to avoid by forcing Ireland to abandon the EU policy. That means that the debts will then default to the lending bank in the lending state.

    It then becomes a problem for German and French taxpayers since it is they will then be called upon to underwrite the losses of their own banks. Thi will be extremely problomatical, as these figures from Constantin Gurdgiev show that EU banks are massively overleveraged and are thereby unable to absorb even a single percentage writedown of asset value without insolvency (less than a 2% writedown will wipe out all of Deutsche Bank Tier 1 capital:

    Deutsche Bank leverage is currently at 52:1 (TCE) and 48:1 (ordinary)
    Commerzbank leverage ratios are at 35:1 and 30:1
    Credit Agricole is leveraged 70:1
    BNP Paribas is leveraged 36:1
    SocGen is leveraged 34:1 on TCE basis and 28:1 on ordinary basis

    Those figures are the real reason that Ireland has been forced to implement the EU’s policy on debt containment – to protect EU banks, and ultimately to ensure the burden of bailing-out French and German banks that the taxpayers of those states are unwilling to endure.

    Ireland can not borrow on the bond markets until it defaults. It is only then will those markets believe that it is in a position to repay any money they lend to it.

    However, the state faciliated the exit of close to 200 billion in debt repayment last year. If the state defaults then it has access to the money provided for ongoing debt repayment. Just to focus on mortgages (less than 7% of all external debt): 110 billion is outstanding, and more than 93% of them are performing. The government can implement laws to ensure that it recovers all of the money it has squandered bailing-out the eurosystem from the loans due from borrowers on the outstanding external debt of 1.67 trillion euros. Access to money to finance the state from internal reserves is not a problem for the state. Holding this loaded gun, the government should point it and then fire it by exiting the eurozone. Those states will then have to be as co-operative as they can be lest the state decide that it needs to use some of the repayments of 1.67 trillion of external debt as a fiscal stimulus package to rebuild the economy rather than redirect it to the lending states.

    Contrary to what rabidly europhile media such as the Examiner and Irish Times will tell you, Ireland holds all the aces…

  • Old Mortality

    Andrew
    “Servicing a structural debt of 60% GDP is money down the drain – we should be aiming for zero government debt within a generation, and once per cycle thereafter.”

    Not necessarily so. There is an argument on grounds of ‘intergenerational equity’ that capital spending should be financed by debt.

  • OM,

    There is such an argument. However, if we were to aim for “intergenerational equity”, then unfunded pension liabilities would have to be offset against capital investment.

  • Neville Bagnall

    “Contrary to what rabidly europhile media such as the Examiner and Irish Times will tell you, Ireland holds all the aces…”

    When Ireland has a balanced budget and a working banking system, it will hold most of the aces. When we’re in that position, we should play them, but we’re quite a bit away from that. Even if those two were true, any action we take has to be balanced against the openness of our economy and the negative effects of European instability.

    But truth is, this is a chess game, not a poker game. Our opening was dreadful, we’re just about holding our own in the mid-game, but the endgame is a fair way off yet.

    I agreed with pretty much everything in the Jim Power article. I’ll just call out one quote with added emphasis mine:

    “Personally I have no love for the euro project and still believe we would have been better off outside the system provided we managed the economy in a prudent way.”

    Where I differ from Power is I don’t think we would have. We didn’t inside the Euro when it mattered even more. As part of the “EuroMark” we’ll have to – or pay the price. But it will require real reform of our own economic management – we can’t leave it to others. The pity is that we didn’t start doing it a decade ago.

    A No vote wouldn’t rock Europe, it might not even rock Dublin immediately, but long term I think we’d move back to being peripheral to “London” rather than to the “Rhine”.

    I think, assuming the Germans eventually bow to the consensus on debt sustainability, we’ll fair better adapting to the German economic model than to the British.