Is a Yes vote in #euref absurd?

Taoiseach Enda Kenny has already signed the European fiscal compact treaty along with 24 other European Union leaders at a ceremony in Brussels, although it still has to go to a referendum in the republic (at an as yet unknown date). The text of the treaty is provided here and is relatively short.

A couple of extracts from Article 3 (below) give the real substance of this.


1. The Contracting Parties shall apply the rules set out in this paragraph in addition and without prejudice to their obligations under European Union law

(a) the budgetary position of the general government of a Contracting Party shall be balanced or in surplus;

(b) the rule under point (a) shall be deemed to be respected if the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised Stability and Growth Pact, with a lower limit of a structural deficit of 0,5 % of the gross domestic product at market prices. The Contracting Parties shall ensure rapid convergence towards their respective medium-term objective. The time-frame for such convergence will be proposed by the European Commission taking into consideration country-specific sustainability risks. Progress towards, and respect of, the medium-term objective shall be evaluated on the basis of an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures, in line with the revised Stability and Growth Pact;

(d) where the ratio of the general government debt to gross domestic product at market prices is significantly below 60 % and where risks in terms of long-term sustainability of public finances are low, the lower limit of the medium-term objective specified under point (b) can reach a structural deficit of at most 1,0 % of the gross domestic product at market prices;

A brief review of the exchequer statements shows that the relative income in 2004 was €37.5bn whilst expenditure was €37.5bn, since then only 2006 ran a surplus (2.3%) whilst other years ran deficits such as 0.5% (2005), 1.6% (2007), 12.7% (2008), 24.6% (2009) , 18.7% (2010), 10% (2011), with a further projected 8.6% deficit for 2012. So much for balanced budget, then (or complying with Article 3a).

As Constantin Gurgdiev has consistently pointed out, the recent history of structural deficits does not suggest a capacity to comply with Article 3b either:

  • Ireland was least insolvent in 1997-200 when the average structural annual deficit was just -0.65% of potential GDP
  • The closest we came to structural balance was in 1997 when structural deficit hit -0.394% and in 2000 when it was at -0.209%
  • Our peaks of insolvency were 1981 (-14.034%) and 2008 (-13.323%)
  • Our worst periods of insolvency were the early 1980s, when 1981-1986 average annual deficit stood at -12.125% and 2007-2010 when structural deficits averaged -10.555% annually (omitting 2007 raises this to -11.266%)
  • In 2011 we are expected to run structural deficit of 6.761% and in 2012-2015 we are expected to run average structural deficits of -3.753%.

What also needs to be factored in here, in terms of the austerity measures required to reach the treaty targets, is that the government must pay out €3.1bn each year until 2023 to cover the Anglo-Irish Bank promissory note. That’s equivalent to around 6% of government revenues, at 2011 levels, or 8% if it managed to fall back to 2004 levels. That’s on top of repaying the loans taken out to cover the deficits currently being run. In these circumstances, there appears to be no real possibility of the state complying with the terms required by the treaty. This makes the promotion of a yes vote seem, well, absurd. What possible reason could there be to promote a treaty which will result in the automatic imposition of penalties on the state?

In the Irish Times, Fintan O’Toole gives one answer, as he delivers a scathing verdict on the ideological underpinning of the treaty:

…the fiscal treaty does not deal in “facts”. It is right-wing opinion given the force of law…

We’re being asked, in other words, to vote for a badly thought-out ideological power grab that seeks to outlaw one side of the argument about fiscal policy. This is as paradoxical as the “war to end wars” – a democratic debate to outlaw democratic debate on one of the defining issues of politics, a vote to limit the meaning of voting.

As ever, read the whole thing!

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  • Alias

    “What possible reason could there be to promote a treaty which will result in the automatic imposition of penalties on the state?”

    This is simply a failure to understand and come to terms with the new reality. Folks still think ‘things can go on as before’ because that is a comfort blanket but Germany has already spelled out exactly how things (for a fiscal nature) will go on in “Assurance of Compliance in the 2nd GRC Programme”:

    “Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure.”

    It will now be unconstitutional for the state to go on as before. Therefore, it can not go on as before.

    Therefore, your granny won’t be getting more than 60 euro a week in her pension and your mother can die of cancer on a hospital trolley because the Supreme Court will forbid the state to borrow the money for her care.

    You must hereafter dedicate all taxes for the primary purpose of “debt service” and only then can “any remaining revenue may be used to finance primary expenditure.”

  • Mick Fealty

    That’s a perfect exposition of why the structural deficit measure is close to absurd. But saying No won’t stop it from happening.

    You can take the view that it’s so beneath contempt as a measure that Ireland should protest by saying no. But as Margaret Ward said on Vincent the other night, in that case you are making a big gamble on the EU finding some special measure beyond the special measure already set up for Greece. Or having it’s current inadequate strategy bursting apart in the effort to find that answer.

    All of which is fair enough, if you’re prepared to spell out that what you really want to do is take on the deflationary minded Germans, the ECB and the rest of the Union.

  • wee buns

    A Yes vote is not absurd, but insane.
    Talking of people’s grannys – see Finbar’s comment (on Fintan’s article):

    I agree with you that this treaty is a “Thought Grab”. However to understand it, you need to see it not as a right wing – left wing conflict, but as an age – youth conflict.

    Germany is one of the most rapidly aging societies in the world. It’s imperitive is to do everything that it can to aquire as much capital as possible and preserve the value of that capital against the day when a large proportion of its citizens are no longer able to produce, but require extremely expensive care and services as their health and well-being ebbs. To do that, Germany — publically, through its banks and through its overwhelming influence in the ECB — has pursued two policies:
    1. Exploit the free movement of capital in the Euro zone and the incompetence of peripheral market bankers and regulators to extract over the odds returns from supposedly ‘safe’ assets, such as Irish and Spanish property.
    2. Use control of the ECB to prevent losses on those investments returning to German banks, and to prevent the inflation which would ease the burden on peripheral debtors but reduce the value of German assets that German pensioners will rely on.


  • Alias

    What the smaller eurostates are being forced to do is to assume the burden of bailing-out overleveraged banks in the larger states by converting private debts belonging to those banks into sovereign debts and containing them within their state rather than allow them to default to those overleveraged banks in the lending states.

    That is a policy that is aimed at preventing contagion via systemic risk. However, systemic risk is the essence of a union, so this policy of union running alongside isolation and containment is counter to the idealistic form of europhilia.

    If the argument is that German and French banks must be protected in order to prevent the collapse of the euro monetary system (a system of misgovernment by the EU that has destroyed the economies of the smaller states) then it is the larger states who should provide that protection, not the smaller states.

    Those larger states are using their control of the EU to ensure that their own taxpayers are not held liable for the debts of their overleveraged banks by ensuring that burden is not shared but instead is placed entirely upon the smaller states.

    If German and France want to save the euro, then let them save it with their own money. If Germany and France was a fiscal union then let then have a debt union too.

    Clearly, they want power and control without responsibility. Is that what the europhiles want too? Those folks are strangely silent on trying to sell this contract of indenture on the basis of their former giddy idealism.