Referendum and the Euro crisis: “Its unravelling, if it comes to that, will look very different.”

Even though David Begg could not get the numbers in the ICTU to call for a Yes vote for the Fiscal Compact Treaty, he has clearly has some of concerns of his own about where a No vote would take Ireland. RTE reports this afternoon that “he voiced fears that rejection would mean exclusion from the European Stability Mechanism, the consequences of which could be very difficult.”

The disaffection with a Europe that ten years ago was paying into the Irish economy, both through public and private investment, is palpable. Not least with people on the left who once looked to Europe to bring in the kinds of social protections that Irish leftist parties could only dream of getting past their electorates.

Now it’s all gone belly up, the accountants are in charge and the nation state is being pressed into the very tightest end of that political trilemma Pete keeps linking back to… Fertile ground for a section of the Irish left that’s never trusted the suits (and the accountants) in Brussels…

This is going to be a tough campaign which may have some major consequences not only for Ireland but also for it’s major trading partner, the United Kingdom… There is some considerable truth in David Cameron’s defence of the UK’s dip back into recession that he can’t help it if its market in Europe more broadly is slowly disappearing into a slough of dispond.

As noted already here on Slugger, Ireland has a free hand here.  Unlike Nice or Lisbon, the Irish decision cannot hold back other countries from signing up to the tough fiscal demands of the Bundesbank  European Central Bank… Furthermore Ms Legarde’s recently enlarged umbrella decreases the likelihood of contagion should any of the European countries go bust.

So what if Ireland votes no to the fiscal treaty? Well, they might get a handout. Then again, they will have just chosen not to seek shelter under Ms Legarde’s elegant and commodious umbrella.  Last year, when, admittedly the Eurozone was a great deal more vulnerable to the contagion effect, Angela Merkel asked: Does Greece want to stay in the Eurozone: Yes or No?

However the Government (and Fianna Fail) choose to play this campaign, being asked this question with regard to Ireland is  just one of the real fears stalking behind this referendum.

Chris Bowlby put together a fascinating piece for BBC Radio 4 Analysis programme, which tries demonstrates what might happen if there was an exit from the Euro, for Greece, Ireland or anyone else… He notes there woul be no opportunity to plan anything… At the point at which an exit from the Euro was mooted, it would effect a massive exit of capital from the country…

Setting up a new currency would, according to a representative of DeLaRue in England who print all manner of currency s could be implemented no quicker than four months… Devaluation would impose a 50% cut in value… As Brian Feeney noted in February:

What would happen then? Return to the Punt? You/re kidding.

Economic catastrophe is what would happen. The Republic can only borrow on the international bond market this year if it meets the terms agreed by the EU-IMF bail out. It they don’t have the euro behind them they will have to default on their debts.

That means no money to pay for teachers, nurses, medicines, you name it. It’s back to the 1930′s.

The No camp are banking on the idea that Europe would never let Ireland fall off such a cliff… Or I presume that’s what Gerry thinks when asked this afternoon where he would get the money it needs for next year if the country votes No:

Mr Adams said that Ireland would get it from the “current sources”, namely the EU, ECB and IMF. He rejected suggestions a No vote would make a second bailout more difficult to achieve.

He said Sinn Féin recognised the deficit had to be reduced and was proposing alternative plans. In the pamphlet, the party has put forward proposals for a radical Europe-wide reverse of current policies. It argues for all member states to put in a “once-off investment” into the European Investment Bank, that would then initiative a EU-wide investment programme. No sum is specified.

Except that the much hated Compact is the new entry fee to the ‘current sources’.  Such wishful [just keeping an eye on the Czar of, erm Frau Bundeskanzlerin surely? – Ed] interpretations depend on the likely flawed idea that the firewall (Ms Legarde’s elegant umbrella) is intended to keep Greece inside the Euro.  It’s such  that’s clearly giving Begg sleepless nights..

At the close of the analysis programme, Chris Bowlby puts tangibly what Beggs likely means by “very difficult”:

Everyone, Germans, Greeks, others across the eurozone and EU, is wondering where it might all lead – now the unthinkable is being well and truly thought. The eurozone may be saved intact; the optimistic public statements we still hear from leaders may be vindicated. But behind the scenes very different outcomes are being imagined.

Such are the sensitivities, the fear of prompting panic, we won’t know the response unless and until such a crisis is underway. Creating the euro was a painstaking, well-publicised process of negotiation, planning, weaving together economies and peoples. Its unravelling, if it comes to that, will look very different.


  • wee buns

    Mick – who needs an umbrella when it’s not raining?

    ‘’When it comes to the fiscal compact, the EU is pissing down our backs and telling us that it is raining.’’

    Mc Williams

    He goes on:
    ‘The fiscal compact has nothing to do with solving the eurozone’s problems. Let’s be clear about that. It has everything to do with reassuring the German electorate that they will not be on the hook for the internal inconsistencies of a currency union, which they were bounced into a few years ago.’

    The problem with that is to placate the German electorate is futile – as the formula of the treaty is not curative.

    What seems to be dawning on your average Paddy (likewise elsewhere) is that Europe’s structures are not accountable to its citizens. The European elite are not listening to those whom they assume are servile. This is the only state where people (not governments) have an input, so this referendum does have leverage.

    It’s getting messy of course – but that was on the cards.

    With respect to Mr. Feeney, it is the absurdity of Maastricht that prevents us from arriving at a national solution, thus recreating the circumstances of the 1930s – perfect for either political or military backlash. Which shall it be?

  • Mick Fealty

    Don’t disagree with David’s analysis, but where to you go to make it happen? As I noted here last week, the German’s have political hoops to jump through just like Irish politicians are having to. Merkel is not just constrained by the need to win an election:

    “…only the federal parliament, the Bundestag, has the constitutional authority to send Germany’s money to Greece, not the chancellor or her ministers, or any hand-picked Bundestag “special committee” either. The court wanted to ensure that the economic benefits of the euro, such as they were, cannot be turned into costs for its democracy.”

    The SF option does not admit there would be any problem of saying no to the new conditions to obtaining the money the country needs to continue borrowing from ‘current sources’, other than “they would have to rescue us anyway”.

  • cynic2

    “they would have to rescue us anyway”.

    When the crunch comes – and it increasingly looks like it will, they wont have to rescue anyone.

  • wee buns

    It’s simply a question of time.

    ‘’The world knows that the fiscal compact is not credible. Eventually, the people of Spain and Italy will get fed up of austerity, and the people of Germany and the Netherlands will get sick of bailouts.’’

  • DT123

    The western world can no longer afford to pay the lavish wages and pensions of the public sector and maintain the benefits culture which has grown into an unsustainable drain on the economies.

    Where it all ends up ,is anyones guess.

  • Mick Fealty

    Here’s an interesting interchange near the end of the Analysis programme:

    BOWLBY: And is there worry though that Greece, knowing what a political humiliation it would be for the eurozone to break apart, even just one country leaving, are going to try and use that angst to extract as many concessions as possible?

    MARSH: Yes and they do call it blackmail. The Germans call it by its name – they say this is blackmail. And obviously they’re willing to go into blackmail up to a point. The euro is very important to the Germans. It’s not that important that
    they would forsake all their principles and indeed all their guarantees and pay billions and billions more in terms of future guarantees and future drains on the German taxpayers, but there is a game of brinkmanship going on. There will be a time when limits are reached for political and economic reasons, and I think that time may not be all that far away.

    And that’s just in the Greek context, where they have nothing under control and an election which is not going to change any capacity for the Greek people or its new government to change anything.

    A year ago, a Greek default would have been disastrous for the Euro. But if, as we know, this wall of money is intended not to help out the PIGS and others but to save the wealthier countries from contagion, Ireland needs to decide which side of the fence it wants to be on.

  • Neville Bagnall

    Gerry & Co. are very good at spending other peoples money. I think, as you point out, those other people tend to have something to say about that, and it’s seldom “No problem, here’s a blank cheque”. Maybe if push comes to shove, Germany will stump up the cash, but the “big umbrella” could be spent in Germany, France, Belgium, etc. shoring up their banks when Ireland’s banking system collapses with a lot less political repercussions for Merkel.

    The Irish electorate were given the option of higher income taxes and less austerity, or lower income taxes and more austerity. Sadly, they chose harsher cuts over more taxes in the General Election. According to the opinion polls, they still do. Personally, I think there is scope for more tax reform with an emphasis on higher non-payroll progressive taxation. But it appears I’m in the minority. To make it worse, the cuts that are being implemented – cack-handed doesn’t begin to describe it. Reform? Hah!

    We’re stuck with austerity or collapse until we’re in a position to run a balanced budget – treaty or no treaty. There are a number of ways of getting out of the hole we’re in, but there is no free lunch.

    What I don’t get is the argument that this treaty rules out Keynesian policies. Keynes tends to be simplified to an advocacy of deficit financed stimulus. He actually advocated counter-cyclical policies. I don’t see anything that prevents us using “Above Trend Taxation” to build a Stimulus Fund that would be used on the demand side in periods of extended recession and provide automatic stabilisers that would protect the most vulnerable in society from the harshest effects of adjustment.

  • Denis Cooper

    As a paid-up member state of the IMF since 1957, under its Articles of Agreement Ireland must have the same right to apply for and receive IMF assistance as any other IMF member state.

    There is nothing in the EU treaties whereby Ireland has agreed to waive that right, or subject it to EU or eurogroup approval.

    Nor indeed is there anything in the intra-eurozone ESM treaty which says that ESM members forgo their individual rights as IMF member states.

    And nor has there been any change to the IMF Articles of Agreement recognising that henceforth IMF assistance to an EU member state shall be subject to EU or eurogroup control.

    So the claim that rejection of Merkel’s “fiscal compact” would leave Ireland without any hope of external assistance must rest on the assumption that Lagarde would abuse her position as head of the IMF, and violate its rules in the same way that she connived to break the EU’s rules when she was French Finance Minister:

    “We violated all the rules because we wanted to close ranks and really rescue the euro zone.”

    “The Greek and Irish rescues – €110 billion and €67.5 billion, respectively – and the creation of the bailout fund were, Ms. Lagarde said, “major transgressions” of the Lisbon Treaty that is the European Union’s governing document. “The Treaty of Lisbon,” she says, “was very straightforward. No bailing out.””

  • FuturePhysicist

    The blunt truth is that rejection would mean exclusion from the European Stability Mechanism, the consequences of which could be very difficult … the answer is quite simple, learn to deal with the difficulty, the twin difficulties of not only losing ESM protection, but also the insurance of ESM protection to foreign investors and importers.

    Sinn Féin can’t handle the difficulties of austerity, it certainly can’t handle the difficulties of that subsistance independence strategy either … it promises a growth utopia if the people vote No, ignoring the reality that Ireland is massively balied out by Europe and the IMF and using the same propaganda they criticised the main parties for using over the Lisbon Treaty.

    Maybe Ireland should trade places with Iceland for a year.

  • FuturePhysicist

    … but also “selling” the insurance of ESM protection to foreign investors and importers.

    At the end of the day I think FG-Labour are more prepared for a No Vote than Sinn Féin are for either result, as they make it up as they go along.

  • FuturePhysicist


    The issue wasn’t bailout money from the IMF, but from the EU. Large amounts of IMF money is being spent on Ireland, Ukraine, Greece, Portugal, Iceland and Italy I believe, including two European countries outside the Eurozone/EU.

    @ Neville Bagnall
    Keynesian economics isn’t being suggested because of the nature of the German economy who arguably thinks through non-Keynesian methods it had developed a strong economy to bailout countries they might consider to be more Keynesian … just a hunch.

    @ wee buns (profile) 25 April 2012 at 11:02 pm

    With regards getting sick … the spreading an illness does not imply immune response.

  • Denis Cooper

    @ FuturePhysicist – Indeed, and therefore it’s misleading for supporters of the treaty to give the impression that a “no” vote would leave Ireland cut off from all possibility of external assistance should it be needed.

  • FuturePhysicist

    My mistake Italy isn’t getting any significant backing from the IMF, the 4th EU country getting major IMF assistance is Romania.

  • wee buns

    With regards getting sick … the spreading an illness does not imply immune response.

    Let’s not get into metaphor country – when people get sufficiently fed up, disruption shall result in either a political or military backlash.

    There is no way that Ireland shall be cut off from further sources of finance, precisely because of the interdependent nature of the currency.

    This treaty is loaded gun democracy i.e. no democracy at all.

  • FuturePhysicist
  • wee buns

    ’’The drafters of the European Stability Mechanism Treaty inserted clauses that provide manoeuvrability in negotiations with any Eurozone country in need of financing, regardless of the Fiscal Treaty. In particular, they inserted references to ‘new programmes under the European Stability Mechanism’, a clause which would have been unnecessary if all financing under the ESM were strictly conditional on a yes vote.’’

    ”We have attempted to outline concrete alternative funding scenarios for Ireland. Whether these would become available is a subject for legitimate debate. However, those who claim that Ireland would be denied access to EFSF funding – or any other funding sources – should provide concrete evidence to this effect. Evidence one way or the other would be a valuable contribution.”

  • Neville Bagnall


    Sorry for the late follow up, but I’m not sure I follow you. The Germans will do typical Keynesian interventions – even though they are predisposed against them, as much by legislation as by inclination (e.g. they pumped an additional €18bn into infrastructure and set up an additional €100bn commercial financing fund as a response to the credit crunch). Plus they also have very strong “interventionist” agencies such as the KfW development bank. Their problem with easing the austerity in the periphery has as much to do with their perception of the periphery as uncompetitive and transfer/default dependent.

    But my point re Keynesian economics was regarding the tagging of the Treaty as an “Austerity Treaty” that permanently makes austerity the only possible response to a recession, suggesting it’s effectively outlawing Keynes at a constitutional level.

    I don’t see how that is true. What it does do: it effectively requires us to start a Keynesian counter-cyclical response to the economic cycle when we are in the boom phase. Save before we spend.

    Obviously that requires us to get out of the current mess first, but that will happen, one way or the other. My point is that an austerity response is not the only option in future downturns under this Treaty, provided we have done some long term planning. Maybe I’m just too much of an optimist, thinking we might have learned our lesson. I just think that this is much more a “Grow up, will ya” Treaty, than an “Austerity” Treaty.

    I’m a social democrat. I think its a responsibility of Government to plan for and actively smooth out the effects of the economic cycle, both at the micro-economic level via a taxation supported Welfare State and at the macro-economic level via Sovereign Wealth buffer funds. But I don’t think it can achieved on a wish and a prayer.

  • Neville,

    But that’s exactly the problem with the Treaty. It outlaws deficits, but doesn’t mandate the matching surpluses you speak of. We all know that we should save during the good times, we’ve known that since Daniel saw the moving hand on the wall. The problem is that elected politicians are incapable of planning for the future downturn when they believe the election will happen first.

    People complain that the treaty goes too far. Nonsense. It doesn’t go far enough. It suffers from the same problem as the euro itself – it’s only half a solution. Governments will still spend the cash during the good times in order to bribe the electorate to return them to office. Democracy and fiscal responsibility are in perpetual tension. This is the problem that still hasn’t been solved.

  • Neville,

    But that’s exactly the problem with the Treaty. It outlaws deficits, but doesn’t mandate the matching surpluses you speak of. We all know that we should save during the good times, we’ve known that since Daniel saw the moving hand on the wall. The problem is that elected politicians are incapable of planning for the future downturn when they believe the election will happen first.

    People complain that the treaty goes too far. Nonsense. It doesn’t go far enough. It suffers from the same problem as the euro itself – it’s only half a solution. Governments will still spend the cash during the good times in order to bribe the electorate to return them to office. Democracy and fiscal responsibility are in perpetual tension. This is the problem that still hasn’t been solved.

  • Denis Cooper

    But on the face of it Ireland was a very good boy in the narrow terms of the “fiscal compact” right up to 2008, not just avoiding excessive government budget deficits and the build up of debt but actually running budget surpluses and paying down the national debt to a long way below the Maastricht limit:

    So in the light of that excellent past record it seems to be completely missing the point to force Ireland to pledge that it will never, ever, be fiscally irresponsible in the future.

  • Denis,

    You’re right – there is no way to define “fiscal responsibility” in a mathematically watertight manner. Ireland’s irresponsibility was not in running large deficits, as you point out. Ireland’s sin was to intentionally feed an asset-price bubble and then rely on it for general revenue.

    There’s no way to fix such problems by imposing rules from above, because they arise from a fundamental misalignment of incentives. It is in the personal interest of politicians to make things look superficially wonderful, milk the electorate for a term in office or three and then retire with a fat pension, preferably before the shit hits the fan (insert Bertie Ahern reference here). If politicians are so motivated, they will find ways around whatever restrictions are put in their way.

    We need to look at methods of realigning politicians’ personal incentives with the long-term health of the economy. Large corporations attempted this by giving senior executives share options, but these aren’t long-term enough for our purposes, and are too easily cashed in. Perhaps politicians should have half their pay put into an index-linked trust fund that pays out over a term significantly longer than the business cycle, say 25 years.

  • Alias

    Andrew, Ireland doesn’t have sovereignty over monetary policy and therefore asset price inflation is not within the government’s remit. The systemic problem there is that the state derogated its sovereignty to an institution (the ECB) that does not include asset price inflation of property as either a measure or an objective of its price stability function.

    Therefore, neither the ECB (which had the sovereignty and therefore the responsibility) or the government (which could do no more than attempt to use taxation policy as an ad hoc [tears on a fire] counterbalance to delinquent monetary policy was controlling the asset price inflation of property.

    Not that the external debt would be other than marginally smaller if it did, since defaulting mortgages account for an infinitesimal fraction of the 1.8 trillion borrowed from the eurosystem in the 10 years since Ireland made the financially disastrous decision to join it.

    As Denis Cooper points out, this pact does nothing to address the core and systemic problem.

    It is merely a means of ensuring that those eurosystem businesses outside of this state that sold 1.8 trillion worth of financial products – making huge profits on them – to other eurosystem businesses within this state recover their money from those who didn’t borrow it now that they have discovered that those who did borrow it can’t repay it and therefore should not have been lent it.

  • Alias,

    Monetary policy is a blunt instrument. It is a single lever (more or less) which can only be used to control one output function at a time. Everything else has to be tackled some other way.

    Ireland did not even attempt to use monetary policy to control the asset-price bubble – in fact they deliberately did the opposite. At the time property prices were taking off, stamp duty should have been racked to the roof. Unlike monetary policy, fiscal policy can be targeted at very specific sectors. It may not have been enough, but they didn’t even try.

  • Alias

    Do you think that action to stem the 1.8 trillion tsunami of borrowing that occurred over a period of 10 years required a delicate touch then?

    By the way, it is unconstitutional for Ireland to fail to support the monetary policy of the ECB, however massively expansionist it is. That is because the Maastricht treaty (duly annexed to the Irish constitution) mandates that eurozone member publically support its policies. Your view that Ireland could have acted to countradict its policy is simply mistaken.

    In addition, in cases where the Central Bank is independent of the government (such as the UK), it is obliged to support the policy of the government. That is to prevent a situation occuring where the government’s policy is contractionist and the Central Bank’s is expansionist, or vice versa.

    In Ireland’s case, the ECB does not take its lead from the Irish government, so the Irish government must take its lead from the ECB to in order avoid the disastrous misalignment that you are curiously arguing for.

    The ECB is the dog, and the government is the tail that wags accordingly.

  • The opposite of blunt is not “delicate”, it is “pointed”. I can think of plenty of pointed things that are far from delicate. And domestic taxation has nothing to do with supporting (or otherwise) ECB monetary policy. The ECB has no mandate to consider asset-price bubbles, as you rightly point out. Whatever is not the ECB’s job is the government’s.

  • Alias

    Thank you for your kind tutorial about the applicable antonym. I’m sure it will come in useful before I die.

    Why don’t you list a few of these “pointed” things that you think could have been used to stop Ireland’s external debt ballooning from a mere 10 billion punts before it joined the eurozone to a staggering 1.84 trillion euros less than 10 years after joining it.

    I can’t wait to hear about the subtle ‘points’ that a government without control of monetary policy could have used to prevent annual borrowing that was in excess of GDP (and in some years a multiple of it).

    There’s a Nobel Prize in it for you, Andrew. But just remember that you point must be so sharp that it can work without the taxation policy (such as stamp duty) that you have excluded.

    “Whatever is not the ECB’s job is the government’s.”

    Did you get that in a fortune cookie? Asset price inflation is the ECB’s job since the state derogated the sovereignty to them. The problem might just be, Andrew, that the ECB excluded the value of property assets from their calculations and therefore didn’t consider using the tools at their disposal to control its inflation in Ireland. And note that those tools were at the disposal of the ECB, having been duly derogated by the state.

  • wee buns

    As expected, ahoy the large scale propaganda machine, with RTE at its helm, dwarfing all culprits in the dark arts of the misquote…
    Mr. V.B writes:

    ON SUNDAY last the Sunday Times carried a story by journalist Mark Paul stating: “the IMF . . . has told the Sunday Times there is ‘no reason’ why Ireland could not ask it for another loan when the current bailout programme ends in 2013.

    From at least 9am on Sunday, RTÉ led the radio news throughout the day with a “story” that the IMF had dismissed the newspaper’s story.

    So by the end of last Sunday at least a million people here would have had the impression that the Sunday Times story was substantially incorrect and that there could be no funding from the IMF in the event of a No vote. This was potentially a game-changer in the debate.

    One would have expected that our lavishly funded national public service broadcaster would have adhered to elementary journalistic standards in the reportage of a story that was potentially of such significance, all the more so in circumstances in which its journalistic practices are under such scrutiny, given its indifference to such standards in the recent past.

  • Alias,

    I have not excluded taxation. You are the one trying to make out that Ireland has no control over taxation policy. The only sovereignty that has been derogated to the ECB is control of the money supply. You have taken the words “support the policy of the ECB” out of context in an attempt to prove that the ECB is some all-powerful bogeyman, when in reality its powers are constrained. I will not continue arguing with a paranoiac. Goodnight.

  • wee buns

    In terms of circumstances afoot being perfect for political or military backlash, this just came to my attention.

    A requirement has arisen for the provision of Public Order Equipment – Visors – Anti-Riot. A quantity of 1,000 is required.