Ireland’s impending experience of its own ‘Total Perspective Vortex’?

It’s probably true that there is no such thing as a hard way and an easy way out of Ireland’s dilemma, but there’s no shortage of denial to go around… Expect there to be some good for the No camp in the Red C poll coming up this weekend…

But in his business column in the Irish Times today, Dan O’Brien characterises some of what’s driving the No campaign as something akin to the denial over the housing bubble in Dublin five years ago… He begins by citing Richard Curran’s Futureshock programme for RTE at the time… And then extrapolates from there…

Many of those who want Irish voters to reject the European fiscal treaty at referendum are behaving just as Curran’s critics did five years ago. They label as scaremongers those who warn of negative consequence if the treaty is rejected and claim that Ireland is invulnerable to any ill-effects of a No vote.

It is astounding, after everything that has happened, that people can be as blithe about the risks facing everyone in this State.

The biggest foreseeable risks are: a break-up of the single currency; the ejection of Ireland from that currency union; a collapse of the Irish banking system; a Greek-style sovereign default (while remaining in the euro); and a much bigger fiscal adjustment owing to a lack of additional bailout funds. A rejection of the treaty will increase the probability of all of these things happening to varying degrees.

He goes on to enumerate the risks:

A rejection of the treaty by Ireland would certainly not break the euro overnight, but it would lessen the chances of the currency holding together.

The second-biggest risk is ejection from the euro. If Ireland becomes part of the problem rather than part of the solution, the probability of being pushed out can only rise. Rejection of the fiscal treaty would be problematic, as outlined above.

Under what circumstances could Ireland be ejected? The answer: at the same time as Greece. Thus far, the most compelling reason for not cutting Greece loose has been the risk that any unpicking of the single currency would start an uncontrolled unravelling.

A possible solution is to shrink the euro zone in one go, removing all the weaker links at the same time. If Ireland were to become politically problematic by rejecting the treaty, having been economically problematic for some time, the case for ditching it along with Greece would be much stronger.

The third risk is a collapse of the banking system. It is closely correlated with the second risk. The greater the probability of a new currency being launched in Ireland, the greater the flight of capital out of the State. If capital flight were to be sufficiently great, the banking system would collapse.

The fourth risk – sovereign default – would likely be least affected directly by a rejection, as there is a shared collective interest in avoiding another such default after the multiple knock-on effects of Greece’s debt writedown.

Most of these are unquantifiable, and will no doubt be contested. Some critics of the government, particularly in Fianna Fail privately that say the government should have delayed a referendum until the autumn…

That way a number of externalities (primarily the French and Greek elections, perhaps even a ring side seat at what a small country defaulting looks like) would have had time to play through, and it would be harder for the No side to argue there was time to re-negotiate.

He concludes with another observation, i.e. a full and realtime exploration of Ireland’s position in Europe could very well function with the same effect as Douglas Adams’ fictional the Total Perspective Vortex…

…[it] does not mean that a rejection of the treaty would not increase the fifth risk – of greater austerity. A rejection would reduce the chances of escaping the current three-year bailout while at the same time lowering the chances of an extension of official funding along current lines.

Following a No vote, it is very unlikely that creditor countries would go out of their way to reward such rejection by setting up new mechanisms tailored just for Ireland. A treaty rejection would make the terms of any new bailout more onerous.

Or perhaps they will just tell us what we knew all the time… that “we’re really great guys…?”

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  • PaulT

    A week is a long time in politics,

    Germany (who wrote the treaty) wants to delay voting on it.
    France (who did the cheerleading) wants to change it
    Greece aren’t responding to treats and Spain is getting uppity.

    So the OP was last Fridays question, this Fridays question is why and what exactly is Ireland is voting on

  • John Ó Néill

    Well, as Nama Wine Lake has put it’s argument for a No vote:
    If your insurance broker were to offer you the pick between the following two insurance policies which would you choose? (a) a policy which covered you for all risks, entails a premium of €1,000 and is payable now or (b) an identical policy but instead of paying now, you can pay after disaster strikes and it will still cost you €1,000. Wouldn’t you be crazy to plump for the first policy?

    Given all the uncertainty, it is just speculation to claim the unknowable: that a treaty rejection would make the current (or a future bailout) more onerous (controlling both the Improbability Drive and the Total Perspective Vortex). But the permitted deficit levels in the Treaty guarantee that acceptance of the treaty will make the current bailout more onerous in Ireland (particularly when dumbly converting even more Anglo promissory notes to sovereign debt and calling it re-negotiation is merely steepening the gradient that must be climbed to meet the obligations a yes vote would bring). With the ongoing issues in Spain and Greece, the change of emphasis in France etc, delaying the referendum would actually make sense purely on the grounds that the context is shifting, as would rejecting it for the same reason (that it is actually premature to expect a sign-up to it’s provisions now – it only has to be in law by next January).

    And, more so, since the drift towards the left is a better fit to the general aspirations of reconfiguring the socialised banking debts than the existing Merkel/Sarkozy approach of protecting the private sector by strong-arming other states into the nationalisation of speculators’ losses.

  • Mick Fealty

    Improbability Drive? I’d forgotten that one. Suspect we’re going to need ole Doug’s fiction more and more to describe what’s going to happen over the next few years…

  • Mick Fealty

    I’d add John that there is a political argument to be made in addition about sovereignty and the price likely to be extracted in exchange for a genuine fiscal union. But I don’t see that being clearly articulated anywhere yet.

    What NWL does not describe is the nature of the disaster to be insured against… He seems to axiomatically assume that the same thing will happen in both scenarios.

  • Mick Fealty

    Oh, and this is priceless…

    “There are other reasons – I could cheerfully throttle the Sinn Fein bod who thought of describing this as the “Austerity Treaty” because regardless of whether or not the referendum is passed, we still need cuts and new taxes totalling €8bn over the next three years. That is an almighty adjustment in a country that thinks it has already seen pain. It’s an average of €5,000 per household per year – it mightn’t be new taxes, it might be reduced services, but the average cost of the adjustment from 2013-2015 is in that order. Voting “no” won’t remove the need for this State to balance its books over time, and from where we are starting now, that will mean more austerity – Fiscal Compact or no Fiscal Compact. We can try to stimulate growth and carry through reforms but most of the adjustment is likely to come from austerity. And for the next 18 months at least, we will have the Troika poking around our finances with quarterly reviews as well as weekly/daily reporting, so close international oversight of our finances hasn’t been a disaster.”

  • John Ó Néill

    The ever-steepening gradient of austerity will reach into the thin air of high altitude by 2014 when there is an €11.9bn bond maturing in January of that year. If the state hasn’t gone back to the bond markets that would been the point that it would need a second ‘bailout’.

    I’ll advance another reason for a ‘No’ – the government can’t publicly reject the Treaty – but the citizens can. That would strengthen the negotiating hand of a government that has consistently failed to look like has any sort of handle on its brief in this area.

  • Mick Fealty

    I do agree with that second… it’s how you articulate that without sounding too cynical that’s the problem… Not sure that would have worked if this was a September rather than a May poll..

  • John Ó Néill

    I think that’s the clever narrative you use to explain a ‘No’ vote.

  • John Ó Néill

    I don’t think it is too cynical a platform to call for a ‘No’ vote on either as it merely reflects a domestic political perspective on the government rather than an attitude towards the EU or eurozone (i.e. it says ‘get back in there and get something better out of this’).

    From a wider point of view – the arguments ‘for’ the Treaty largely rely on [hegemonic] acceptance of the logic of the current plans as being somehow natural or inevitable. I assume that if the drift to the left extends beyond France and Greece, then a neu logique will displace it that states that finance houses and other lenders will have to just accept their losses rather than be bailed out via sovereign borrowing/funding.

  • Mick Fealty

    I do think the No camp need to crisp up its messages… Both ULA and SF have been bogged done in often questionable detail when they ought to looking at the harder, larger politics of it all… I know some folk think “Austerity Treaty” plays well on the doors, but it is for the reasons NWL points out above, too easily debunked…

  • PaulT

    Mick, you’re forgetting one very big detail, the ‘NO’ budget is about 10% of the ‘YES’ budget, there is no way that a fair fight can happen, Sinn Fein are doing what Sinn Fein does best, Guerilla tactics in promoting a ‘NO’ vote. Getting ‘Austerity Treaty’ into the media was free

  • Mick Fealty

    10%. How so?

  • PaulT

    “The NO side simply dont have the money to compete.

    Funny how no one is asking questions as to were all this funding for the yes side is coming from at least not the same scrutiny Ganley got.

    I think i read somewhere that FG will spend 300k, Labour 150-200k and Sinn Fein about 70k or something like that.”