Ireland will reluctantly vote "Yes" n the EU Fiscal Compact referendum
By: John Spain | Published Wednesday, May 16, 2012, 2:15 PM | Updated Wednesday, May 16, 2012, 2:15 PM
|Labor Party launched their "Yes" campaign last month|
Ireland is now just two weeks away from our referendum on the EU Fiscal Compact. Even though the vote on May 31 is the most important one we have faced in years, you would not know it looking at the media here.
Newspapers and TV are leading on other stories every day, clinging to any distraction they can find, because the fiscal issues and arguments are so boring.
So instead of us having a searching national debate here, a resigned acceptance hangs in the air. It's the last thing people want to talk about, or even think about.
When pressed, most people seem to feel that a yes vote is the lesser of two evils. And they are probably right.
But they will be voting yes with a heavy heart and a feeling of resentment. They know we've got a rotten deal from Europe.
The problem is that the rotten deal we got which transferred billions in private bank debt into sovereign debt carried by the Irish taxpayer has nothing to do with this Fiscal Compact. Voting no is not going to make that situation any better.
That is the basic reality and people here understand that. They also understand that, tempting though it might be to vote no to "get our own back" on Europe, the consequences could be disastrous.
So what's this Fiscal Compact all about? It's a financial treaty agreed by 25 EU states in January this year, all of whom were able to ratify it by a vote in their parliaments -- all except Ireland, where our Constitution requires us to have a referendum.
There's nothing revolutionary in the treaty. In fact it's basically a restatement of earlier EU agreements on fiscal discipline, with new mechanisms attached. The aim is to prevent a repeat of the debt crisis in Greece and some other EU countries, and to avoid the potential collapse of the euro.
Under this new Fiscal Compact, or treaty, 25 of the 27 member states have agreed to keep their budget deficits below 3% of gross domestic product (GDP) in the future. They also have agreed that in future they will not let their total state debt exceed 60% of GDP.
This has been tried before and even Germany did not stick to the rules. To enforce discipline this time the European Commission will monitor compliance, and countries which breach the agreed limits will face legal action in the European Court of Justice.
All of which sounds impressive. The reality is, however, that all this is aspirational.
Many countries in Europe are way beyond these targets at the moment and it will take considerable time, three or four years at least, to get budget deficits down to 3%, and far longer to get the debt-GDP ratio to the target 60%.
In the meantime, countries will have to implement a program designed to bring them steadily into compliance over the coming years.
This, of course, is exactly where Ireland is at right now under the terms of the EU-IMF bailout. In fact ratifying and implementing this treaty won't make any difference to us here since the terms of our EU-IMF program are even more demanding.
Why does Europe need this treaty?
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For years, in fact for decades, countries across Europe have been borrowing too much. Governments have run budget deficits year after year to keep up state spending on services, state pay, pensions, welfare and so on in an effort to maintain a standard of living that their economies could no longer afford.
Europe, its empire days long gone and its industrial competitiveness undermined by China and developing countries, has been in decline. It's also been in denial.
Accustomed to a standard of living far higher than in other parts of the world, European populations wanted to preserve their privileged positions, but they did not want to work harder or longer or pay more taxes. So politicians in Europe soon learned that the way to get power and stay in power was to borrow on a massive scale.
Instead of cutting back or forcing through efficiencies, they ran huge budget deficits year after year, even when tax revenue was shrinking.
The problem is, of course, you can only do this for so long before the markets start to doubt your capability of ever paying back your debts. Eventually the markets get spooked and the cost of state borrowing (the bond yields) soars to the point where borrowing becomes non-viable.
In the doomsday scenario (like in Greece and Ireland) the markets won't lend to you at all, at any interest rate, so you become completely dependent on institutional sources of funds like the EU and the IMF.
Preventing this kind of crisis in the future is what this Fiscal Compact is about. It's about curtailing the freedom of EU countries to make eejits of themselves, like the Greeks and the Irish.
But you would not think that listening to Sinn Fein and the few loony lefties here who are the only ones advocating a no vote. All the other political parties are calling for a yes vote, including Fianna Fail, to its credit, even though it is in opposition and could easily have tried to exploit the situation.
The arguments being put forward by the no side include opposition to the introduction of water charges and a property tax, refusal to allow any cuts in welfare rates, demands for extra spending on health and education, demands for investment in job creation programs and so on.
A lot of this is couched in language which talks about "growth promotion" as an alternative to the "downward austerity spiral" which is blamed for lowering domestic demand and shrinking the economy even further.
The refusal of political parties in Greece to accept bailout terms, and the insistence of the French president-elect on new growth measures, as well as public anti-austerity demonstrations in countries like Spain, are all seen by the no side here as evidence that the tide is turning against the austerity regime and the Fiscal Compact.
The problem is that all the solutions being advocated by the no side have one thing in common. They all mean spending more money, which means borrowing more money, which is the last thing Ireland, or any other European country, should be doing right now.
Ireland's agonizing but steady reduction in our budget deficits, which aims to get down to a 3% deficit within two or three years, means that until then we have to go on borrowing to keep the show on the road. We are still adding to our debt mountain even while the austerity measures bite.
Those who advocate a growth agenda as the solution never discuss what it would take to make countries like Greece, Portugal, Spain, Italy, Ireland, even France, really grow. Growth is always talked about in terms of extra spending, of investment, even though what that really means is extra borrowing.
The trouble with that is that the money borrowed has a way of vanishing into extra pay or services rather than goods that can be sold at competitive prices on the world market.
We're all in favor of growth. But the real driver of growth is not borrowing. It is keeping pay at competitive levels, increasing working hours and efficiency, maximizing output, cutting waste and overspend out of the system.
It's all about making an economy a slim effective machine that can sell goods and services on global markets that people round the world want to buy.
It sounds terribly simplistic. But it really is that simple. The rest is just a toxic mix of prevarication, self-interest and laziness.
Because of the uncertainty across Europe, the no campaigners in the debate in Ireland are calling for a postponement in the referendum, at least until the growth element the French are calling for is agreed.
But there does not seem to be much sense in putting the vote off. We can take any growth measures that come in the future as a bonus. The most important thing now, however, is to show our support for a fiscal regime in Europe that will avoid this kind of mess in the future.
One other point needs to be kept in mind. Because we will need to keep on borrowing for another few years and are more than likely going to need a second bailout, we need to be able to access EU funds in the future, particularly the new ESM rescue fund. Only countries that ratify the Fiscal Compact are going to have access to that fund, where money will be available at much cheaper rates than on the markets, assuming we can get the markets to start lending to us again.
The no side have been making assumptions that the IMF or someone else will lend us money in the future instead. There is no basis for such assumptions.
If it were to go wrong it would mean having to balance our budget immediately, in a single year, which would cause real suffering and possible chaos here.
All of which means that the only sensible position for us to adopt is that of a reluctant yes voter. It's a rotten deal, but it's the only one out there.