The Perfect Storm

Ben Tonra (posted by David Farrell, February 29 2012)

This referendum campaign will have a profoundly different dynamic to those that have gone before. The first point is that this is not an “EU Treaty”. As a result, and according to its own provisions, just 12 of the Eurozone member states need to ratify it before it comes into operation. Thus, unlike all previous European referenda, the rest of Europe does not depend on Irish ratification. We can say ‘no’ – 12 of the rest can say ‘yes’ and the treaty proceeds with Ireland simply left outside its provisions. In that respect, talk of European ‘sweetners’ or increased Irish bargaining power are dangerously misplaced. While they may wish to avoid the political embarrassment of an Irish ‘no’ and the market wobbles that might result, Ireland has no blackmail capacity over its European partners. To make that argument risks a serious disappointment to the electorate and makes the prospect of an ultimate ‘no’ vote even higher. In addition, because this is not a broad-based “EU treaty”, making the argument that a ‘no’ vote threatens our EU or euro membership is profoundly wrong-headed. Reduced influence in Europe? Certainly. Raising doubts in the markets and in the minds of potential investors about Ireland’s future trajectory in Europe? Perhaps. But Ireland will be an EU and eurozone member without an iota of change in Ireland’s rights under EU treaties. This, of course, is in part thanks to David Cameron’s veto.

The second point that makes this campaign different from past contests, is that the ground of the treaty is exceptionally narrow. There is little legitimate scope to invoke many of the shibboleths of past referenda, but, perhaps perversely, this may well benefit ‘no’ campaigners. If this campaign is just about the pact, with all of its associations to bailouts, troikas, austerity and cuts, then ‘yes’ campaigners will have a mountain to climb in crafting a persuasive argument to favour ratification. To date – less than 24 hours after the referendum announcement- ministerial calls on the electorate to endorse ‘stability’ and progress, to do our part in defending the euro and to endorse the rectitude of ‘balanced budgets’ are not themes to warm the popular heart.

The third point that makes this campaign different is that we have no clear understanding of what it might mean to be left outside the new European Stability Mechanism. Economists – who love to pretend to deal in absolutes – are at sixes and sevens over what the fiscal pact entails, what its long-run implications will be and even over basic definitional points arising from the treaty text. To my mind this is redolent of the fact that so much of the recent crisis has been a function of the (thus far failed) efforts of politicians to manufacture market confidence and the determination of markets to exploit uncertainty for profit. We have yet to hear from serious economists as to what exclusion from the ESM might mean. Would we be less likely to get back into the money markets on schedule? If we get back into those markets on time, would the state inevitably face higher international borrowing costs? Would our credit rating suffer? And, of course, the big issue: if we need a second bailout – or in the future need another bailout (because future political leaders would be free to spend us into another collapse) to whom would we turn? Without the ESM we would have to rely on the IMF – but would the IMF treat us better or worse than the ESM – even if they agreed to assist in the first place?

In sum, what appears to be on the horizon is a perfect political storm: a vote directly associated with profoundly unpopular themes and institutions, with no obvious incentives for a ‘yes’ vote, with contested or limited consequences of a ‘no’ vote, and an electorate feeling badly used and abused by those now asking for more.

16 thoughts on “The Perfect Storm

  1. “We have yet to hear from serious economists as to what exclusion from the ESM might mean. Would we be less likely to get back into the money markets on schedule? If we get back into those markets on time, would the state inevitably face higher international borrowing costs? Would our credit rating suffer? And, of course, the big issue: if we need a second bailout – or in the future need another bailout (because future political leaders would be free to spend us into another collapse) to whom would we turn? Without the ESM we would have to rely on the IMF – but would the IMF treat us better or worse than the ESM – even if they agreed to assist in the first place?:
    ill try
    If we do not adhere to this we need to ideally move to a budget surplus by 2014. Plan at present is to move to a 3% deficit by 2015. So, much faster and much deeper cuts/tax.
    Second, the IMF, imho (and yes, ben, sometimes there are legitimate grounds for opinion) would be amenable to us seeking funds IF we were close to a balanced budget.
    If we are at or close to a budget balance we will face low-ish orrowing costs anyhow.

    • Brian

      Thanks very much. Your starters for 10 🙂

      So, absent the (flawed) ESM we face further and faster budget cuts than would be foreseen under existing programme? Can you put numbers on that i.e. how MUCH more annual cuts than the billions already envisaged?

      All OTHER things being equal and with budget surplus (!) is there any argument about either higher borrowing costs or credit rating likely to arise as a result of being outside ESM?

      With second programme or subsequent programme: what if any likelihood of IMF insisting that an Irish bailout was an EZ issue and subsequent buck-passing?

      Do you argue that, on balance, the IMF has been ‘better’ to us within Troika that either ECB and/or Commission, i.e. are we likely to get better deal from IMF than from ESM in a second or subsequent programme?

    • @Brian Lucey,

      I see you have your economist ‘hat’ on, but I see this as a profundly existential choice between the vision of a more tightly integrated EU core with increased democratic safeguards and increased democratic legitimacy and the reality of an island embedded in the trans-Atlantic Anglo-Saxon economic and political space with a distinctly different tradition of law, democratic governance and individual liberty?

      In purely economic terms Ireland is a regional economy operating at the intersection of the trans-Atlantic Anglo-Saxon economic space and the EU economic space and functioning as an ‘aircraft carrier’ for mainly US MNCs selling in to Europe and avoiding tax to the greatest extent possible. How sustainable this model is is very much open to question given the core EU disgust at so-called ‘fiscal dumping’, the future prospects of the Irish-based US pharmaceutical firms as some of their drugs become generic and the desire of the US Administration to enforce taxation of its multinationals.

      There is no doubt that Ireland would ‘survive’ irrespective of the result of this referendum, but there is huge uncertainty about economic performance and social well-being in both cases. The minutiae of the ‘compact’ are important but they conceal a much more profound political and strategic intent by the core EU. Does ireland want to be part of this?

      Rather than thrashing these issues out in a properly functioning parliament it appears that most Irish people prefer to use the Constitution as an alternative to the Oireachtas. And so we’ll get this ‘dialogue of the deaf’ characterised by atavistic prejudice, sound-bites and utopian visions with layers of cant, hypocrisy, bullshit and bluster.

      • Very well put Paul. We badly need to be taking the long view, thinking in terms of decades not years. Not something we seem to be good at. What’ll be the implications of any choice 30 or 40 years from now? Should we try to go with the EU core or move in a more semi-detached direction? In purely economic terms I’m far from certain. Short-term (5-10 years) it seems certain a yes vote would be preferable. But longer term I’m not at all so sure. There are many imponderables. Where really do we want to be in the world? I probably wouldn’t be as confident as you on the eventual evolution of more balanced EU democratic structures. Throwing our lot in with the Germans and others would seem a much more attractive option if I were. My fear is that the EU will remain primarily intergovernmental and I don’t really envisage a substantial transfer union developing. North European fiscal discipline is all well and good (I’d actually be rather in favour of debt brakes and such ideas) but I have my doubts as to what kind of place there will ultimately be for a small and peripheral state like Ireland in such a union. Maybe I’m being too pessimistic. Anyway my hope is such questions will be teased out in the upcoming debate (probably am being way too optimistic now! 🙂 ).

  2. What is the problem with a ‘constitutional prohibition’ – if this was a serious proposition – on deficit spending by Gov for day-to-day expenses? You can only spend what you take in in taxation.

    Most folk do this ‘ceptin they use a credit card or borrow to buy a car! Maybe this ‘day’ has come?

  3. We have yet to hear from serious economists as to what exclusion from the ESM might mean.

    would prefer to hear from from our politician on that

  4. Those who would vote against ratifying the new treaty need to consider the alternatives. The way I see it, the choice we have is between voluntary austerity, with the EU / EMF supporting us, or assume the risk of having austerity imposed on us by virtue of not being able to repay the debts we have already taken on, and therefore being denied access to new loans. If that option so weakens our position that we cannot stay in the Eurozone then our situation would indeed be dire.

    Whether the people who feel sore about bankers, developers and venal, reckless politicians like it or not, we are a small open economy in a global market. This means we must be linked to, or members of, a global hard currency system. A resurrected Punt would not cut it in this regard.

    Those who glibly talk of it being alright to default because “countries like Argentina did it and came out OK”, are either being extremely naive or criminally irresponsible. Firstly, savings and pensions were destroyed in that country after default. Unemployment was drastic. Public services disappeared. Secondly, what eventually saved Argentina was that is has extensive natural resources, for which there was a dramatic rise in demand at a time when it was needed to put the country back on its feet. We don’t have that safety net. All we have is foreign direct investment, which will think hard about staying if we damage the Euro or our position within Europe. Our corporation tax rate, at that point, will be well down the list of their considerations.

    • @Seamus McKenna,

      You are right about Ireland being a small open economy in a global market, but, in reality, it is a small regional economy that has been able to duck and dive between Berlin and Boston for the best part of a generation. That game is up. A choice now has to made between Boston and Berlin. But the political and economic agenda being pursued in Berlin does not resonate in Ireland. No politician will make a positive case for this – not even Chancellor Merkel’s EPP allies in government. So, instead of making a positive case, the focus is on arousing as much fear as possible, either real or imagined, about the implications of a rejection. This is dishonest in the extreme.

      The ‘no’ camp is no better – raising fears about the implications of acceptance and making naive and unfounded assertions about the benefits of rejection.

      But, in the same way as a positive case may be made for acceptance, an equally positive case may be made for rejection. Brian Lucey makes a valid case that, if this amendment were rejected and the EU support were decuded or withdrawn the IMF would not be found wanting. But he quite rightly highlights that the fiscal deficit would probably have to be closed even faster. In addition, the structural refroms that the Government has succeeded in either avoiding or watering down would have to be implemented. And it is likely that Ireland would have to integrate its economy more closely with Britain’s – and possibly the US’s. These last three would be an anathema to most in the ‘no’ camp, so they are being as dishonest as the ‘yes’ camp.

      For all sorts of reasons, with probably equal measures of love and hate, Ireland is embedded in the trans-Atlantic Anglo-Saxon economic space. Does ireland retreat to what it knows well or advance to engage with the German-driven EU vision? Boston or Berlin? That it is the real choice, but none of those campaigning on either side has the honesty or guts to present it as it is.

  5. @ Seamus McKenna: “… …therefore being denied access to new loans.”

    Seamus, perhaps the cent has not yet dropped. Our national income cannot sustain the current borrowing level, so ‘new loans’ are moot. Its simply moving whatever money I have in one pocket, into another one. I am no better off, financially. In fact, I still have to find the interest payments.

    What we need is a massive increase in national income – in the region of a 7% increase in aggregate economic activity, each year, for the next decade. Not going to happen. In fact, a long-term decrease in national income is more likely (with the odd ‘dead cat’ bounce to liven things up a bit). We, urgently, need to slough off as much debt (personal, corporate and state) as we can, and as fast as we can. If our politicians, economists and financial wizards insist that we continue with this ‘austerirty’ programme, NAMA, and the Calvinist-style personal bankruptcy proposals, we will regress economically to the point that we will never be able to recover.

    “… … savings and pensions were destroyed in that country”. That would be the case here as well.

    The only constitutional referendum we need is one prohibiting our legislators from introducing deficit budgets for day-to-day expenditures. They are so firmly addicted to spending taxpayers money that they have to be stopped – permanently.

  6. Interesting piece!

    Though, on the point: “Ireland has no blackmail capacity over its European partners”, technically that’s not strictly true. We can still actually veto the paragraph that a council decision in March last year proposed to be added to TFEU article 136: “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”, which would gives a legal basis to the ESM in EU law. That has to be ratified by every single one of the EU 27 (even non-Eurozone members). We actually haven’t ratified this yet. It still needs to be approved by the Oireachtas. I suppose, in theory, our parliament could refuse to do this, which would remove any EU legal cover from the ESM and cause all kinds of other problems for it. It’s certainly true that our refusal to complete the ratification of the ESM (the recently updated version which added the fiscal compact requirement) and fiscal compact treaties wouldn’t stop them from going ahead. But I suppose we still could (though it might amount to shooting ourselves in the foot) veto the amendment to article 136. Perhaps someone may yet challenge this amendment in the courts (am no lawyer so couldn’t say anything on the chance of success). What’ll be interesting to see though is that, given a referendum has now unexpectedly been called, whether approval of the article 136 amendment will now be hurriedly rushed through the Dáil at the earliest possible opportunity.

  7. I can’t see any reason to vote yes.

    The credit bubble that was unleashed in Ireland was in part the result of failed national politics (a) and policy and also in part due to international policy (b) which also failed.

    So the consequences must be split two ways. The consequences of our national failings mean that the contraction in the economy has meant the day to day costs of running the country far outstript the day to day income generated and we have to bridge that cap and as we do that we borrow each year for (a) and that debt has to be repaid at some point.

    However, the other side is that the failure of Lehman and the ECB insistence that no EU bank can ‘fail’ meant that the Fianna Fáil/PD/Green/Ind government of 2007 to 2011 was ‘made’, I use the word made loosely as there’s little evidence that they put up any resistance, transferred onto the Irish taxpayer leading to debt (b).

    So it means since the banks stopped lending, and hundreds of businesses closed and since the guarantee was brought in the Irish taxpayer has been faced with cutbacks to balance the day to day books and has received a ‘bail-out’ from the EU/IMF/ECB to give us the space to bridge our spending gap and when we do that by 2015/16 we will then have to start repaying the (a) and the (b) debt and is it fair that we even have the (b) debt in the first place? I would say no.

    This treaty is to put in place rules that relate to day to day spending, which by themselves are not that unreasonable, so as to prevent (a) occuring again, which is fair enough. But have the EU leaders learnt nothing about how diverse the EU is and how a blanket approach on policy doesn’t work.

    Then there’s the (b) part.

    Once we balance our books for (a) we will have to start repaying the approx €60billion of debt we were ‘made’ take on for (b). So in 2016 where is that €3billion debt repayment going to come from when in the years up to then we are taking about that much out of the economy to get the cost of running the country down to about €30b and have income of €30b and we are expecting somehow to generate enough extra income to have a €3billion debt repayment for the next 20 years?

    If we find out we can’t pay it then this treaty is to give us access to another bail-out. As in more debt (c).

    People who say we cannot vote no as we can’t ‘go it alone’ and Argentina etc weren’t able to default and get away with it and people there lost their savings and pensions.

    We are not Argentina but we can be like Iceland where they defaulted and people didn’t lose their pensions or savings and where other countries did step in to help and allow it access to the funding it needed.

    We have the funding in place for (a) up to 2016 which as long as we are cutting out costs the EU/IMF will release in stages. If we vote no are they going to refuse the next batch? I don’t think so.

    Which means we get to 2016 and we’ve balanced our books and we decide to ‘default’ on the (b) debts and therefore don’t need the (c) debts. What’s the EU going to do when we allow all those who expect to be getting money from us for the investments they made in Lehmans and Anglo etc – are the other countries in this treaty going to step in and pay up or let the investors face the consequences they should have faced in 2008.

    If the policy of austricty is working then why would we need to have access to yet another bailout and add even more unsustainable debt onto our backs?

    Vote no.

  8. “THE IRISH PEOPLE WON’T BE BRIBED” [an Taoiseach]

    Wow, the poor man must be having some sort of neuronal malfunction. Now here was me thinking that that sort of thing was Normal behaviour for Irish politicians – election or no election.

    Ah well!

    To: DF. There are 4 votes in this household: 4 x No – without as much as a moment’s hesitation. Lot of folk are mad as hell.

    • No real reasons there Seamus. You think this tretay will end global poverty and help tackle climate change. Can you detail how it will achieve these lofty goals?I don’t like the inference that if you vote No you are ambivalent to poverty and climate change.Do you have any opinion on the EDA and how this tretay will provide the EU with the power to demand Irish troops be deployed wherever they decide?My position remains undecided on the tretay. I was definitely in the No camp as the EU is not a democracy, but the shady underbelly of Libertas has given me food for thought.

  9. On reflection I have come to the conclusion that this referendum should be postponed until such time as the Irish people are in a better position to make an informed decision. While Ireland is in an official support programme the conditions of the programme will over-ride the terms and conditions of this ‘fiscal compact’ so they will not apply – although the objective of the support programme is to get Ireland to a position where they may be applied. If it transpires that Ireland needs a futher support programme – which appears increasingly likely – this situation will continue and the referendum should be further postponed until Ireland is getting close to the point of exiting from that programme.

    If the Government decides to press ahead with this untimely and irrelevant referendum voters should simply abstain from voting.

    This is the only sensible and logical approach. It is right and proper that the people should be asked to decide, but there is absolutely no point in asking them until they are in a better position to decide and the decision has some effect. People may never know enough to make an informed decision, but they most certainly don’t know enough now – and any politicians who claim they do and they should are being deliberately misleading and pursuing an agenda about which they are not being open or honest. And that goes for politicians in both the ‘yes’ camp and the ‘no’ camp.

    Why should the people be asked to decide when they don’t have to for possibly a considerable period of time? I’m confident many people would support a campaign to postpone this referendum and, if this were to prove unsuccessful and the referendum were to be held, to abstain from voting in it.

  10. Darren O’Donovan has yet another interesting article up on in his ongoing series of articles on the Fiscal Compact Treaty:
    This article is mostly about whether or not we could withdraw from the treaty at a future time and also possible ways of dealing with some of the ambiguities in the text. There’s a link in the comments to yet another interesting article on the treaty by Kenneth Armstrong:

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