The debate on the fiscal compact treaty has rapidly, and predictably, gone off the rails of the treaty and onto tracks that are only vaguely parallel.
It has morphed into a debate on austerity, driven for the most part by the ideologues of the left tapping into an inchoate, if understandable, desire on all our parts to see an end to austerity. The argument is that signing up to the treaty will institutionalise austerity as we drive towards a 60% debt-to-GDP ratio.
Adopting the fiscal compact will require that the debt-to-GDP ratio decline to 60%. That is a massive fall from where we are now. Many commentators, including myself to some extent, see that trajectory as probably involving a requirement to not just run small or zero deficits but to have surpluses.
Underscoring the concern that the treaty will institutionalise austerity is pessimism about growth. The reality is that debt at the national level is rarely paid down. The debt/GDP ratio, the metric that will be used in the fiscal compact era, can fall as a result of debt being paid down (which doesn’t happen), GDP rising, or both. So long as debt does not grow the ratio should fall. So we are fine if we get growth, but where will that come from? This is the key dilemma for Ireland and for Europe.
We face a period of significant fiscal consolidation through 2015 to simply move to a state where the level of debt stands still. At present, the plans are to run a deficit. Structural or otherwise a deficit where debt continues to grow is not conducive to reducing the debt/GDP ratio. The Fiscal Council has suggested that, in addition to the Government’s plans to have fiscal consolidation of €12.4bn through 2015, an additional €2.8bn might be required to achieve balance.
A major problem with the plan “going forward” is that it relies, in essence, on an export-led recovery. The entire world seems to now be betting on export-led recoveries. This only makes sense if we have found a Martian civilisation willing to pay for all our goods and services.
At some stage, we can expect pro-growth measures at a European level. The French and Greek election results guarantee that growth measures will be written into a revised compact or added as an addendum.
The main reason why I see myself, reluctantly, voting yes is to secure access to funding, if we need it. The reality is that even if we did not require a single additional euro of debt, by running a balanced budget, we face a massive refunding requirement.
To reiterate, national debt doesn’t get paid off — it gets rolled over and over, paying off the maturing debt with new debt. The trick, as we have noted above, is that with a modest amount of growth the burden on the state falls as a proportion, and with a modest amount of inflation the burden in present day funding terms falls further. Achieving this is Ireland’s challenge.
There is an argument that we can apply to the IMF, but application is by no means the same as acceptance. The IMF have expressed doubts as to the appropriateness of them sharing the burden alone.
The EFSF continuation would also seem to provide some cover only for the existing bailout, leaving the remainder of the rollover of national debt and any additional funding to be sought from the markets.
Voting no would thus expose the state to having to fund at least a part of its requirement from the markets or from internal resources.
Ireland no longer holds the cards it did when our banking system was a source of major potential contagion. The ECB will support banks (though that support has to be coming to its limits) but it will not support states.
* Brian Lucey is professor of finance at Trinity College Dublin.
© Irish Examiner Ltd. All rights reserved