With our fiscal policies, is the compact right for Ireland?

The fiscal compact — the Not Quite an EU Treaty as it has been termed — is the proverbial curate’s egg.

At one level, like mom, apple pie, puppies and sunshine, it’s hard to disagree with the lofty notion of government finances being run in a coherent, sustainable fashion.

But, like the curate’s egg, it is good and bad in parts. To my mind, the bad elements outweigh the good. The Government had an opportunity to take on board a (soft) fiscal compact in the form of a private members bill tabled by Senator Sean Barrett, which would have addressed many concerns of the compact without the hard numeric targets.

That they did not kill the bill is testimony to the sense of such a rule being required, but that they did not progress the bill shows that there is no urgent will absent threats and cajoling.

Had the Barrett bill been progressed it would have strengthened the governments hand in that they could have gone to the treaty meetings with a fiscal rule in hand, which might have been used as the basis for discussion.

The issue it addresses is that all signatory powers must have a binding rule on how much government debt they can have, and if this is too much (over 60% of GDP) they have to reduce it at a rate of 5% of the balance per annum, and to maintain a balanced or surplus budget.

This is not sensible economics. It rules out counter-cyclical spending at least until the 60% balance is reached.

This is similar to the stability and growth pact, the terms of which were breached by Germany and France, now insisting that the rest of Europe swallow the medicine they have persistently rejected without demur or sanction.

Some argue that the terms of the compact are those that we agreed to under the Maastricht treaty and its stability pact. The main difference here is the speed of adjustment which would imply that Ireland would face up to 20 years of austerity followed by an indefinite period of being unable to borrow.

Europe is significantly over the 60% limit, as are the majority of countries. Adopting the compact means a massive deleveraging of the European sovereign bond market.

The 17 euro countries need to reduce from 85% to 60%. At present terms, that is a reduction of about €2.3tn. That is a massive fiscal drag on Europe.

Ireland is only now coming to grips with the twin financial problems of the banks and the budget deficit. The drag the banks will have for the next decade is the role which the Anglo Irish Bank promissory notes will play.

To ensure that the exceptional liquidity granted to Anglo via its swapping the promissory notes does not become a permanent increase, the Central Bank, acting for the ECB, is requiring the repayment of same. This amounts to €3.1bn per annum for the next decade.

The ECB rationale is that if it does not do this here, it will set a bad precedent and could result in money supply increasing and this might in turn result in inflation.

European inflation is about 3% per annum. Hyperinflation is generally defined as being rates of about 50% per month.

The scarring effects of the Weimar experience still scare the ECB. But we are orders of magnitude away from this problem. In order to prevent the possibility of hyperinflation in Europe, the Irish taxpayer must engage in a money burning exercise.

And we must now, under threat of being cut off from funds, engage in a more rapid deflation of the system than would be deemed optimal. We are being asked to pile austerity on absurdity. At the very minimum the state must seek the removal of the Anglo bond burden.

Then and only then can we see where the true trajectory of Irish fiscal policy might be found, and then and only then can we see if the fiscal compact makes sense for Ireland.

— Brian Lucey is professor of finance at TCD and MD of Ussher Executive Education

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