The debate on the referendum on the Intergovernmental Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union, otherwise known as the fiscal compact, kicked off in earnest this week.
The farcical and hypocritical nature of what is in store for us over the next month has already been exposed.
On Tuesday, Michael Noonan warned that rejection of the treaty by Ireland would mean a much tighter budget next year. Immediately, the no campaign reacted angrily, accusing him of scaremongering and bullying. The no side should look at their own claims about this being a treaty for austerity and the promise that if we sign up to it, we will be exposed to years of austerity.
Balance and consistency are required. The fiscal compact itself is really much ado about nothing. When EMU was launched back in 1999, we all signed up to a stability and growth pact that was meant to impose fiscal discipline on member countries. Unfortunately, this was largely ignored.
The ‘new’ compact seeks to enshrine rules into European law that will aim to ensure the structural budget deficit, that is the deficit when the impact of the economic cycle is removed, does not exceed 0.5% of nominal GDP, and that the Government debt does not exceed 60% of GDP.
There is so much difficulty in estimating a country’s structural deficit in any event that it is also a pretty meaningless concept to have built into a rules-based system, but if it makes the Germans and the ECB happy, let them have it.
These rules will supposedly be subjected to strict EU oversight and applied by the European Court of Justice. Countries who fail to play ball may be subjected to a financial penalty which does not exceed 0.1% of GDP. The EU is trying to create a rules-based approach to fiscal management.
In return for accepting what has already happened and what is likely to happen in the future, the fiscal compact was effectively manufactured to convince disgruntled electorates that in return for bailing out errant countries, serious fiscal rules will be imposed. I am not at all convinced that these rules will in practice change very much.
If Ireland rejects the treaty, what then? Europe does not require Ireland to sign up — just 12 of the 17 eurozone countries are required. That will be easily achieved, so Europe will proceed with the enactment of the new fiscal rules with or without the Irish.
In the short-term this would most likely mean that the risk premium attaching to Irish government debt would widen significantly as it could be interpreted as a refusal by the Irish authorities to behave in a fiscally prudent manner; the markets would most likely continue to refuse to lend to the country, and we would not have access to the emergency funding available from the European stability mechanism.
Those who oppose the treaty need to inform the electorate how they would come up with the money required to run the country in that eventuality? IMF funding would in theory be available, but that funding would come with very strict obligations attached.
The IMF is not the St Vincent de Paul. In the longer-term, Ireland’s influence in Europe would be further eroded and, ultimately, I do not believe we could remain part of the euro. Given the disastrous situation in the country at the moment, that would not be positive.
In my view it would be utter lunacy to reject the treaty — there would be absolutely no upside and an unquantifiable level of potential downside.
Mr Noonan is most likely correct — if we think we have austerity now, tougher austerity would probably be required if we vote no and the treaty is ratified by the 12 countries required.
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