Who is right about the fiscal treaty?

THE fiscal treaty debate is heating up by the day.

The political parties of the left, Sinn Féin and the United Left Alliance, claim the treaty contains a whole raft of new measures which will be economically and socially destructive for Ireland.

The Government claims most of the treaty measures have been in existence for some time and they are nothing to worry about. They also claim this is a “stability treaty” and not an “austerity treaty”.

So, who is right?

Let’s start with the new rules on the deficit. The legal basis for these have been present since the treaty on the functioning of the EU came into force in Mar 2010.

This was made possible by the Lisbon Treaty coming in to force on Dec 1, 2009.

Articles 121 and 126 do allow for surveillance of EU states that are in “excessive deficit” and ultimately allows fines to be imposed on them if they don’t reduce it. It also empowers the EU to demand that money be lodged with it by the non-compliant state. So the Government is right to assert that the legal basis for the present treaty rules on the deficit did already exist.

The member states adopted an open method of co-ordination in Mar 2011 to allow for automatic fines on countries that had excessive deficits or debt. This builds on the Revised Stability and Growth Pact since 2005, which recognised the need to have an excessive deficit procedure for countries in this position and which established the basis for the penalties in the current treaty.

The “reformed” pact also laid down a new measure for examining a country’s deficit, the “structural deficit”.

Nonetheless, the long-standing features of the pact, going back to 1997, continued to be the relevant benchmarks, despite allowing for a determination that a country was in “excessive deficit”, based on structural deficit parameters. However, the existing benchmarks persist: The deficit should not exceed 3% of GDP and the national debt should not exceed 60% of GDP.

However, under the “reform” of the pact in 2005 and the 2011 open method of co-ordination, there was a strong push towards reducing deficits and using the “structural deficit” as a more stringent way of measuring the deficit. The “structural deficit” is now the pre-eminent measure of the country’s deficit. This is definitely new. The new rules governing the structural deficit in the current treaty states in article 3 that there should be no deficit whatsoever or that a country should be in surplus.

The treaty enshrines the need for governments to work under the surveillance of the EU to formulate and implement medium-term objectives to get its finances into balance.

These provisions are definitely new and didn’t exist heretofore. What is also new is that the EU will only tolerate a maximum structural deficit of 0.5% of GDP. It is also very new that where a country’s general government debt exceeds 60% of GDP, the country will be compelled to reduce the excess by 1/20th per year, under article four of the treaty.

These present new difficulties for Irish economic policy not present heretofore. If Ireland is to adhere to the new deficit measure, a further €5.7bn “adjustment” in public spending cuts on top of the already planned austerity would be required by 2015.

From 2008 to 2011, the austerity meted out in terms of spending cuts and taxation increases was €20.7bn. The Government is working towards the established 3% general government deficit (the existing stability pact measure) rules and to bring this to less than 3% in 2015, a further €8.8bn in cutbacks and taxes need to be implemented, as stated in its fiscal outlook last November.

This general government deficit, not the one used in the new treaty, is what Finance Minister Michael Noonan has publicly stated he is working off at the moment.

However, the Government’s fiscal outlook of last November does take into consideration what the challenge of using the structural deficit would look like. Based on the Government’s future plans as of last November, the structural deficit will be 3.7% of GDP in 2015. To bring this down to 0.5% as set out in the fiscal compact, would require a further €5.7bn in cutbacks and tax increases, over and above the €8.8bn already set out by the Government.

Also, there are new measures which will be required if the treaty comes into effect in regard to the general government debt, which have not applied heretofore. On Jan 1, 2013 when the treaty comes in to effect, the Irish debt:GDP ratio is forecasted to be 118% of GDP at €195bn.

The Referendum Commission states the 1/20th rule on debt reduction won’t technically apply to Ireland until 2019. However, to give some sense of the figures involved, were it to apply to Ireland immediately, it would require a repayment of about €4.8bn a year back to the EU.

What is also new in the current treaty is the “blackmail clause” which establishes that any eurozone country which does not ratify it, will not be allowed bailout funding under the new European Stability Fund. This was only agreed for the first time on Dec 9 last. Up to now, any eurozone country can apply for a bailout under the existing European Financial Stability Facility.

A further negative feature of the new treaty which builds on the increased co-ordination of economic policies among EU and particularly eurozone countries is the ability of any country to bring another to the European Court of Justice for failing to bring down its structural deficit to less than 0.5% of GDP or its debt to less than 60%.

The framework allowing this to happen was laid down in article 260 of the new treaty of the functioning of the EU in 2010, but the actual specifics are new. This new provision allows the court to impose a penalty of up to 0.1% of GDP on the country in question. This would be equivalent to €1.65bn at present in the case of Ireland. The establishment of a Fiscal Advisory Council under the treaty as both a watchdog and advisor to the Government is also fundamentally new. This does raise serious questions regarding the openness and transparency of economic policy and decision-making.

Overall, it is fair to say that while the broad legislative and institutional scaffolding was present for many of the current provisions in the fiscal treaty, they were absent for others. Further, the specific requirements are almost totally new. It seems Irish people are being presented with momentous economic changes which are new to them and without any great knowledge of what the consequences will be.

* Tom O’Connor lectures in economics and public policy at Cork Institute of Technology

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