The complete treaty guide

REGARDLESS of whether you intend to vote yes, no, or are still among the don’t knows, you need to be fully informed, so read on for a foolproof guide to the treaty.

FULL NAME:

Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.

WHAT’S IT ALL ABOUT?

At its simplest, tightening the rules to ensure that participating states keep their budgets and borrowing in check.

IS IT A TREATY?

Sort of — just 25 of the 27 EU member states have agreed to go along with it, so it’s more an inter-governmental agreement than a full-blown treaty.

WILL IT BECOME PART OF OUR CONSTITUTION?

No. Its provisions will be written into national law.

SO WHY DO WE NEED A REFERENDUM THEN?

To allow the Government ratify the treaty. Tomorrow in the polling booth, you will be asked to vote yes or no to adding a new subsection to Article 29.4 of the Constitution. The proposed new subsection states: “The State may ratify the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union done at Brussels on the 2nd day of March 2012. No provision of this Constitution invalidates laws enacted, acts done or measures adopted by the State that are necessitated by the obligations of the State under that Treaty or prevents laws enacted, acts done or measures adopted by bodies competent under that Treaty from having the force of law in the State.”

WHOSE IDEA WAS IT?

The Germans — and the European Central Bank. They had no faith in a scenario where governments merely put the rules into their ordinary legislation. They wanted the rules inserted in a country’s constitution, thereby making them permanent and binding. But this proved impossible for most states. So they settled for a treaty.

CAN WE VETO IT?

No. It’s not an EU treaty, meaning we don’t have a veto. It needs only 12 member states to sign up for it to come into force.

DOES IT RESULT IN AUSTERITY?

Whether or not we sign up to the treaty, we will be living with austerity for some time.

Ireland is, of course, currently in a bailout programme through which the troika of EU, ECB and the IMF are providing the money to keep the country afloat. That programme comes with onerous terms and conditions, which Ireland is meeting by cutting spending and hiking taxes. The bailout runs until the end of 2013, which means two more harsh budgets regardless of anything in the treaty, starting with a €3.5bn adjustment in December. Nothing in the treaty will affect the bailout programme. Regardless of a yes or no vote, the bailout, and the harsh budgets, will continue until the programme ends.

And then what? Well, in a general sense, it can be said that the treaty beefs austerity up. So in time, when the bailout ends and the treaty (if ratified) is eventually applied in full to Ireland, it would mean taking firm action to get debt and deficits under control.

We had budget rules under the original eurozone Stability and Growth Pact, but they lost their edge when it was breached more than 60 times, starting with France and Germany.

The more recent so-called “six-pack” of laws, which came into effect last December, toughens the rules up, closes some loopholes and makes them stick.

SO WHAT’S NEW IN THE TREATY?

It commits governments to having a “debt brake” or golden rule law limiting their annual budget deficits. Countries can bring one another to the European Court if the debt brake law has not been properly introduced.

IS IT REALLY NECESSARY?

It’s a political “to be sure to be sure” agreement — mainly reinforcing existing legislation. Countries like Germany that believe rules are sacred hope it will make the rest of us think so too. And being the biggest and richest EU member, they contribute most to our bailout, so…

WILL IT MAKE THE EURO HEALTHY AND ALL WHO LIVE WITH HER HAPPY?

It’s just a hinge for a door — you need a door, a frame, more hinges, a handle — so let’s see.

Many economists like our own Karl Whelan say it’s a straitjacket that will actually prevent prudent fiscal management. Others disagree. All agree there will have to be economic growth measures to restore the economy to health, but where this comes from is still being debated.

WHAT ABOUT US PARIAHS IN A ‘PROGRAMME’?

Because we are in a bailout programme, we will have our own special transition period — a “managed observation” — once the programme is finished at the end of 2013. Major elements of the treaty, such as the requirement to reduce excess debt by one-twentieth every year if debt exceeds 60% of GDP, won’t apply to Ireland until we finish the transition period.

DOES IT APPLY TO EVERYONE IN THE EU?

The countries that have agreed to participate, pending ratification, are the 17 eurozone member states and eight of the 10 remaining EU states. The Czech Republic and Britain are the two states which have opted out.

RIGHT, SO HOW LONG IS THIS THING AND HOW DOES IT READ?

It is short by EU treaty standards. A few thousand words with the preamble or recitals — “conscious”, “desiring”, “bearing in mind” stuff — taking up about a third.

IS THE PREAMBLE JUST PADDING THEN?

No, it’s legally binding and has two important sentences for us.

1. That nothing in the treaty can interfere with our existing programme and bailout money;

2. That we can’t get anything from the ESM, the EU bailout fund from July, if we don’t ratify the treaty by next March.

And it sets out the role of the European Commission and the European Court of Justice, anchoring as much as possible in existing treaties.

AND THERE ARE HOW MANY ARTICLES IN THE TREATY? 16. LET’S GO THROUGH THEM.

1. Aim of treaty is to strengthen economic and monetary union with rules to improve budget discipline and better coordinate economic policies.

2. Says treaty must comply with EU treaties.

3. This is the meat: Says government must run a balanced or surplus budget so cannot spend more money than it gets in taxes. It sets out the technical terms, structural deficit and medium term objective, which will take into account national variables such as demographics. It allows countries to deviate temporarily in exceptional circumstances outside the country’s control, such as a sharp recession, but steps taken must not endanger the euro. It allows countries with low debt to run higher deficits — only Estonia qualifies at present.

4. Debt limited to 60% of GDP and anything over must be cut by one 20th a year, as under existing law.

5. Countries spending more than they take in must adopt a reform programme as in the Stability and Growth Pact and will be monitored by the European Commission.

6. Countries will tell one another when they plan to sell bonds to raise money.

7. All parties to the treaty agree to operate as a bloc and support the commission’s recommendation to take action against a country breaking the deficit rules — unless there is a qualified majority against it.

8. Another member state can complain to the European Court of Justice if a country does not introduce a proper debt brake into national law — relevant only for first few years of the treaty. The court could fine the country as a result.

9. Binds countries to foster a healthy euro by balancing their books, bringing their economies closer together, promoting competitiveness and promoting employment.

10. Countries agree to come together in groups if necessary (enhanced co-operation) to move ahead on particular issues.

11. Agree to share plans for major economic policy reforms with one another.

12. Committing to regular meetings of eurozone leaders and the procedures for appointing a president.

13. Such summits will modify the architecture of the euro area and its rules.

14. Each country to ratify the treaty according to its own rules. It comes into force once 12 eurozone countries have ratified it by Jan 2013.

15. Other member states can sign up in the future.

16. Within five years, try to make this treaty part of the fundamental EU treaties. It would need all 27 member states to agree for this to happen.

* Compiled by Ann Cahill, Europe Correspondent

Terms & Conditions

Glossary of terms: The alphabet soup and EU-speak.

* Treaty: The EU treaties are the closest the EU has to a constitution, including all the laws member states agree to and covers all members.

* Fiscal treaty: It is not an EU treaty per se because that would need all 27 member states to agree, and only 25 do at present. So it’s an intergovernmental treaty between those 25 that hopes to become an EU treaty within five years.

* Deficit: Each year the Government gets in so much money from tax, and spends it on keeping the country going. If it overspends and has to borrow, that’s a deficit. The rules generally say the amount you have to borrow to balance your books each year should not be more than 3% of your annual gross domestic product (GDP).

* GDP: The amount of money in the country. This is the headline deficit.

* Debt: The borrowings/deficit from one year do not go away and so become the country’s debt, which builds up year after year if not sufficiently addressed. Ireland had got its debt down to 24% of GDP before the economic collapse but now it’s hitting 118%. The rule is it should be no more than 60%, otherwise the wise-ones reckon you will never be able to get rid of it and the amount paid in interest on loans will take all the country’s tax income.

* Structural balance/deficit: Headline deficits are easy to understand but too simplistic when it comes to running a country. Since business is good one year and bad the next, this cycle has to be factored into the figures. It’s not easy, especially for a small open economy like Ireland where a big import of chemicals makes imports look very high one month, but when it is exported weeks or months later as expensive medicines, it makes the exports look very rosy indeed. So the commission has a formula to estimate the structural balance/deficit.

* Golden rule/balanced budget Rule: Your budget must be balanced, in surplus, or have a deficit of just 0.5% of GDP (Ireland is aiming for 8.2% this year) but it can go as high as 1% if your debt is well below 60%. Ireland will enshrine this ideal in law later this year.

* Stability and growth pact: The original rule book for the euro. It has two aspects — one designed to prevent eurozone members overspending so it introduced rules (see above); and secondly procedures to make you get back into line.

Countries submit their budget plans for the next year and their action plan for employment, research, energy and social inclusion; the European Commission and Council can recommend changes including and can be taken to court for ignoring this. It’s now been beefed up by the six-pack, the two-pack and the fiscal treaty.

* The excessive deficit procedure: When a country’s deficit is over 3% of GDP and debt exceeds 60% of GDP, it is given recommendations to reduce it — failure can land you in court and facing fines.

* Medium term objective: A budget target given to each country that takes into account the level of debt and things that will affect it in the medium term, like an aging population.

* Six-pack: Six laws on managing euro countries’ economies which came into force last December. The year will in future kick off with the European Semester when countries submit their budgets for the coming year. It must be in line with debt, deficit targets and spend to improve competitiveness on research, education, poverty decrease, for instance. The rules for failing to abide by recommendations include a deposit of between 0.1% and 0.2% of GDP which can be confiscated if the issue is not rectified.

* Two-pack: Not fully agreed yet but will apply to all euro countries and provides more detail on how countries in trouble should be handled — the European Parliament suggests bankruptcy protection.

* Euro plus pact: Ireland and the other eurozone countries plus some others signed up to this Dutch pact last year committing to work for greater competitiveness and employment, and undertake a structured discussion on tax policy issues — a toughie for Ireland.

* EFSF: The EU’s temporary bailout fund that can borrow up to €440bn backed by guarantees by eurozone countries. So far it has lent €190bn to Ireland, Greece and Portugal. It combines with the EFSM which raises up to €60bn backed by the EU budget. In the beginning, German morality demanded borrowers from the EFSF be punished with an excessive interest rate.

This has since been abolished so that the money is lent at a less onerous rate of around 3% — less than half of what Ireland would have had to pay on the open market. Money can be used to buy sovereign debt or recapitalise banks, something Ireland is exploring to ease the €31bn Anglo IOUs.

* ESM: The permanent €500bn bailout fund that takes over from the EFSF in July.

The Oireachtas will vote later this year on amending the EU treaties to allow it come into force, but don’t have a veto. Each eurozone country will have a member on the ESM board and will pay in capital over five years €1.27bn in Ireland’s case and an additional €10bn in callable capital that we would have to pay up if it’s needed.

It can buy a country’s debt directly or on the secondary markets, give a credit line if the markets are charging too much for money or borrow for banks. But it all goes on the country’s debt and each board member must agree. It has the same rules as the IMF allowing it to burn bondholders in some cases.

A country can only tap the fund if it has ratified the fiscal treaty. Many expect Ireland to seek money in 2014 when the current bailout money has been spent to meet at least part of the €18bn needed to pay creditors.

* Compiled by Ann Cahill, Europe Correspondent.

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