Jim O’Brien returns to break down the Fiscal Treaty referendum
Today’s article will be discussing the Yes and No arguments for the upcoming Fiscal Treaty Referendum on May 31st. The objective is to give a balanced and unbiased approach, hoping it will illuminate the facts and give a clear understanding for many who do not understand the economic jargon, or for some of us who are still scratching one’s head to fully understand the term, structural deficit. (Definition to come)
I will not be speaking from the heart or making political points against the establishment or siding with one political party. I have researched the subject, the key economic concepts and properly referenced leading domestic and international economists.
Firstly, a note regarding the latest Sinn Fein controversy regarding leaflets distributed to the public. The Party quoted economists Karl Whelan and Colm McCarthy from UCD, and Brian Lucey from TCD. All three economists criticised the economic substance of the treaty but have announced publicly that they will be voting yes because of a specific rule regarding the soon to be created, European Stability Mechanism (ESM). This will be a permanent bailout kitty for struggling Eurozone nations, who are being priced out of the international money markets. Anyway, in order for a Eurozone member to assess such funds next year, their parliaments must have passed the Fiscal Treaty, failure to do so will see a country forced to access funds in the private markets at unsustainable rates, beg for money off the British, Americans, Chinese etc., or default, the former being more uncertain, due to the will of that country’s electorate and/or parliament to agree upon. A country like Ireland may default without wanting to but when an IOU maturity date reaches, and the coffers are empty, well, what can you do.
The Yes Side
Karl Whelan’s public statement about his voting intentions is explained in rather fairly logical and quite obvious terms. The current state of the economy, which the IMF has declared that if our growth rates remain at 0.5% of GDP, our national debt would not stabilise and rise significantly. Professor Whelan believes the government’s growth rate for this year is too optimistic, especially since Ireland in the second half of last year went back into recession. He also states that the stress tests scenarios which were applied last year are nearly upon us. Mortgage debt and high unemployment are putting pressure on Irish banks, furthering reducing the amount of money lent into the real economy. This could possibly mean another bailout for our banks, with billions more of taxpayers’ money used to recapitalised them. So Karl Whelan’s yes vote is based on the inevitability of Ireland needing another bailout to pay for our budget deficits, bank recapitalisation and borrowings from the Central Bank of Ireland and the ECB. However, this all assumes the ECB, the EU Commission and other member states sign off on the restructuring of our bank debts, which up to this date is low, or even a null probability.
IBEC, the employers’ body, recently published ‘Five facts about the Fiscal Stability Treaty’.
Reform is essential. The theory states that a monetary union must be complemented with a fiscal union, where the whole of the EU acts and performs as one. IBEC also argues that the treaty will accomplish fiscal stability.
The treaty allows for fiscal flexibility. The rules of the treaty will allow governments to fight against recessions, in order to limit the impact of future recessions.
No extra austerity is required. IBEC believes that Ireland will reach our agreed targets with the troika, therefore, it will be easier to reach the new, but lower deficit targets under the treaty.
A YES vote would strengthen Ireland’s position in Europe. IBEC also argues that if we stay at the heart of Europe’s decision making process we can influence our leadership abilities and the Irish commerce success story.
A YES vote is essential to boost confidence. By voting yes, Ireland can gain access to ESM funds, if such a requirement is needed, therefore, ensuring investors that there is certainty regarding our fiscal survival.
The NO side
With response to the above ‘facts’, many other commentators argue against such propositions, the reason why is due to the deficit limits and the amount of national debt allowed to be accumulated by a government. By reaching these targets, the Irish economy will have to achieve double digit growth in order to close our budget deficits and naturally reduce our total national debt, or make larger spending cuts and tax increases that have already being made, years after we are supposed to exit the troika programme.
Speaking at the Dail Committee on European Affairs, Economist Michael Taft from the IMPACT trade union outlines seven points regarding the fiscal treaty.
The fiscal treaty will require substantially more austerity measures in the medium-term. The key concept within the treaty’s text is the ‘structural deficit’ (this measures the difference between GDP now and potential GDP. Example: a gov. will borrow to invest in education now, and assumes to will receive a long-term benefit which will grow the economy. However, if they borrow more than what they expected to receive in return, then they have a structural budget deficit.) Within the treaty text, all countries must not have a structural deficit greater than 0.5% of GDP. Ireland expects to have a structural deficit of 3.7% in 2015, meaning we need to find an additional 8 billion euro in more cuts and tax increases to meet the new targets set and agreed by all member states.
The Fiscal Treaty will depress growth in the Eurozone, impacting on our external demand. The German Institute for Macroeconomic & Economic Research estimates that further cuts will drive Eurozone growth down to 0.5% per year up to 2016. This means that one of our largest export markets will have less spending power to consume, meaning our so-called export-led growth strategy slows and therefore limits our growth capacity to create jobs and invest in public services.
Even the Government regards the structural deficit as unrealistic. The EU Commission’s definition has been described by our government as ‘highly uncertain’ and ‘unrealistic’. Therefore, when it comes to picking on countries that breach such a target, one can simply present a different methodology illustrating that they are not.
The Fiscal Treaty restricts governments in combating future recessions. Since we are experiencing negative growth and rising debt, Ireland will not be in a position to save future income from budget surpluses, therefore, when we enter a recession in the next decade or two, we will not have the resources to fund spending increases and tax cuts, and since we cannot borrow more than 0.5% of GDP, we will experience another prolonged slump.
The Fiscal Treaty will perpetuate instability in the Eurozone. Due to its deficit restrictions, Eurozone economies will have to continue with their austerity strategies. However, this will put more pressure on economies such as Spain and Italy who are fighting against the need for their own bailout. These economies are as the phrase goes, ‘Too Big to Bailout’; therefore the entire Eurozone will be under greater financial uncertainty and vulnerability. Also, if member states decide to compromise and alter the provisions of the treaty, this would undermine the credibility of the treaty, which is the core response by the zone to tackle the current crisis. Also, with low levels of debt, this will negatively affect the financial industry, particularly pensions. ‘As one man’s debt is another man’s treasure.
Ireland has guaranteed access to institutional funding, regardless of a Yes or No vote. At present, Ireland has other options in seeking finance to pay for our budget deficits. These include the EFSF and the IMF. Therefore, the need for the ESM is somewhat offset by the help of others. However, in order to access funds from the EFSF, Ireland must put in a bid before July 2013. We have already exceeded our quota for IMF funding, but we can be granted additional support due to meeting their conditions.
Both sides of the argument have given numerous and worthwhile reasons to vote yes or no to the upcoming treaty. On the Yes side, we need certainty regarding the future funding of our state that we also need to be at the heart of the EU decision-making process. Businesses and foreign investors must feel confident in investing in Ireland and ensuring that we have a stable economy, banking system and currency. As a small open economy, many firms, indigenous and multinational acquire materials, capital etc. from abroad; therefore, a stable currency reduces inflationary pressures and the cost of buying in foreign currencies.
The No side believes strongly that the provisions of such a treaty means more austerity in the foreseeable future, negatively impacting the Irish economy and the economies of our main trading partners, who we need to buy our exports. As Paul Krugman argued, we all cannot export because we need someone to buy them.
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