Spanish bailout - the straw that broke the camel's back?

Despite the intense debate which surrounded the Fiscal Treaty, and ultimately its passing by the Irish people two weeks ago, its overall impact on the Euro crisis discourse has proven to be minimal.  The speculation had immediately turned to the details of a Spanish bailout, a prospect that would have been ridiculed only three years ago.  No matter what pans out in the Euro zone, the only certainty is that nothing has proven to be outside the realms of possibility. 

While there was bound to be apprehension within Brussels and Frankfurt at the prospect of a lack of a democratic mandate for the controversial terms, the conservative nature of the Irish electorate was predictable.  Despite the fact that the main political parties are deemed to be untrustworthy by vast swathes of the population due to the undelivered promises of the last election, the fact that the vast majority of the political and academic establishment was behind the Treaty – however grudgingly – was a major reason behind the overwhelming yes vote.  The requirement of years of austerity was seen as a lesser evil than the unpredictable consequences of Ireland leaving the Eurozone, an outcome that probably would have been brought about by a negative vote.  Another decisive factor was the reassurance provided by the facility of the ESM if, as expected, we need a second bailout.  Of course, the viability of the ESM is still questionable, given its inadequate size and the threat of contagion sparked by the Spanish banking crisis.

In relation to Spain, the necessity of even a partial bailout has not exactly been a secret.  The scale of the property crash over there has been comparable to Ireland, and the requirement for extra capital on the scale of Ireland’s was always going to be an eventuality.  While the leaders of Spain and the EU are trying to keep a clear divide between the Spanish banking problem and the sovereign, no matter what happens the cost will have to be borne by Spanish taxpayers, or through the ESFS.  

The likelihood of a successful Spanish bailout is unlikely, but one for Spain and Italy is impossibility.  There is simply not enough cash reserves, or economic growth, within the EU to be able to put up E600-700 billion euro for bailouts for two of the largest economies in the EU.  The stringent terms of the Fiscal Compact are a not-so-obvious predecessor to Eurobonds and a European Department of Finance, two outcomes that may be announced in the conference being held in two weeks.  Once again, Merkel and Burroso will claim the outcomes of the conference as being a resolution of the crisis.  There will be a lull of perhaps a few months; things might begin to look up.  But then, as before, further crises will envelop the euro – be they economic or political - requiring more drastic action. It was always thus.

The Most Important Election of the Year?

As the Euro crisis rages on, Nicolas Sarkozy faces an uphill struggle for re-election. Current Affairs Editor Jerry Larkin asks - will Angela Merkel's support aid his campaign or prove to be a kiss of death?


After a year which saw both a general and presidential election take place in this part of the world, any Irish person could be forgiven for having election fatigue. However, with major elections happening in France in April and in the US in November, political hacks have much more drama to look forward to this year. The French election, in particular, promises to be a closely-run contest, given the fractured nature of French politics. Along with the two main parties – Sarkozy's UMP and the Parti Socialiste which will fight the election with François Hollande as their candidate – there is also the Parti communiste français (PCF), the Front National, the Green Party and the centrist Democratic Movement led by François Bayrou, along with many more smaller niche parties. The French political system is fairly unique in the way that the president is elected, with a first round taking place on 22nd of April. The top two candidates from that round will advance to the second round of voting which takes place two weeks later and is a straight face-off between the two candidates.

At the time of writing, Sarkozy still had not officially announced that he is running, although the feeling amongst the media in France is that he is paving the way for an imminent announcement by making prominent speeches and taking populist positions in the last couple of months. The French President had been sliding in the polls in the last year or so, with small successes like the overthrowing of Gadaffi in Libya doing little to prevent this decline. In having an approval rating of 32 percent, Sarkozy is the most unpopular French President since World War II. Indeed, his reputation is such that they were rumours circulating amongst the French twitterati that the recent birth of his fourth child with Carla Bruni was timed to roughly coincide with the election. Although he is currently 10 points behind Hollande in the opinion polls, he has the significant advantage of incumbency – the French have historically been reluctant to vote against a sitting President.

While Sarkozy's popularity has hit a nadir in the last year, Hollande's star has been on the rise. He had to fight a primary election within the Parti Socialiste (PS) last year, beating five other candidates, including the PS leader Martine Aubry and the 2007 PS candidate Ségolène Royal. The primary election certainly provided the French media with many column inches, given the fact that Royal and Hollande had been partners for over 30 years, before they separated in 2007. Despite this personal history, Royal and the other candidates have rowed in behind Hollande since his nomination. The seemingly serene state of the Socialists is in marked contrast to the turmoil of last summer, brought about by the arrest and subsequent trial of Dominque Strauss-Kahn (ubiquitously known in France as DSK). Many in France thought him to be the automatic challenger to Sarkozy and a certain winner of this election, although the rape trial saga ended that scenario comprehensively.
However, followers of the Socialists must be pleasantly surprised that the negative publicity surrounding DSK did not overly impact their presidential bid. Hollande has taken a decisive swing to the left since his nomination, and a victory for him would see a sea-change in the European consensus of austerity and punishing smaller states for supposed fiscal irresponsibility. Despite this, the last Socialist President Mitterand was forced to lurch to the right midway through his first term due to global economic pressures, and this may be a factor in an Hollande presidency.

Another important element of the upcoming French election is the performance in the opinion polls of Martine Le Pen for the Front National. She has performed extremely well, running currently in third place, with some speculating that she could make the second round if Sarkozy's campaign falters. That scenario would be a near-repeat of the election of 2002, where her father Jean-Marie defeated the Socialist candidate to proceed into the second round against Jacques Chirac. Such was the fury on behalf of the ordinary voter that Chirac won in a landslide. However it would be foolish to dismiss Le Pen, largely because of the French equivalent of the 'Shy Tory' effect, where voters are afraid to speak publicly of their support for an extreme candidate. Le Pen has built herself up as an anti-establishment option for French voters sick of the UMP and the PS orthodoxy, and this may appeal to many voters with unemployment at a 12 year high.

A final unpredictable element of this election is the pledge by Merkel to rally behind Sarkozy in his campaign. An alliance between French and German leaders is not without precedent – Chirac and Shroeder combined to condemn the US invasion of Iraq in 2003, and in 1992 Helmet Kohl and Mitterand forced through the Maastricht Treaty. However this show of strength is different, and how this support will actually manifest itself is unclear. This step has already been criticised by Hollande and others in France as an unwelcome foray into another country's political process. There has also been apprehension shown in Germany for the support, with some Germans feeling that Merkel should be concentrating fully on the Euro crisis and not on an unrelated election. However, it is clear that - as the second most influential government in the EU - the upcoming election in France is intertwined with the outcome of the Euro crisis, and the eventual political direction which the EU will take in the future. Whether Merkel's public campaigning on behalf of Sarkozy will help or hinder his re-election prospects is not yet clear, but in this globalised political climate, the result of the 6th of May will have very real consequences for every citizen of the European Union.

The above article was published in the February edition of Motley magazine. Apologies for the delayed analysis!

Fiscal Compact - A Vote to Institutionalise Austerity

To the great annoyance of the Government, Attorney General Máire Whelan has advised Taoiseach Enda Kenny that a referendum on the proposed Fiscal Compact is a legal necessity, and the referendum is expected to be called for June of this year. This Treaty is unique over previous referendums in that it is a relatively short document – only 10 pages long - but it contains extremely abstract issues, which are not clear on first reading. The concern shown in some quarters that it will be extremely difficult to explain these issues and their consequences to the everyday man and woman is valid, but nonetheless patronising to the electorate, particularly considering the numerous long-term consequences which this treaty will bring about. A yes or no vote will have severe repercussions for every Irish person – not just economists.

The need for a more integrated fiscal policy in the Eurozone is legitimate (if you believe in the value of European monetary union), and many argue that the lack of clear budgetary rules is the reason why the Eurozone is teetering on the brink in the first place. Looking back at the debate over the establishment of the single currency, it is surprising that there was so little coverage given to the lack of fiscal unity – it appears ridiculous that monetary union was not followed directly by greater oversight on government spending. The Stability and Growth Pact (SGP) was supposed to address this shortfall of the euro experiment, but this proved to be toothless. That fact was not helped by the reckless behaviour of France and Germany, who both breached the terms of the SGP in 2003 - giving the green light to the PIIGS economies to follow suit. This belies the narrative of the EU – that it was solely the PIIGS countries who spent too much, and that all they need is a dose of medecine in the form of austerity and German economic orthodoxy. As well as being extremely simplistic, this argument is just plain wrong. I am against monetary union, as I believe it does not take into account the economic circumstances in peripheral countries like Ireland when it comes to decision-making – the considerations of Germany and France are paramount to the ECB. It is apparant that having full monetary union without any form of fiscal union is like owning a car with no access to the car keys. However, when signing up to join the euro I think the Irish government wanted all of the advantages of a single currency, with none of the responsibilities.

The terms of the Fiscal Compact appear to be identical to the Stability and Growth Pact, and in the most part the Fiscal Compact is just a legal tool to put the SGP into primary legislation in the 25 countries which signed up to it (the United Kingdom and Czech Republic decided not to enter the agreement and this will have unintended consequences for Ireland, given our close economic relationship to the UK). However, there are also more stringent requirements in the Fiscal Compact, such as a limit of 60% of national debt. This requirement is in the SGP, but under the new agreement, the target for it would be closer to 25% in order to factor in any macroeconomic shocks to a country. As well as cutting government expenditure in the long-term, with all the negative connotations for growth, this would also encourage investors around the Eurozone to buy riskier investments, due to the decrease in issuing government bonds. Within the Fiscal Compact, there is also the condition that the annual structural defecit must not exceed 0.5% of nominal GDP. Despite the fact that this is quite hard to measure and open to subjective analysis, this would have consequences for governments' ability to invest in their economy, and makes Keynesian policies apparantly difficult to implement.

In addition, the Government's stance on the Treaty is hypocritical. On the one hand, they maintain that the state will be back financing itself on the bond market next year, when the bailout deal runs out. They are adamant that a second bailout – like the one Greece had to apply for – is not necessary, and that Ireland will be the first country to exit a bailout programme in the Eurozone. On the other hand, once a country ratifies the Fiscal Compact, it will be able to avail of the European Stability Mechanism (ESM), which is the fund set up to finance future bailouts if (or indeed) when they are required. The Government is arguing for a yes vote to the referendum on the off chance that Ireland needs a bailout in the future. This position is facetious and disengenous – the Government should pick a clear position on the issue instead of flip-flopping like it is currently doing.

There is also the fact to consider that many economists do not believe that the Fiscal Compact would have prevented our current economic crisis. Expenditure by Ireland in the Celtic Tiger years grew at an unsustainable level, on the back of tax take from a property bubble and a fake illusion of wealth. There is an expenditure growth rule present in the SGP which would have alleviated our current plight if it had been enforced, but this is not in the Fiscal Compact. To sum up, I do believe the Fiscal Compact will be passed, as the Irish electorate have been proven to be wary when the facts are not clear-cut. All I can hope for is that the debate is clear of scare-mongering, on both sides.