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.
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