Ireland Should Vote Yes on the Fiscal Compact

With fewer than ten days to go until the Irish referendum on the fiscal compact, a huge percent of the population remains undecided about how they are going to vote. According to a recent opinion poll, 37% of respondents will vote in favour of the fiscal compact, 24% against it and 35% are undecided. While the fiscal compact is misguided and poorly conceived, it is overwhelmingly in Ireland’s best interests to vote for it anyhow.

Fiscal compact: barking up the wrong tree
The fiscal compact will not draw a line under the EZ crisis and may well exacerbate it. By demanding that EZ countries hit a series of budget deficit and debt targets, the fiscal compact addresses the EZ debt crisis but does nothing to address the banking crisis, balance of payments crisis or growth crisis in the region. European leaders introduced the fiscal compact as the first steps towards an eventual fiscal union. In and of itself, the fiscal compact represents nothing of the sort. All the fiscal compact does is institutionalize the idea that all other countries in the EZ need to look more like Germany in terms of fiscal responsibility. The EZ periphery will have to make all of the adjustment while the core makes none, ensuring that the weaker EZ countries will go even deeper into recession. There are also huge concerns about the enforcement of the fiscal compact. Spain and Italy are the most recent countries to push back on their budget deficit targets, but the Netherlands has had difficulty devising a budget to hit its targets and France is likely to succumb to fiscal slippage. The fiscal compact has already been undermined by peripheral and core countries alike before it has even been ratified.

Ireland will need a second bailout
If the fiscal compact is so misguided, why should Ireland ratify and implement it? There are two main reasons. First, Ireland is going to need a second bailout programme, and it cannot avail of the European Stability Mechanism (ESM) if it rejects the fiscal compact. Ireland returned to recession in H2 2011, with domestic demand a negative drag on economic performance. Ireland is entirely reliant on exports for growth, and its largest export markets—the US, the UK and the EZ—are either growing weakly, in recession or in stall speed. This is likely to get worse over the next year and a half, as the US faces a fiscal cliff and the EZ recession worsens. According to its bailout programme, Ireland is expected to return to the markets in a significant way in early 2014. However, market sentiment regarding Ireland is highly dependent on developments in the EZ generally; Ireland saw its government bond yields rise back over 7% last week for the first time in months, owing entirely to drama coming out of Greece and Spain. It seems highly unlikely borrowing costs for Ireland will fall to sustainable levels while the EZ crisis continues.

A no vote for the fiscal compact means that, when Ireland cannot return to the markets as planned in early 2014, it cannot avail of ESM funding in a second bailout. Many in the “no” camp have argued Ireland could just borrow directly from the IMF if it needs a second bailout. I discussed this with a number of senior IMF officials when I was in Washington DC for the IMF spring meetings. It is highly unlikely the IMF would break ranks with its troika partners and offer Ireland loans. Others in the “no” camp have argued that Ireland could get a second bailout from the EFSF. According to the Eurogroup’s press release on the EFSF and ESM, between July 2012 and mid-2013, the EFSF “may engage in new programmes in order to ensure a full fresh lending capacity of EUR500bn”. It seems unlikely that Ireland will be in a position to negotiate a second bailout deal by July 2012.

Relationship with EU is crucial
The second reason Ireland should vote for the fiscal compact is that not doing so really only hurts Ireland. Unlike the Nice and Lisbon treaties, which required a yes vote in Ireland for adoption and implementation, the fiscal compact will go into effect without Ireland’s approval (assuming 12 EZ countries ratify it, which seems certain). Ireland voting down the fiscal compact would therefore only serve to drive a wedge between itself and its European partners. This is something that Ireland should actively seek to avoid. Ireland’s growth model is heavily reliant on multi-national corporations (MNCs) that use Ireland as a springboard into the larger European market. Much more important than its relationship with the EZ therefore is Ireland’s relationship with the EU.

Those in the “no” camp who argue that the fiscal compact will not draw a line under the crisis and therefore Ireland should reject it are only half right. It is true that the fiscal compact will not only fail to solve the crisis, but could make it worse in the weaker EZ countries. But there is no point in Ireland cutting off its nose to spite its face. Ireland needs to play a long game with this referendum and consider its medium- to long-term economic growth model and role within the greater EU.

Please see my presentation to the Oireachtas Sub-Committee on the Fiscal Compact as well as the Sub-Committee’s final report. The latter outlines many reasons to vote for and against the Fiscal Compact.

10 Responses to Ireland Should Vote Yes on the Fiscal Compact

  1. headcaseirl says:

    What’s your view on the 11 billion its going to cost us over the 5 years to avail of this service? about 2 billion a year out of our economy in case we need the bailout – to me that doesn’t make sense…

    If you admit we’ll need a second bailout, then we have to much debt and can’t afford to pay our way and pay our debt… How does more debt solve this? Should i get another mortgage out to pay off my current mortgage?

    How do you feel about the ESM itself, together with it’s managing director and entire board of directors being completely immune from any legal investigation with regard to their role in the new ESM (bank). They will be managing 700 billion of Europe’s money with absolutely no accountability in any country. How do you feel about the working documents of the MD of this bank not being allowed to be viewed. Ever, by anyone. Oh and also the archives from this new bank can never be seen. By anyone outside of the bank. ever. Oh and any professional body who works with this bank can never comment on the workings of the bank as they are swore to professional secrecy.

    In ESM treaty also states that countries wishing to make a claim to the ESM should first make the claim to the IMF. That seems funny.

    How do you grow an economy by reducing people’s purchasing power? That doesn’t make any sense to me really.

  2. Fed_up says:

    The referendum is essentially a vote on whether Ireland is to remain in the Euro or not – rejection of the fiscal compact will result in the Irish being forced out of the Euro, either by the core EU countries or the financial markets.
    Game theory suggests that if you are going to defect then the optimal strategy is to defect early. The Irish must decide whether they are going to stick with the Euro, come what may, or whether to exit now. Playing the long game and losing i.e the Euro collapses anyway even after the Irish undergo decades of debt slavery, is the worst possible outcome. Playing the long game and winning i.e decades of debt slavery but without the disaster of a Euro Exit is by no means desirable. The intense (hopefully) short-term pain of a Euro exit followed by a Icelandic type recovery may be the best possible outcome. Adopting the USD as the Irish currency in the short-medium term may alleviate some of the pain of leaving the Euro.

  3. Jamie M says:

    Why would anyone listen to Ms Greene? She was trained under the same Princeton crowd that the US Federal Reserve is run by. The USA has nearly $16 trillion in official debt, and the liabilities are a multiple of that. The US Federal Reserve is now monetizing the debt with purchases of US treasuries of up to 77%.

    This is not a solution to Ireland’s problems. This same group and their economic theories were the CAUSE of Ireland’s (and the worlds) economic problems. Please look at charts of commodities and housing prices after 2001. US Federal Reserve expansion of the money supply fueled the commodities and housing bubbles. That’s the people that you are listening to.

    If you are considering voting yes, I implore you to know who is advocating this treaty: the same people that got Ireland into this jam.

    Vote smart. Vote for Ireland’s real interests, not for the interests of a self serving and corrupt elite.

  4. says:

    Hi M. You don’t actually explain why you think the “long game” requires a Yes vote.
    The long game, imo, requires that Ireland avoids being pinned down and stays flexible, while the big boys – Spain / Italy and Germany – slug it out. In the meantime, I’m getting food self-sufficient by buying an extra hen and planting more vegetables.

  5. Really Megan that just isn’t enough of a reason to vote yes.

  6. I’m sorry Meg but democracy is more important than short term economic considerations. It’s an ideological position but one of the few worth holding.

  7. Pingback: Ireland Is Holding A Huge National Referendum Today That Could Ultimately Determine Its Fate In The Euro |

  8. Pingback: Ireland Is Holding A Huge National Referendum Today That Could Ultimately Determine Its Fate In The Euro!!! « InvestmentWatch

  9. Pingback: Ireland Is Holding A Huge National Referendum Today That Could Ultimately Determine Its Fate In The Euro – - BizNewsX - Business News AggregatorBizNewsX – Business News Aggregator

  10. Pitocco says:

    Irland have to vote NO to Fiscal Compact and NO to one european union bind by the money.
    This is the massive massacre that banks wish to realize, but it could be one boomerang for them plans.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


Get every new post delivered to your Inbox.

Join 405 other followers

%d bloggers like this: