Ireland Should Vote Yes on the Fiscal Compact
May 22, 2012 10 Comments
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.