Cost of failing to approve treaty could be enormous
ANALYSIS:ECONOMISTS HAVE been very much to the fore in the debate concerning the fiscal treaty. That is to be expected, given that the treaty’s central concern is macroeconomics (the branch of economics that concerns the economy as a whole).
Paradoxically, however, many of the most important questions relating to the fiscal treaty involve questions of law or politics every bit as much as they involve economics – and require no special knowledge of the “dismal science”.
These issues include the following:
1 Does the fiscal treaty actually make that much difference?
This is a legal question as much as an economic one. Anti-treaty advocates have asserted that the debt-reduction rule in article 4 of the treaty will result in years of aggressive austerity. However, this assertion is clearly incorrect.
Ireland is under a legal obligation to reduce its debt-to-GDP ratio by precisely the same amount even should the treaty never enter into force.
This became binding law last December, under one of the “six-pack” regulations (although the rule affects Ireland, as a stabilisation programme country, only in 2019).
What of the treaty’s deficit rules? Again, No advocates have asserted that compliance with the structural – cyclically adjusted – deficit target of 0.5 per cent stipulated in article 3 (1) of the treaty could mean up to €5.7 billion in extra cuts and taxes in one year.
Once again, a simple reading of existing law reveals this to be incorrect: another “six-pack” rule that entered into force last December already limits cyclically adjusted deficits to 1 per cent, making the potential impact (if any) of a new 0.5 per cent target when it ultimately comes into force far more limited.
Furthermore, the obligation is not instantaneous compliance with the 0.5 per cent limit but rather each state ensuring “rapid convergence towards” a customised “medium-term objective” set out for it – implying a considerably more gradual approach.
2 Does the No side strategy of vetoing the (separate) ESM treaty until we get a better deal make sense?
Ireland will likely require a second bailout in 2014, in order to meet the €18 billion funding cliff it faces in that year.
The ESM (the euro zone’s permanent bailout mechanism being established in 2013) should function as Ireland’s lender of last resort.
However, the fiscal treaty’s preamble states that, post-March 2013, ESM bailouts are conditional on fiscal treaty ratification: that is, no ratification, no bailout.
Pro-treaty advocates have thus plausibly argued that fiscal treaty non-ratification courts financial ruin.
Advocates for a No vote have parried that Ireland should threaten to wreck the ESM’s establishment unless it transforms its proposed lending policy (abandoning, one assumes, fiscal treaty compliance requirements).
Ireland, they say, should threaten to veto an amendment to one of the EU’s founding treaties – article 136 of the treaty on the functioning of the EU – which is being used to facilitate the setting up of the ESM.
This argument, however, is deeply flawed. For one thing, it is far from clear that the article 136 TFEU amendment is really necessary in order to set up the ESM. The European Court of Justice has never said so. The only court to have pronounced on this issue – the German Federal Constitutional Court – produced a highly ambiguous ruling on this point last October. (Indeed, the ESM’s temporary predecessor, the EFSF, was successfully set up on the basis of another treaty article.)
In other words it is unclear that Ireland actually has a veto on the setting-up of the ESM. (Even if it had, threatening to veto an institution as vital as the ESM would be an utterly bizarre strategy for a country in Ireland’s weak position, and would achieve nothing other than infuriate states currently standing between us and national default.)
3 What happens if Ireland ratifies the fiscal treaty and François Hollande then seeks renegotiation?
Hollande, the likely next French president, has stated that he will not ratify the fiscal treaty in its present form.
Two possibilities should be considered: (a) a newly elected Hollande announcing (prior to Ireland’s May 31st referendum) that he is renegotiating the entire fiscal treaty; and (b) an announcement that he seeks merely to have provisions added to the treaty providing for a growth strategy.
Hollande will not choose option (a). If he did, however, the Government’s current proposed constitutional amendment would be rendered legally redundant and (probably) politically unachievable. However, option (b) is what Hollande really wants. An announcement by a newly elected Hollande that he wished to see stimulus provisions inserted in the fiscal treaty, however, would be largely politically unproblematic for the Irish Government.
It would also be unlikely to have negative legal ramifications regarding Ireland’s currently proposed constitutional amendment.
Although there is no direct authority on the latter point, the Supreme Court’s 1987 Crotty ruling indicates that the currently proposed constitutional amendment would suffice to cover fiscal treaty amendments effected to meet Hollande’s concerns unless such amendments both (a) went beyond the essential scope or objectives of the existing treaty, and (b) did so in a way that violated some provision of the Irish Constitution.
This is a double eventuality that seems somewhat improbable.
4 What happens if Ireland votes No on May 31st?
Fiscal treaty opponent and erstwhile Fianna Fáil deputy leader Éamon Ó Cuív has suggested that an initial referendum No vote can be followed by a Yes vote once better bailout terms are obtained from our European partners.
However, a No vote on this occasion would be qualitatively different to previous referendum No votes.
Since fiscal treaty ratification (and probably ESM treaty ratification) can proceed without our co-operation, Ireland would lack bargaining power.
Ireland’s borrowing costs would rise, its access to the ESM evaporate. Paradoxically, a No vote, as long as persisted with, would render a second bailout both indispensable and potentially unattainable. Loss of investor confidence and bank runs would threaten.
Legally, nothing prevents a second vote. Politically and financially, the costs of failing to approve this treaty the first time out could be enormous.