Fears of treaty magnifying austerity are all imaginary


OPINION:Opponents are battling with a non-existent threat. Solidarity will be the result of voting Yes

TWO OF the most important questions Irish voters have to consider on Thursday are: (a) what are the consequences in terms of austerity if Ireland ratifies the fiscal treaty; and (b) what will the consequences of a No be?

As regards the first question, one of the striking features of the referendum campaign has been the strenuous efforts made by the No side to persuade voters the fiscal treaty will exacerbate austerity levels. Cuts of €5 billion are regularly mentioned.

Large numbers of No votes will likely be cast on foot of such concerns. Remarkably, however, such fears are legally groundless. It is possible to put a precise figure in euro on the amount of extra cutbacks and tax increases the so-called “austerity treaty” will occasion. That figure is zero.

This is easily explained. The debt reduction obligation in article 4 of the treaty, which will bind Ireland from 2019 onwards, mirrors an existing, precisely similar obligation already found in a 2011 EU regulation (regulation 1175/2011).

As for the 0.5 per cent structural deficit target found in article 3 (1) of the treaty, that mirrors a similar target agreed with the commission under the excessive deficit procedure and that is legally binding on Ireland (a point that may be verified in the April 2012 Ireland stability programme update).

Thus a Yes vote will lead to no extra austerity – and a No vote aimed at preventing austerity constitutes no more than a sword swipe at an entirely imaginary threat. Since the existing rules will continue to bind Ireland regardless of Thursday’s outcome, their merits are not the central issue (although it may be remarked in passing that the debt rules are strikingly mild and the deficit rules strikingly flexible).

However, whether one takes the view they are good or bad, the fact remains they will continue to apply, unaffected by the vote.

Most of what the fiscal treaty involves ultimately simply reiterates existing legally binding debt and deficit rules in treaty form and tightens up (and switches to national level) their enforcement. If that seems a very minor legal matter to have a referendum or even a treaty about, that is because it is.

The real motivation for the fiscal treaty is political, not legal. It has been accurately described as a document for Angela Merkel to wave in the Bundestag to persuade her compatriots that financial solidarity with member states like Ireland will not involve pouring German taxpayers’ money into a bottomless pit.

Ironically, therefore – and notwithstanding the No side’s focus on austerity – the unstated aim of the fiscal treaty is really about facilitating the very opposite to austerity: cross-border financial solidarity in Europe. A Yes vote will facilitate that aim.

What then would the consequences of a No vote be? Unlike the consequences of a Yes, the consequences of a No vote are suffused in near-total uncertainty. This is because a rule in the recital 25 of the preamble of the fiscal treaty (repeated in recital 5 of the preamble to the European Stability Mechanism Treaty) legally precludes Irish access to new ESM bailout programmes from March 1st, 2013, for as long as Ireland fails to ratify the treaty.

In other words, a No vote will effectively lock Ireland out of the ESM’s €0.7 trillion default insurance policy, unless and until reversed. Ironically, this will come at a time when Ireland faces a debt cliff of more than €36 billion in 2014-2015 of deficit-bridging and debt-rollover obligations.

Whether Ireland could obtain alternative funding for these obligations is uncertain. Even if we did, just as uncertain would be answers to crucial questions such as whether the amount, terms and interest rate of any imaginable alternative funding would match those of the ESM.

Such future uncertainty will itself have short-term consequences. Predictable consequences of a No vote are: (a) Ireland’s credit rating will likely be downgraded by agencies such as Fitch and Standard Poor’s, prompting a further withdrawal of investors from Irish sovereign debt; (b) linked to this, Irish bond yields – the cost to the State of borrowing money – will go up and remain up; (c) with bond markets effectively excluding us, Ireland’s prospects of avoiding a second bailout will dwindle to being impossible; (d) within the EU, Ireland will move from being the success story the euro zone has an interest in helping, into being regarded – like Greece – as a difficult, unpredictable and ultimately less interesting partner for other member states to continue assisting; and (e) Ireland will have to accept whatever other negative consequences derive from investor uncertainty – particularly as the 2014 funding cliff approaches.

These are only the short-term consequences of a No. The medium-term consequences come in 2014, when Ireland trundles towards an initial €19 billion funding cliff, having blocked its own access to the lender of last resort that is the ESM.

The worst-case scenario is that, bereft of funding, Ireland will then default. In this regard, it should not be forgotten that the member states have gone to the trouble of reopening two separate treaties to underline their lack of interest in providing a new bailout programme to states that fail to ratify the fiscal treaty.

If, out of self-interest, they nonetheless intervene in some shape or form, the terms on which they do so will be entirely uncertain. They could be penal, and – ironically – involve austerity on a scale as yet unseen in Ireland. Why Ireland should put itself in such an unenviable position (to avoid the application of a treaty whose substantive rules already apply) is something the No side has failed to explain.

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