Treaty would bind us even after State regains its feet

Oversight promised under the pact would severely restrict elected governments’ room for decision-making

EUROPE’S NEW fiscal treaty changes the landscape within the euro zone by introducing strict new limits on public debt and budget deficits. Whether the pact leads to an Irish referendum is in the balance, but the initiative heralds a fundamental change in the way all participating governments run their budgets.

Thanks to the EU-International Monetary Fund bailout, Ireland is no stranger to the hazards of intrusive external oversight of its internal affairs. There will be more of the same for ever in the new dispensation, with considerably less national discretion over fiscal policy, and heavy-handed treatment for any government which flouts the pact.

It is one thing, of course, to submit to the unforgiving writ of the troika in an emergency situation in which the State is shut out of private debt markets. It is quite another to accept the hands of future governments will be tied by Ireland’s expanding obligations to Europe – even when the State can stand on its own two feet again.

Questions of democratic legitimacy abound, even if this is a post-hoc endeavour to reinforce the foundations of a currency which has been listing for two years. Although much of the treaty falls within the ambit of recently enacted legislation to toughen up Europe’s stability pact, it opens a new vista by obliging the Dáil and Seanad to adopt a permanent debt-brake, a binding deficit-brake and an automatic corrective mechanism to reverse any slide off course.

It can be argued that dire times call for desperate measures to ensure recovery from crisis and prevent any repeat. At another level, such measures and the vigorous policing which is promised under the pact would severely restrict the room for manoeuvre of elected governments in perpetuity.

After the financial disaster that has befallen the State, many people could well take the change as a good thing which will keep manners on sharp-talking politicians who practise wayward economics for electoral gain. They might prefer a choice in the matter, however, and they well might decide that reflection is merited on the limits of a permanent balanced-budget policy. If the crisis has shown us anything, after all, it is that economics is a very imprecise science. As EU leaders distort language in their attempt to promote “growth-friendly” budgetary consolidation, the tension between the demands of economic growth and the reduction of debt and deficits remains unresolved.

For Taoiseach Enda Kenny, all of this represents a step into the unknown. At issue right now is whether a referendum is to be called and whether his administration can carry the day in that event. That is a huge question – the answer to which may well determine whether Kenny succeeds in his campaign to shake off the yoke of the bailout.

With the treaty a done deal, the clear danger now is that any failure to follow the 16 other euro countries into the pact would seriously impede Ireland’s return to markets.

For one thing, any doubters would have reason to say Ireland is not fully up to speed. More importantly still is the fact that countries which do not ratify the pact within 13 months will have no further right to aid from the permanent bailout fund of the European Stability Mechanism. Observers may well see something decidedly nasty in that provision, which was a German idea.

True, the Government insists it will not need a second bailout. Still, recent history shows the lack of a safety net or any threat of default tends to spark a self-reinforcing cycle of doom at moments of weakness. Thus the stakes are very high here for Ireland – the implication being the State is not really at liberty to stay outside the pact even if that turns out to be what the people want.

For Kenny, who has pledged to follow a step-by-step ratification process, much rests on the advice of the Attorney General on the pact. While a strong argument can be made in favour of the people having their say on a matter of such sensitivity, the Taoiseach insists there will be no referendum if the Attorney General says it is not necessary. Even if that is the assessment, however, the Government faces the inevitability of a Supreme Court challenge. At that point, the decision would be in the hands of the judges.

The danger for the Government if the court called for a plebiscite would be that the people would take the opportunity to vent their anger at the austerity programme in the bailout and the repayment of billions of euro to undeserving bank bondholders. If would be difficult in that context to make the case for a Germanic “golden rule” on debt and deficits, but the Government would have no choice but to make the case.

A related question arises as to whether a quid pro quo is offered in return for a Yes vote. However, Kenny made the case late on Monday night that there was no link between his campaign for a concession on the €30 billion in Anglo Irish Bank promissory notes and the debate on the treaty. Assuming the going is tough in any referendum campaign, he might well have to think again on that front.

The great unknown in the treaty debate is Germany’s ultimate response to the willingness of its partners to back an initiative championed by Chancellor Angela Merkel but which inspires little enthusiasm outside Berlin. At one level, Germany insists the payback is its support for the second Greek bailout. At another, however, questions remain over the country’s support for a bigger “firewall” and its evolving attitude to eurobonds. Although the expansion of the bailout funds comes before EU leaders next month, the betting in Brussels suggests the treaty will have to be proven to work before Berlin backs eurobonds.

Only time will tell whether the treaty actually works. On paper, it is a prescription for virtually the entire European economy to remodel itself on Germany. In political real time, however, that is bound to prove tricky. The treaty gives a greater role to the European Commission than foreseen at the start of the negotiation but the European Parliament feels left out in the cold. Bedding all of this down will not be easy.

Arthur Beesley is European Correspondent of The Irish Times. For the full text of the treaty see irishtimes.com/indepth/