A number of people over the last while asked me how I intend to vote in the forthcoming referendum on the fiscal compact. At the moment I am firmly in the I don’t know camp.
I have previously blogged and written about my concerns regarding the fiscal compact. I think we’re being asked to sign up for something which is in principle a good idea, that is to say it is better for government not to be ill-disciplined with regard to the taxpayers money. There are problems with regards to how we measure some of the key aspects of this proposed fiscal compact, issues around its effectiveness, and concerns as to whether or not it will have an overly large impact upon the bond market.
If we do not sign up for this fiscal contact what happens?
We will not be thrown out of the Euro. No such mechanism exists, and if we can countenance a Eurozone which contains Greece then we can imagine a Eurozone that contains an Ireland which is not adhering to the fiscal compact.
Nor will we be thrown out of the European Union.
As things stand at present if we do not adhere to the fiscal compact then we will not be in a position, should we need to, to obtain funds from the proposed European Stability Mechanism. Of course, obtaining funds from the European stability mechanism is only something that would occur if we required a second bailout, and the government have previously described the notion that we would need such a bailout as ludicrous. So would be signing up to obtain that which we do not need….
There is some question about whether or not not adhering to the fiscal compact would cast doubt on our bona fides in relation to acting like a financially mature country. The concern is that if we did not do so then, having to go back to the bond market as we will be doing if we believe the government, we would be facing into higher bond costs than would otherwise be the case. There’s nothing whatsoever to stop the Irish government from putting in place a domestically originated fiscal responsibility Bill. In fact, such an opportunity was presented by the tabling of exactly that Bill by Sen Sean Barrett, which the government declined to support but which to their credit did not vote down. A set of slides explaining the background to the bill and to fiscal rules in general is here.
There will not be a rain of frogs, nor will we see (somewhat contingent on the proposal in item 4) in mass outflow of deposits or a mass outflow of foreign direct investment. These may outflow anyway, but the mere declining to participate in a European fiscal compact (but making it clear that we would pretty much do the things that are suggested by the compact, although in a more sensible manner) is in my view unlikely to be the catalyst.
If we do not sign up for the compact then, as noted, we are not able to access the European stability mechanism. This to my mind is perhaps the only compelling pragmatic reason to consider signing for the compact. At present the funding under the first bailout extends through the end of 2013. The intention of the government expressed the number of times is that we will then be “back in the market”, and able to borrow an reasonable terms both to fund our ongoing government deficit and to meet the maturity schedule of existing debt. It is this issue that seems to be missed by many of the proponents of the no vote who seem to think that in voting no we will escape austerity. Even on the governments own proposals we will still be running a deficit of approximately 3% of GDP in 2015. Let’s assume that we decided to close the deficit by 2014, in that case we would have to take an additional €5-€6 billion out of the system over the next three years. But even if we were to run a balanced budget by 2015 we would still not be of the woods. We face significant repayments of previously borrowed monies from 2014 onwards.
From 2014 to 2020 €30 billion worth of previously borrowed Irish national debt needs to be repaid. If we are not able to borrow from the European stability mechanism to repay these then we will have to borrow from the bond markets, but in that case we will not, I would submit, be in a position to both borrow for the maturity of existing debts and for ongoing deficits. In fact, with an ongoing deficit and not adhering to the European fiscal contract we would face very significant interest rates, perhaps in effect locking us out of the markets again, but this time with no European full-back. While it might be possible to borrow from the IMF this is not a guarantee. So if we do not sign up to the compact, cannot borrow from the European stability mechanism, and do not want to face enormous borrowing costs, we would have no choice but to be running a primary budget surplus by 2014. Given the deleterious effect that the existing “austerity” program is having on the economy, politics, and society, we need to ask whether or not imposing perhaps 50% more is either desirable or feasible? In other words, there is no magic relief from austerity. If we do not sign up for the compact then we are in effect going to have to massively accelerate our movement towards a budget surplus. If we do sign up for compact we’re going to commit ourselves to achieving a budget balance, but over a somewhat slower period.
One way in which we could perhaps begin to square this circle might be if we could get some relief on the money borrowed for the Irish banking recapitalization, now masquerading in most part as promissory notes. Stephen Kinsella, Karl Whelan and yrs truly spoke at length to the Oireachtas on the whys and wherefores of the Promissory Notes and how to escape the €3.1b anglo-tross which they represent .Unfortunately, once again the government seem to have ruled out any linkage between the promissory notes (approximately €31 billion) being relieved from Ireland and a vote in favor of the fiscal compact. This morning the Taoiseach said that the Irish voters would not be bribed… I have a very distinct recollection of a previous Taoiseach returning in triumph from Europe weaving a cheque for the then outstandingly large sum of £8 billion, prior to a referendum. If it was good enough then to induce the voters to see the in pocket benefits of being on good terms with Europe then why not now?