(so far 8) questions on the Fiscal Compact which I would like answered..

Following up on my blogpost today and just in time for the sunday business and talking heads shows, some questions spring to mind on the Fiscal Compact. Feel free to pose these to relevant politicians or better yet to answer them below..

  1. How would the existence of the fiscal compact have prevented the Irish economic collapse, given that we would (debt levels apart) have been pretty much within the terms of the criteria? Our problem on the fiscal side was that we were badly balanced in terms of the makeup of the tax base and clientilist in our expenditure.
  2. How exactly will a structural deficit be estimated, given that there is no consistent method for so doing and that it is dependent on in essence a backcast of what the economy might have been at were it growing at capacity? What models and approved by whom will be used to estimate the economic dynamics? What if the ESRI say we are in balance, the ECB say we are not, the OECD say maybe, and the IMF say we might be if their model is right…? Who arbitrates..?
  3. Given that the implied dynamics of the fiscal compact on sovereign debt are that it will radically shrink, what are the knockon effects and how will they be handled in terms of pension and investment funds which will now have to either move to other low risk assets with the danfer of igniting bubbles therein or take more risk with the consequent dangers to pension funding (private and public).?
  4. Would the existence of the FC have prevented the taking on of the bank debts, in 2008, given the effect which that had on the fiscal side? If this is so how can the FC be squared with the evident desire by the ECB to not see banks fail?
  5.  Given that if you exceed the terms of the Fiscal Compact you will be fined up to 0.1% GDP, will that not lead to a exceeding-fine-exceeding spiral?
  6. Given that in general Fiscal policy is taken as the taxation and expenditure elements of government as they interact with the economy, and that this is in essence a state level spending side only treaty, when can we expect common movement on either state level taxation or community level transfer payments to offset the pro cyclicality of this pact ?
  7. If this is ‘a vote on the euro’ what mechanism wil be used to remove us from the euro zone? What treaty, what section?
  8. Given that the government have already stated that the talk of a second bailout (aka being in the ESM) is ‘ludicrous’, and that the only sanction mentioned in the FC is not being able to access same ESM if one does not sign up, what is the downside of saying ‘hmm, no, not quite what we need thanks’?
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12 thoughts on “(so far 8) questions on the Fiscal Compact which I would like answered..

  1. Cormac Lucey

    Brian,

    Given that Ireland is already in an EU/IMF programme (and the strictures of the Fiscal Compact will therefore not immediately apply to us) another key question for our European overlords is this: just what will be the economic and financial implications of applying this programme to Spain and Italy (not portected by such a programme) in 2013?

    Surely the answer cannot be anything other than a significant increase in deflationary pressures on already severely weakened national and bank finances.

    Regards,

    Cormac

    Reply
  2. Lisa

    The Fiscal Compact, in my opinion is designed to ensure that countries fail and become subsumed into a United Fiscal Europe. The questions raised above, highlight the many flaws in it. In particular the answer to question 4, would assume that the state would not be allowed to assume the debts of a private enterprise, ie the banks. In fact I believe this to be the case already. However, in order to protect the existence of the stronger states, Germany and France and to also ensure that the smaller countries are vulnerable and coerced into ceding more of their powers to the new superstate of Europe, it is essential that they are burdened financially and beholden. After all, the creators of the FC demanded that our state absorb the debts of the banks.However, this is propaganda that our government and main stream media continue to feed us. We are threatened by this ‘financial bomb’ if we do not pay back the anglo unsecured bondholders. But what would really happen? What if we said that we are reneging on all this bank debt dumped upon us. We would then have a trade deficit between our tax intake and spending that would need financing. Government states that this is still 16b pa. How, after four years of an avergae 4b pa cut is beyond me, but if that was all we had to finance, surely the markets would lend to us at a manageable % rate. The markets recognise that the bank debt is not the states. we could then borrow reasonably, continue to cut our excess public spending and inject some of the borrowings to kick start our economy, free of bank debt. This might mean us being *excused* from the euro project, but would it not be in our countries interests to align ourselves more with Britain than a europe that is waging a quiet economic war against us.

    Reply
  3. Karl

    Questions

    Answers
    Well actually thats the nail in the coffin for it right there, it wouldn’t have and due to the fact people would of believed their taxes went foreign more than they already do now they probably would’ve spent even less than they are now adding to the misery and causing a further fall in the economy.
    The European Commission will decided in a period defined by them or the contracting parties and will base it controversially on the market rates rather than the actual contract rates open possibility for falsifying the books making them look better at which point we end back up in the same position or worse at which point we end up under their(EC and Contracting parties) control with all government fiscal and anything that they deem to be related to common concern. It is up to the european commission and at his own choice the Eurogroup President to decide what is taken on a medium-term plan lasting a period defined by the European Commission
    The economy will likely decline at a further pace for some time before recovering speedily causing the boom and bust scenario that helped cause this situation int he first place over and over as it is impossible due to the architecture of the treaty for the calculation of debt to stay within limits when investing in the required major new infrastructure projects putting more austerity on us every time which would be controlled by European Commission and contracting parties(at which meeting our government with have no vote) which only need a majority vote contrary to our current circumstances where all states must approve our budget. Our bailout prohibits this but only until we exit it at which point we are still in the treaty and have to cut down further to 0.5% debt to GDP at market rates.
    No in fact it would have made it legally binding on us to rescue those banks as it says we must do what is the interest of the euro and our fellow contracting parties which obviously we did save the european banking system and some would say even a euro collapse from happening with the banking guarantee and this would of made us break the limits and hand over control to those mentioned in Answer 3. Signing up to this treaty puts us between a rock and a hard place.
    Yes because it states those in danger of becoming in trouble have to be fined it is very possible that the fine brings the limit over the requirement for foreign powers to take over our budget as explained in Answer 3.
    The treaty requires the deficit to be cut at one twentieth(5%) of GDP per year until books back in order with requirements of the treaty as soon as it comes into law which as per the treaty is exactly 1 month after a country has(if it does) ratified the treaty through the appropriate ratification instrument(in our case, exactly 1 month after the results of the referendum are formally declared). If this effects a countries bailout requirements they aren’t obliged by this however if it doesn’t they must proceed with this element of the treaty not contradicting a bailout along with all others exactly 1 month after ratification. Government is yet(at time of writing) to comment on this element of the bailout contract and the treaty raising serious suspicions. We just simply can’t trust government on this and this would cause a further economic decline as further foreign controlled austerity(which decreases consumer confidence more than nationally controlled austerity) is pushed on the people while Europe parties it up,with Irelands pocket of course.
    Likely the same conditions within Europe that applied to the UK upon their clever decision to opt-out of the euro will apply to us if it is a treaty on the euro which it is not(I’ll explain Lucinda’s remarks later in this answer) and we vote to remove ourselves. The mechanism will likely be to gradually change back over a few weeks or months time and a probable devaluation of the punt causing export prices to go down and encourage growth in that sector. The cheaper domestic prices and more expensive import prices would likely cause the domestic economy to grow which would help government tax revenue. Lucinda said it is essentially on our member ship of the euro. It is not on our membership of the euro but rather if we wish to have it controlled abroad, leave it or have it controlled nationally. For her convenience she avoided mentioned the option of controlling it nationally under a different plan.
    There is no downside. Government are under the illusion that the ESM is the be all and end all for our funding should things go wrong. It’s not, there is the option to apply for a bailout solely to the IMF or to an alternative of the IMF. Also, if we handle things properly (scrap the bank guarantee which can’t be done if we say yes to the fiscal treaty)we shouldn’t need a second bailout which even if we did the ways they are presenting to us are the completely wrong way to go about things. That said, it is likely just scare tactics from government as per usual, history repeats itself.

    Reply
    1. Karl

      Crap! The numbers didn’t paste, sorry about that. I’m doing a twit longer now, I’ll post the link here when done, sorry about that.

      Reply
  4. Pingback: "The pact wouldn't have prevented Irish collapse" argument.

  5. Pingback: Structural Deficit in the context of FCT.

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  8. RiceChrisP

    Brian I would love your take on the possibility of growth returning at reasonable levels given that oil production growth has stalled since 2005. Oil prices rose contributing to the economic shock in 2008 (it seems that depressions tend to be preceded by high oil prices) . Since oil production is one bottleneck to growth, is it wise to follow this fiscal pact tying Ireland into debt repayments of a possibly shrinking total GDP, increasing the burden, the negative-feedback loop?

    Karl Whelan said on Vincent Browne that there would be no problem with Ireland’s debt if we could restructure it so as to take 100 years to pay it off, as by this time growth will take care of the relative amount owed but this presupposes that growth will happen. Is this a risk that the Irish should take, given the economy unlikely to withstand high energy prices?

    This crisis is to some extent caused by risk. The banks profited from the (mis!)management of this risk. Why would Ireland sign-up to risk without being compensated?

    Reply

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