Treaty about currency stability and confidence – leading to growth
By Lucinda Creighton: It’s all about generating confidence, so we can borrow and spend
The Stability Treaty is about ensuring that we sustain a stable euro, which will lead to recovery and growth. It is about restoring confidence abroad and enhancing the influence we have worked so hard to rebuild with investors and our partners in Europe and the United States in particular.
In recent months we have seen a welcome increase in significant job announcements from overseas investors. Their decisions have been primarily due to Ireland’s renewed political and economic stability and above all the determination of the Irish people, despite great sacrifices, to restore Ireland’s economic health.
The Treaty is also about good house-keeping – managing our debt and ensuring that over time, taxpayers’ money is spent not on servicing debt, but rather on vital public services and targeted growth initiatives. It is also about having an insurance policy and making sure we have access to the money that allows us to fund those public services and all aspects of government spending. The Government is determined to return to the financial markets next year. We are on target with our programme but we cannot control world events and the world economy. Markets and investors need to know there is a backup available to us in the form of the European Stability Mechanism (a fund of €7 billion) and we can only access that if we ratify this Treaty on 31 May.
The Government is putting a huge amount of effort into this Referendum campaign. We have launched the biggest ever Government information campaign, undertaking to send a copy of the Treaty to every single home in the country. The Referendum Commission has already begun its work. The website www.stabilitytreaty.ie has been launched. In addition, the two Government parties, Fine Gael and Labour, will be campaigning and holding public information meetings all over the country.
The Treaty itself is a technical document but it is fairly straightforward and relatively easy to read. It may read as if it is something brand new, but in fact in policy terms, it goes very little beyond what already exists at EU level – the “Six pack” of five regulations plus one directive (in force since last December) and the other regulations which were adopted by finance ministers, including our own Minister Michael Noonan, in February.
However there is some new material in the Stability Treaty. The correction mechanism is triggered automatically if a country breaks its commitments under the ‘excessive deficit’ rule (Article 3(1)). This means that, while in the past some countries (most particularly the large member states) simply ignored the stability rules governing the Euro currency, the Treaty will ensure that all members states are obliged to play by the rules, irrespective of whether they are big or small.
The adoption of the Treaty is part of the process of getting Ireland back to where we ought to be. It prevents a re-emergence either here or in any other Euro-zone country of the destabilising deficits which we have been running. The result of all that has happened over the last number of years has been to remove our freedom of action as a nation and to put ourselves completely at the mercy of international financial markets. Commentators talk all the time of “market sentiment” although the phenomenon is not market sentiment, but rather a kind of group-think. But the reason we became subject to the markets, to the extent that we had to retire from borrowing commercially and become dependent on outside regulators, was because our debt level was too high and our budget could not be made to balance. Until we demonstrate that we are serious about tackling our debt and our deficit, no independent lender will be prepared to lend to Ireland. So, to regain our economic independence, this Treaty is essential. Without it, more austerity, not less, is the very likely outcome.
This is the second time in thirty years that Ireland as a nation has dramatically mismanaged its finances and lost completely the appropriate relationship between income and expenditure. The attraction of short-term political popularity always risks excessive recourse to borrowing to finance public spending, without any concern about the long-term cost of deficit financing.
This time, when times were good, there was no commitment to effective fiscal management. Spending increased and taxes were cut, leaving us with extraordinarily difficult choices to make once the good times ceased to roll. During the boom times we should have been running a large enough surplus to support the economy when the downturn came.
All the recent political changes in Europe are telling us is that there is a true weariness with the constant refrain on cutting deficits. Some of them are just a refusal to face up to the truth and a hope that all the problems will go away as if wishing them away could make that happen. But there is also recognition of an urgent need to bring growth back into the economy. Ireland, as an open economy which exports so much of what it makes, needs not just internal growth, but growth in our major customer bases. The Treaty won’t create growth. That is not what it was designed for and, let’s face it, no agreement or piece of paper can create growth, despite what some might have us believe. However, the Treaty will create stability and confidence in the Euro, the currency we trade in. This, of itself, is absolutely crucial for growth.
The Treaty on its own will not solve the debt crisis. But what is absolutely certain is that this is much less likely to happen if we do not have the Treaty. The commitment to sustainable financing is an essential part of any recovery package.
I personally see Eurobonds (mutualisation of Euro-area debt) as one of the possible engines of growth in the medium term. But if there are to be Eurobonds it will mean the Triple-A-rated countries sharing risk with countries which cannot currently borrow on the open market. What taxpayer in a Triple-A-rated country is going to agree to that if there is the slightest possibility that we could all end up again where we have been in the past few years?
There is nothing in the Treaty defining the role of government in the economy. Nor is there any suggestion of outside control on the level of government spending. These are inherently political issues on which elections are fought at a national level. The only constraint imposed by the Treaty is that the level of public spending should be matched more or less by the level of revenue collected over the medium term. The Nordic countries, with their tradition of high spending on social support, matched by appropriate taxation, have signed up to the Treaty. There is no suggestion that their levels of social spending will be affected but they know that they need to continue as they have been, not spending money which they do not have.
When we joined the Euro there was recognition that this would impose monetary discipline on us. There were very tight criteria to be met before we could even be accepted into membership. Then many countries, not just Ireland, blew it. The first countries to breach the Maastricht criteria were France and Germany and there were no sanctions, a very poor signal for the behaviour of all the other member countries. There was cheap money. We could spend without consequences and we thought we had actually changed some of the fundamentals of economics. But surprise, surprise, we hadn’t. The same rules apply. Borrowing to spend on consumption, in whatever sector whether public or private, is not sustainable. The Treaty is a weapon in a vital, if long-delayed, new armoury to see that this doesn’t happen again.
Sound finances are not a technical concept, invented in some ivory tower. Having a balanced budget is not an end in itself. Our economy matters because it is the engine which makes our society possible. This government would dearly like to spend much-needed money on education, on health care and on infrastructure. But how can we do that when we are not in a position to borrow the money we need?
We will only be in a position to supply the underpinnings of a healthy, well-educated, well-protected society when we have the freedom to borrow and spend as we want. But in the world we live in, we have to earn what we get. We need to earn the confidence of the markets and of lenders. The insurance policy provided by the Treaty is an excellent way of going about this.
Let me be absolutely clear: the best way for Ireland to avoid the need for a second bail out is to regain the confidence of the markets and investors. We have made considerable progress in the past year with Irish bond yields falling considerably. In order for the yields to continue to fall we must demonstrate that we have a way to fund the Irish state should the worst circumstances arise. It would be irresponsible for the Government not to plan for the worst-case scenario. Access to the ESM is our safety net. Without it we are on our own. Those who say we can go cap in hand to the IMF are deluded. Of course we could apply to the IMF for funding but they will not lend to us if the EU and ECB have turned us down because we failed to sign up to the terms and conditions outlined in this Treaty. It is a ludicrous argument to suggest otherwise.
The Stability Treaty is not the solution to all our problems. There is no silver bullet available. Those who suggest there is a painless way out of the current crisis are being deceitful and blatantly dishonest. We have never claimed that this Treaty represents a magical solution. It will make an important contribution to our recovery, but it has to be seen as part of a wider picture. In order to build that wider picture and in order to create future growth we must stabilise the present. By voting Yes on May 31, we will be voting for the stability that will create the conditions for future growth.
Lucinda Creighton TD is Minister of State for European Affairs.
Treaty does not achieve
stated goals – but perpetuates recession
By Terrence McDonough: Government is masking this with appeals to emotions of caution and fear.
Predictably, the campaign for the approval of the European fiscal stability treaty referendum opened with a number of admonitions to avoid emotional appeals and scare tactics. Yet emotional arguments come in many different forms and are meant to appeal to different emotions. Indeed it is now possible to categorise the arguments for a Yes vote under two contrasting emotional headings. The first set of pro-treaty arguments is primarily intended to be calming and reassuring in nature, telling the electorate that a Yes vote is the safe and conservative course. The second set of arguments appeals to fear.
The Irish electorate is meant to believe that the treaty is the reassuring option in hard times. Let’s consider again what’s on the table:
1. Deficits should be a maximum of 3% or much less in many circumstances. For example, even after reaching its 3% target in 2015, Ireland would have to cut a further €5.7 billion between 2016 and 2018. This substantially outlaws government action to end recessions.
2. Debt should be 60% of GDP. If debt is greater than 60% it will be reduced by 1/20th per year over the next 20 yrs. This would start in 2018 when the bailout terms expire.
3. Even after we reach this target, Ireland will be forced to run primary surpluses over interest payments on the national debt, continuingly bleeding steam out of the economy.
4. If these conditions are violated, control over fiscal policy is ceded to Europe and the European Court of Justice.
This is a dangerous experiment, completely without historical precedent. Take a country at the bottom of a depression. Force it to run budget cuts and tax increases year after year after year. Force this same policy on its neighbours and trading partners. Run this into the foreseeable future and hope it results in stability, confidence and recovery. This is emphatically not the safe option.
We have been assured from some quarters that the requirements of the treaty are simply measures encouraging good fiscal housekeeping. Much like the fabled Swabian housewife, government must balance its income and its spending. This is not in fact literally the case in the long run. Governments can acquire debt at a rate commensurate with their growth rate without damaging their long run fiscal position. It is certainly not true in the shorter run. Keynes’ observation of the paradox of thrift is quite simply Macroeconomics 101. A household which cuts back spending in bad times limits its accumulation of debt. A country, or region in the case of the EU, which cuts back spending slows its economy, damages growth, and shrinks its income, making savings less, not more, likely. Budgets need to be adjusted over the business cycle. Aggressive budget balancing at the bottom of a depression is simply counter-productive.
A second argument meant to reassure an apprehensive electorate is that the treaty has no practical effect as we have already agreed much of its substantive content already in the form of the EU’six-pack’ regulations. These regulations underwent insufficient consideration and debate, are relatively recent, and their deleterious effects have not yet had time to register. These regulations should not be copperfastened and intensified. The implementation of the 0.5% structural deficit rule in the new treaty is considerably more stringent than any of these existing regulations and the treaty contains new enforcement mechanisms.
A third contention is that the treaty is intended simply to prevent another crisis. This crisis was not precipitated by public spending. This crisis was precipitated by irresponsible private finance at a global, European, and national level. While Irish government actions were irresponsible in many ways in the run up to the crisis, surpluses were run and the debt drawn down. Had this treaty been in place before the crisis it would not have changed Irish government actions.
A fourth contention is that this treaty will create stability in Europe and the Eurozone.
In 2013, 18 of the proposed signatory countries to this treaty will have a structural deficit greater than their target. Reducing these deficits would mean €166 billion worth of cuts and extra taxes. Europe is on the verge of a double dip in the recession. If anything, the treaty’s provisions will contribute to pushing Europe over the edge.
A fifth argument is that this treaty will create confidence in Europe’s and Ireland’s economy. This contention confuses the market participants with free market ideologues. The markets are not pursuing a political agenda. They are trying to make money. You don’t invest in countries which have lost their ability to stimulate their way out of depression or deep recession. In the current economic conditions, this treaty and its provisions will eventually seriously undermine confidence.
This leaves the second category of emotional appeal – the appeal to fear. Make no bones about it, Ireland will need a second bailout after 2013. A No vote will forbid us from accessing funds from the European Stability Mechanism (ESM). This is the famous gun-to–the-head clause. It is less often observed that, in the event of a No vote, the Irish government is in a legal position to veto this section of the separate ESM treaty. Despite a reluctance to veto this clause, the government claims a lack of access to the ESM will result in disaster.
In fact, Ireland will have a number of options in this event. First, Ireland is small but scary. A disorderly Irish default would threaten the stability of the European banking system. A European Central Bank intervention to restabilise the system would be considerably more expensive than a second bailout of a comparatively small country. It is highly unlikely that Europe would ignore its self-interest in order to spite the Irish electorate. Secondly, Ireland also has the option of borrowing from the IMF rather than the European institutions. Experience to date indicates that the IMF would be less demanding than Europe in its conditions.
A third possibility is to set about closing the budget deficit. Irish tax take, as a percentage of GDP, is well below the EU average. Taxes on wealth and high incomes are considerably underexploited.
A fourth possibility is the restructuring of debt. The Anglo-Irish promissory note payments alone constitute three billion in any given year.
A fifth under-discussed possibility is the issuance of innovative debt instruments. It would be possible to make Irish bonds acceptable in payment of taxes in the event of any default as advocated by the Levy Economics Institute in New York. This should eliminate the risk premium which makes it difficult for Ireland to re-enter the markets at this time.
A judicious combination of these strategies would finance the resulting deficit with little disruption and would favour the improved health of the economy as well.
The “common sense” retailed by the government and establishment commentary on the fiscal stability treaty is at directly right angles to reality. There will be no disaster in the event of the need for a second bailout. It is the adoption of the budget provisions of the treaty which is risky and dangerously experimental.
If the Irish people are against permanent austerity they should reject this treaty. The walk away option is not a disaster. It is not worse than status quo with an added austerity treaty. We need to bargain harder and with deadly serious intent for our own good and that of wider Europe as well. A popular rejection of this treaty could be the start of a new and more effective Irish engagement with issues in the European Union.
Terrence McDonough is Professor of Economics in NUI Galway.