Yesterday, following advice from the AG, the government has decided that it needs to hold a referendum to ratify the Fiscal Compact, or to give it the more correct name the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. That is quite the mouthful so I'm going to stick with the Compact from here on.
As I have repeatedly pointed out, I am no economist. In fact I'm fairly economically illiterate. But it came as a bit of a surprise to me that the Compact itself only runs to about 24 pages, mostly whitespace, written in fairly straightforward English. I would recommend that everyone
grab a copy of the treaty and have a read of it. I'll hang on while you do that .... ok, are we done downloading? If so let's have a quick skim through.
Like all good documents, there are a lot of pre-amble qualifying clauses before we even get to Article 1. They set the scene for the treaty and also, like all good overtures, give us hints of the main themes that will crop up in the main text. For example page 1 mentions the "balanced budget rule" and at the top of page 2 we get the key point, the 3% limit of deficit and overall debt limit of 60% of GDP. Many of the "NOTING" and "RECALLING" clauses provide pointers to the legislation and treaties already in place that permit the implementation of the Compact. On page 6, we get an explicit statement that the Compact will have no impact on existing funding arrangements in place for Ireland and Portugal through the ESF, so our current bailout will remain in place.
Eventually, on page 11, we get to Article 3 which is the first important stopping point on our tour. Here we are told that by default countries will have to run balanced or surplus budgets or at most run a deficit of 0.5%. That's pretty stringent by any stretch of the imagination and it almost immediately rules out any Keynesian activity of spending money to make money. Section 1.c provides some respite, where due to external influences an economy is in shock, it can temporarily go beyond a 0.5% deficit. Of course, no definition is given of what temporary means - is it on a quantum or geological timescale?
The second major part of the Compact appears in section 1.d which defines the long term goal of a debt to GDP ratio of less than 60%. Dangling in front of us as a carrot to reach this goal, is the permission to run a 1% deficit if our ratio is below the target, so assuming growth of 2% we would still be reducing our ratio even in carrying out this deficit spending. Then the stick of section 1.e kicks in and forces automatic corrections if we deviate much from the plan outlined in sections 1.a through 1.d.
Section 2 is obviously the one that scared the AG into recommending the referendum. It forces countries to enact legislation "of binding an permanent character, preferably constitutional" enabling the terms of the Compact. Now to my mind the word constitutional can only be in there to force a vote in Ireland. After desperately trying for months to come up with a wording that wouldn't invoke a referendum, you'd think the smart people in the EU would have managed to avoid that phrase. But there it is in black and white and so we're having a vote.
Article 4 is our next port of call. This short little paragraph provides the timescale for reaching the requirements of 3.1.d (60% debt-GDP ratio). It says it should be reduced by 5% per year. Given that Irish debt is about €170B (and expected to reach €200B by 2015) and our GDP is about €150B, our current ratio is about 115% and even allowing for some economic growth (say 2.5% pa) will top out about 120%. Reducing this by 5% per annum to the magic 60% will take a further 12 years, bringing us right the way out to 2027. That's 15 years of austerity and cuts ahead of us, unless the state discovers huge quantities of gold or oil somewhere in Laois.
Article 7 is a real doozy. Articles 5 and 6 outline how the Commission shall have oversight and the power to recommend actions for countries who break the pact. Then in Article 7 we have the get out of jail free card for the big four - Germany, France, Spain and Italy. Any recommendation can be rejected by a qualified majority vote and considering the big four pretty much have a qualified majority between them that effectively turns the Compact into a stick for the large countries to beat the little ones. So much for a union of equal sovereign states! We only have to think back to who were the first two countries to breach the previous attempt at a financial stability pact to see how this will play out.
In Article 8, the countries agree that the Court of Justice will be the final arbiter in disputes concerning the Compact which is probably a good thing. This article also quantifies the size of fines that can be issued to countries for breaking the Compact, putting an upper limit of 0.1% of GDP. It is not clear how often a country can be fined because sometimes it might just be easier to break the rules and be fined than to have to slash welfare or raise taxes.
The next few articles are somewhat housekeeping in nature as the put in place terms of reference for co-ordination of economic policy between the countries and how the Euro will be governed. These make sense if you agree that signing up to the Compact is a good idea - if you are tied to each other then you had best make sure you're all pulling in the same direction.
The treaty comes in to effect under terms outlined in article 14. This is 1st January 2013 assuming more than 12 countries have ratified it. Otherwise it will come in to effect as soon as the 12th country ratifies it. This means that Ireland's referendum does not hold a veto over the Compact so we can't do our usual Nice/Lisbon trick of demanding extra concessions. The core of the Eurozone can continue leaving up to five periphery countries behind. However, with only Ireland holding a referendum, it is most likely to be 16 countries driving ahead with the Compact if we vote no.
So that's it. We've covered the entire Compact. Where's the downside in voting no I hear you ask. Well that's hidden away in a different treaty that we've already signed up to covering the operation of the ESM. That is a very murky document that I might go through some other time, but the key point for now is that any state that doesn't sign up to the Compact will not be allowed access new funds from the ESM. If you believe the government that we are meeting all the troika's requirements and that we'll be back in the bond markets in 2014 then we shouldn't care about the ESM. But it would be a precarious position to be in without the ESM safety net below us.
