You don’t get what you deserve, you get what you negotiate – An Irish “NO” vote until convinced otherwise
The people of Ireland, unlike the folks in Greece, will finally get a chance to have their say and vote on whether or not to stick with the Euro. Although the referendum announced this week is strictly speaking a constitutional amendment seeking support for the European Fiscal Compact, we all know it is really an opportunity for the people of Ireland to decide if they want to continue in the Eurozone.
On its merits, the European Fiscal Compact is just a plain bad idea – there is no doubt about that in my mind. It is really just a jazzed-up version of the original Euro treaties concerning deficit spending and aggregate debt – you can read an excellent layperson’s explanation of it here. It will do little, if anything, to fix the huge debt problem in Europe. It may well make the problem worse – this debate around austerity versus stimulus is raging amongst Nobel-decorated economists the world over. In the absence of sound and conclusive evidence, it is as much a matter of outlook as it is of debate. But let’s say that, for now, the people who believe that governments need to stimulate economies (Keynsians) are slightly in the ascendant with the continued challenges being seen in places practicing austerity like Ireland, Greece and the United Kingdom.
My personal view is that counter-cyclical stimulus works when total debt is lower, but once you fall over the “debt cliff” further stimulus doesn’t work – Ireland is a sound underlying economy and that is why the freedom to do things that would break the Compact is a necessary one, as it is in Germany.
The Compact treaty seems to be little more than a re-dedication to try harder – like the promises of an addict on entering rehab. It is also in some ways a sop to the Germans who are picking up much of the tab for the Euro bailouts – rightly so, having also been a huge beneficiary from the Eurozone’s help to their economy. It seeks to tell them and the wider markets that “we will try harder to be more like Germany”.
We should ignore the fact that Germany has a Debt/GDP ratio of 80% – although it has run annual deficits in recent years that would violate the Compact, it recently reported that its deficit was down to around 1% of GDP and likely to stay there.
The Compact does little other than cosmetic (“market confidence”) good and may actually do harm. This all in a currency union that still seems doomed in the medium term.
Any sane Irish person should vote “NO”, correct?
Not so fast – the people of Ireland should find out the real “quid pro quo” for their support. What will European leaders give Ireland to ensure their YES vote? We are back to the old adage from this time last year – “you don’t get what you deserve, you get what you negotiate.”
If the people of Ireland are going to cast their lot firmly with the Eurozone once more, then they need to see what the concessions will be. Banks in Europe were again allowed to draw down on over $700bn of ECB money this week at less than 1% interest rates. Ireland (therefore its people) continues to be forced to borrow at rates closer to 5%. This, along with some of the Greek concessions, shows what the EU are willing to do when forced.
The powers that be in Europe will need to give Ireland some form of break on the size of debt, the rate of interest and the risks still inherent with the Irish mortgage/debt situation for Irish people to even consider a yes vote.
This due diligence is worth it – if we can transform the Irish debt situation in a deal, and put someone else on the hook for much of the cost, then we should (selfishly) try to do this.
To maximise the probability of such an outcome, the people of Ireland and the government of Ireland would do well to fold their arms, look skeptical, and say that it is a “NO” vote from Ireland until we are convinced to do otherwise.