What Would Change as a Result of the Fiscal Compact?

In comments on Philip’s Sunday Business Post article, Bryan G raises a number of important points about what actually changes as a result of the Fiscal Compact.   I think an important role for this forum is to discuss what the Compact actually does, so thanks to Bryan for focusing on the question.    For one thing, it may reveal areas where clarifications from the Commission are required so informed decisions can be made.  

Bryan G identifies what he sees as the major consequences of the Compact:

(a) requiring rapid convergence to MTO [Medium-Term Budgetary Objective]
(b) limiting the scope for temporary deviations due to exceptional circumstances
(c) requirement for an automatic correction mechanism
(d) requirement for Member States that have been made subject to the excessive deficit procedure to put in place budgetary and economic partnership programmes
(e) the ex ante reporting of public debt issuance plans.
(f) defining the scope and procedures for Euro Summit meetings

Points (d) and (e) are the subject of the proposed two-pack.   Point (f) seems uncontroversial.    I think Bryan G is right that point (c) is a — indeed I would say the — critical element of the Compact, and relates to the requirement to put a correction mechanism into “binding and permanent” national law.   From my reading of the proposed Compact and the revised Stability and Growth Pact (SGP), I do not see the case for (a) and (b) being real innovations.   Here is the critical Article 3 of the Compact:

1. The Contracting Parties shall apply the rules set out in this paragraph in addition and without prejudice to their obligations under European Union law:

(a) the budgetary position of the general government of a Contracting Party shall be balanced or in surplus; 

(b) the rule under point (a) shall be deemed to be respected if the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised Stability and Growth Pact, with a lower limit of a structural deficit of 0,5 % of the gross domestic product at market prices. The Contracting Parties shall ensure rapid convergence towards their respective medium-term objective. The time-frame for such convergence will be proposed by the European Commission taking into consideration country-specific sustainability risks. Progress towards, and respect of, the medium-term objective shall be evaluated on the basis of an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures, in line with the revised Stability and Growth Pact; 

(c) the Contracting Parties may temporarily deviate from their respective medium-term objective or the adjustment path towards it only in exceptional circumstances, as defined in point (b) of paragraph 3; 

(d) where the ratio of the general government debt to gross domestic product at market prices is significantly below 60 % and where risks in terms of long-term sustainability of public finances are low, the lower limit of the medium-term objective specified under point (b) can reach a structural deficit of at most 1,0 % of the gross domestic product at market prices; 

(e) in the event of significant observed deviations from the medium-term objective or the adjustment path towards it, a correction mechanism shall be triggered automatically. The mechanism shall include the obligation of the Contracting Party concerned to implement measures to correct the deviations over a defined period of time. 

2. The rules set out in paragraph 1 shall take effect in the national law of the Contracting Parties at the latest one year after the entry into force of this Treaty through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes. The Contracting Parties shall put in place at national level the correction mechanism referred to in paragraph 1(e) on the basis of common principles to be proposed by the European Commission, concerning in particular the nature, size and time-frame of the corrective action to be undertaken, also in the case of exceptional circumstances, and the role and independence of the institutions responsible at national level for monitoring compliance with the rules set out in paragraph 1. Such correction mechanism shall fully respect the prerogatives of national Parliaments. 

3. For the purposes of this Article, the definitions set out in Article 2 of the Protocol (No 12) on the excessive deficit procedure, annexed to the European Union Treaties, shall apply.

The following definitions shall also apply for the purposes of this Article: 

(a) “annual structural balance of the general government” refers to the annual cyclically-adjusted balance net of one-off and temporary measures;

(b) “exceptional circumstances” refers to the case of an unusual event outside the control of the Contracting Party concerned which has a major impact on the financial position of the general government or to periods of severe economic downturn as set out in the revised Stability and Growth Pact, provided that the temporary deviation of the Contracting Party concerned does not endanger fiscal sustainability in the medium-term.

For Bryan G’s point (a), the relevant part is paragraph 3(1b).   It is true that the Compact raises the maximum structural deficit to 0.5 percent of GDP (from 1 percent of GDP) unless the country has a debt to GDP ratio of less than 60 percent.  However, given that Ireland has a country-specific MTO of -0.5 percent already, this change in the allowable range does not bind (see page 39 of the most recent Stability Programme Update).   On the speed of convergence, I don’t see any change from the revised SGP.   The recent Commission document on the implementation of the SGP uses very similar language to the Compact on how “sufficient progress” is evaluated:

Sufficient progress towards the MTO shall be evaluated on the basis of an overall assessment with the structural balance as the reference, including an analysis of expenditure net of discretionary revenue measures.

Note also the “in line with the revised Stability and Growth Pact” in 3(1b) above.

On the exceptional circumstances provisions (Bryan G’s point (b)), here again is the language from the SGP implementation document:

In case of an unusual event outside the control of the Member State concerned and which has a major impact on the financial position of the general government or in periods of severe economic downturn for the euro area or the Union as a whole, Member States may be allowed to temporarily depart from the adjustment path towards the medium-term objective implied by the benchmarks for the structural balance and expenditure, on condition that this does not endanger fiscal sustainability in the medium-term.

Again I do not see any major change here, but I may be missing something. 

As noted above, the major innovation of the Compact is the domestically enforced correction mechanism, which is to be designed according to “common principles to be proposed by the European Commission”.    I think it is essential that we should be given more information on what these principles will be.   The SGP implementation document may give some important clues. 

The identification of a significant deviation from the medium-term budgetary objective or the appropriate adjustment path towards it should be based on outcomes as opposed to plans. It should follow an overall assessment, with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures. For a Member State that has not reached its MTO, the deviation will be considered significant if: 

both

(i) the deviation of the structural balance from the appropriate adjustment path is at least 0.5% of GDP in one single year or at least 0.25% of GDP on average per year in two consecutive years; and  

(ii) an excess of the rate of growth of expenditure net of discretionary revenue measures over the appropriate adjustment path defined in relation to the reference medium-term rate of growth has had a negative impact on the government balance of at least 0.5 of a percentage point of GDP in one single year, or cumulatively in two consecutive years; or if one of the two conditions (i) and (ii) is verified and the overall assessment evidences limited compliance also with respect to the other condition.

The government expenditure aggregate to be assessed should exclude interest expenditure, expenditure on EU programmes fully matched by EU funds revenue, and non-discretionary changes in unemployment benefit expenditure. Due to the potentially very high variability of investment expenditure, especially in the case of small Member States, the government expenditure aggregate should be adjusted by averaging the investment expenditure over four years. The excess of expenditure growth over the medium-term reference will not be counted as a breach of the expenditure benchmark to the extent that it is fully offset by revenue increases mandated by law.

For a Member State that has overachieved the MTO, the occurrence of condition (ii) is not considered in the assessment of the existence of a significant deviation, unless significant revenue windfalls are assessed to jeopardise the MTO over the programme period.

A deviation may not be considered significant in the case of severe economic downturn for the euro area or the EU as a whole or when resulting from an unusual event outside of the control of the Member State concerned which has a major impact on the financial position of the general government, provided that this does not endanger fiscal sustainability in the medium-term.

Thanks to Bryan G for focusing attention on these important questions. 

37 thoughts on “What Would Change as a Result of the Fiscal Compact?”

  1. The key question is, indeed, the following;

    “The Contracting Parties shall put in place at national level the correction mechanism referred to in paragraph 1(e) on the basis of common principles to be proposed by the European Commission, concerning in particular the nature, size and time-frame of the corrective action to be undertaken, also in the case of exceptional circumstances, and the role and independence of the institutions responsible at national level for monitoring compliance with the rules set out in paragraph 1. Such correction mechanism shall fully respect the prerogatives of national Parliaments”.

    If the “common principles to be proposed by the European Commission” are to be agreed before ratification, the logic of such a position, it seems to me, is that all signatories should have made this a condition beforehand.

    As far as one can tell at this stage, this is not an issue for other countries. They have, in effect, accepted that this is a matter for future discussion and agreement.

    What these useful technical exchanges reveal is the fact that there are, indeed, few if any constraints in the fiscal pact beyond what Ireland has already signed up to as part of the normal EU legislative process and what is new refers to the actions that have to be taken nationally, with input from the Commission.

  2. Does anyone see an issue with ex ante sharing of information on debt issuance. So far we have seen our budget and EU report shared in the Bundestag before the Irish parliament.

    Will the track record of leaking in the European Commission undermine domestic plans?

  3. Theres a lot of hoops there – I suppose it is a circus act but a serious one.

    Eventually we will be divided between connected people who wish to suck the teat of the European super state and those that don’t or simply cannot.

    The plan seems to be to push malcontents onto monetory reservations and then to slowly leech resourses away from them.
    This will prevent civil war or at least make it of no consequence when it does eventually occur.
    The Pure evil that is Europa is beginning to manifest itself now – in open view for all to see.
    The Shire has been scoured and now it is time for the main course I guess.
    It is past time for Irishmen to pick sides although it is probally too late already.
    The populace have taken the Euro opiate with little questions asked – I shudder when I listen to yes men , functionaires of the Dark power.
    They have no soul.
    How right Crotty was – the man should have been listened to while we had the chance – but they were the livestock – we are now dead meat.

    Welcome to the glue factory folks.

  4. ”the major innovation of the Compact is the domestically enforced correction mechanism, which is to be designed according to “common principles to be proposed by the European Commission”. I think it is essential that we should be given more information on what these principles will be. ”

    – a recurring problem with these treaties, etc. – and nothwithstanding the assessment in the paragraphs following – is that they are designed to provide scope for the commission, (and presumably, the ECB, etc.) to drive future evolution of the overall apparatus as they will see fit.
    The nucleus of the operation is left undefined and amorphous.

    In fact the whole history of the project has been predicated on these lines, which to mind is one of the reasons why it’s legitimacy is severely undermined.

    Though there are no specific provisions here for the particulars of spending, under their interpretations of budgetary objectives & ‘appropriate’ adjustment paths there certainly will be.
    I think the most important thing to hold in mind is that the compact has been (quietly) touted as a tentative first step towards a uniformity in budgetary policy, a move towards centralisation in other words.

    And as such, best nipped in the bud.
    Perhaps the best way to proceed would be to introduce parallel policy here which sticks to the spirit of responsibility that is pretended as the motivation for the compact, in a way that naturally deflects all criticism Eurocorp can throw at us. A pre-emptive moral high-ground, as it were.
    But make it unmistakeably clear that we are diverging from the common path henceforth.

  5. I can tell you what will change if we vote no – no more German bulls**t.
    They can’t even stick to their own targets for god sakes:
    http://www.spiegel.de/international/germany/0,1518,820828,00.html

    Germany is wealthy because it is bordered by markets of greater than 100 million all accessible by land, it has coal and iron, it has industrial know-how, and it was forgiven for the worst act of mass murder Europe has ever seen by foreign investment. Oh and by the way it uses poor indebted peripheral countries (thats us) to depress the Euro value and increase its export power. It is not some model we should all follow.

    Rejecting the pact means rejecting this German über-right wing economic model for Europe. I respect the intellect of those who can argue the technicalities but my gut says its time to shake them up

  6. This gets better all the time. Next we’ll be told there’s nothing of any importance in the fiscal compact that people should worry their pretty little heads about. Leave it all up to the ‘experts’ and the EU’s Grand Panjandrums and everything will be fine. The requirement to amend the Constitution is just a little annoying technical matter because that silly David Cameron (aided by the Czechs) prevented this being done completely under the usual EU procedures. A bit annoying, yes, but that’s the Brits for you. Just vote ‘yes’ and leave it all to the people who know about these things.

    That’s precisely the process that gave us the Euro with all its glaring institutional and procedural faults and the decade-long pantomime that started out as the EU Constitution and was eventually rammed through national parliaments or past voters as the Lisbon Treaty.

    With Ireland in an official support programme, a gross government debt heading north of 100% and a target fiscal deficit of 8.6% why the rush to pester people to decide on something like this that is extremely unlikely to be applied in anger in Ireland for many’s a long day? What’s the real agenda here? Because as sure as eggs is eggs we’re not being told the full story.

  7. Thanks John

    Ok, Ireland’s specific MTO replaces the Fiscal Compact’s 0.5% structural deficit metric. However, the correction mechanism is still triggered “automatically” if there are “significant observed deviations”….that is, significantly negative economic performance vs. target automatically incurs further tightening, and potentially more negative loop effect, undermining the intention of the corrective action itself. This is particularly dangerous to a highly (downside) vulnerable economy like Ireland’s.

    That will force the “exceptional circumstances” trigger presumable on a regular basis. As per IIEA’s Peadar O’ Broin’s comments quoted on the other thread, could result in all excess deficit jurisdictions claiming same from outset /on an ongoing basis i.e. gaming of this aspect of the Fiscal Compact (with perhaps Ireland trying hard to distinguish itself as being the best pupil in class!).

    Basically, subject also to the comments already made here, the practical impact of the Fiscal Compact provisions can be highly exagerated in distressed economies, with potential for difficult-to-manage negative loop effect. Reversal of the negative impact(s) of the automatic correction triggers seem only to be possible by the applicable majority vote of the Euro members (it doesn’t appear that the EU technocrats can interject…..even in “marginal” deviation cases….there’s no sense of proportionality incorporated once locked in legislatively)…That in turn leads to potential political difficultes in stopping the mechanism(s) where needed (e.g. where enough right wing N Europeans don’t agree to alleviation).

    My initial thoughts for now….

  8. re Bryan G on point (c)

    Worth noting the view of (President to be) Hollande in an interview with Der Spiegel

    “SPIEGEL: And what about the automatic penalties for violations?

    Hollande: They are necessary. What we experienced with the Maastricht Treaty cannot be allowed to happen again.

    SPIEGEL: Then why don’t you want a balanced budget amendment, a so-called debt brake, anchored in the French constitution?

    Hollande: Not in the constitution, but I would propose a law to the French parliament that provides for reducing the budget deficit year by year, until we have reached a balanced budget by 2017.”

    http://www.spiegel.de/international/europe/0,1518,820660-2,00.html

    I remain to be convinced on why one should place something which lacks social scientific validity into any Constitution … I’m in learning mode up to April 1 …

  9. …. and the tricky issue of Law which mediates the relationships between the Systems of Financial Capital & its twin the System of Administrative Power and the Lifeworlds of ordinary European citizen_serfs ….

    SPIEGEL: The chancellor believes that the fiscal pact is the only way Europe can reduce its debt and save the euro. What don’t you like about it?

    Hollande: I want to renegotiate it. Not all of it — some things seem reasonable to me. I’ve already committed myself to a balanced budget and better economic governance. But what bothers me most is that there is nothing about growth in the fiscal pact. And then there is some uncertainty with regard to the automatic sanctions — that is, what is expected of countries to reduce their deficits.

    SPIEGEL: Then what exactly do you want to achieve?

    Hollande: Some provisions should be renegotiated. Take, for example, the role of the European Court of Justice. I’m opposed to it having the power to intervene on national budget votes. No parliament can agree, in my eyes, to be subordinated to a court.

  10. Agreement on retrospection where the automatic triggers are stopped will also be an issue.

    The ability of individual states to sue to enforce breaches will be another difficult area, given the inherent potential for different legal interpretation and political motivations.

    The supremacy of a Programme agreement over the Fiscal Compact is also another area for thought……likely to produce unusual results (need to think of some perhaps).

    Then, how about e.g. potential for constitutional conflict domestically e.g. supremacy of the Irish Constitution over conflicting implementing legislation and regulation, etc. There’s always some factual situation that causes “exception”.

    In the current system, there is much more flexibility to deal with such issues. Not in the Fiscal Compact it seems.

    So much yet to settle before implementation……Changes post referendum may require additional referenda. Again, a moving target it seems. If the French and Germans subsequently adopt changes via legislation, we are left now in the stupid precedent situation of requiring (additional) referendum? Is there a need therefore to draft the referendum to allow for a constitutional exception to this type of thing?

  11. I’m already thinking about the potential for creative accounting, structured “solutions” in all this…..! e.g. netting of positions OBS national accounts, via private intermediaries, etc, etc. The incentives will be high!

  12. @ David O’Donnell

    I remain to be convinced on why one should place something which lacks social scientific validity into any Constitution … I’m in learning mode up to April 1 …

    It does seem odd given the dodgy constitutional role of the Troika and do these new fiscal rules involve a greater diminution of sovereignity than effectively losing all control of monetary policy?

    I doubt it.

  13. John

    I’m left this evening with an overriding sense of (too much) inevitability from you & colleagues re this.

    Thus far, Colm McCarthy has weighed in heavily on the Yes vote side via a Sindo article which apparently wrongly assumes that the Fiscal Compact is fiscally neutral while there is a Programme in effect. Highly influential….but incorrect and hence misleading to the public it seems.

    Stephen Lane’s more recent SBP article is not incorrect per se but is also heavily yes vote supportive. However, again it can be argued that it is misleading by omission of any real fiscal downside analysis in particular.

    So your colleagues have thus far put an incomplete picture and hence, by definition, mis-leading picture to the public. I also note Paul Hunt’s and similar other comments in particular above.

    The end result is in danger of being pro yes vote “propoganda” and not balanced analysis of what you are now focusing on here – the real /actual potential impact of the Fiscal Compact….”what the Compact actually does”, as you state above. Additionally to my knowledge, none of you yes-vote senior economists have yet to produce /publish an accurate analysis of the fiscal upside /downside of the Fiscal Compact as it currently stands…..Yet , despite the absence of same, and despite “bona fides”, unquestioning and incomplete-analysis support has been promulgated all the same.

    So you elicit our support here to help you to help “shore up” a very imperfect existing Fiscal Compact and what you (with these colleagues) seem to promulgate as the only Irish position…..The point is that the Fiscal Compact has not yet been accepted by the Irish people, which is the only true, valid & legal forum for acceptance /rejection in this instance. In that sense (and in my opinion), you guys have not thus far done the debate /the Irish voting public a balanced service in informing them what the actual effect is /is not of this Fiscal Compact as it currently stands….and where it needs to be corrected and evolve.

    Without more balance in argument from you guys, “I am now disappointed to have contributed to this thread at all” were the words used by Seamus Coffey elsewhere in a different context, but I feel are apt all the same.

  14. @John McHale

    Thanks for responding and developing this topic further. A few points, grouped by topic, below:

    (a) Speed of convergence to MTO

    The section in the “Code of Conduct” that I used to conclude that there was a difference was

    Member States should achieve a more symmetrical approach to fiscal policy over the cycle through enhanced budgetary discipline in periods of economic recovery, with the objective to avoid pro-cyclical policies and to *gradually* reach their medium-term budgetary objective …

    In comparison the Fiscal Compact has a much more concise and to the point:

    The Contracting Parties shall ensure rapid convergence towards their respective medium-term objective.

    I suspect the Fiscal Compact writers don’t have much time for the “gradually” interpretation, and which I presume means the annual adjustment rate of 0.5% GDP specified in the SGP.

    (b) Limiting scope for deviations

    My reasoning here is that, in the SGP, there are a number of provisions, in different places in the text, that explicitly allow for deviations/exceptions etc, but the Fiscal Compact says that the only deviations that shall be allowed are the ones listed in Article 3(3) of the Fiscal Compact treaty itself. In effect, the Fiscal Compact is selecting a subset of the SGP exceptions (and includes them word for word), and says that these are the only ones that can be considered. For example the SGP contains the following

    The Council and the Commission shall take into account whether a higher adjustment effort is made in economic good times, whereas the effort might be more limited in economic bad times. In particular, revenue windfalls and shortfalls shall be taken into account.

    However since this does not fall into the more limited subset of treaty-allowed deviations my conclusion is that it does not apply.

    On a broader basis, it is clear from the leaked drafts of the Fiscal Compact treaty that this issue was something of a battleground, with the appearance and disappearance of a provision that explicitly allowed the budgetary cycle to be taken into consideration, and that its removal was actively sought by some parties, who presumably believed it to be significant.

    (c) Automatic correction mechanism

    The SGP includes some quantitative measures for triggering the SGP-defined warnings and sanctions for deviating from the MTO path, and it is likely that similar triggers would apply to the automatic correction mechanism. However there’s not much to go on in the SGP that would suggest the likely characteristics of the correction mechanism itself.

    I agree that details of such a correction mechanism are needed before an informed decision can be made, and would take the view that the referendum should not take place until the details and implications of this mechanism are clearly understood. Based on the performance of EU-decision making bodies over the last few years, I believe that it should be considered dangerous until proven benign, rather than the other way around.

    Overall I view (a), (b) and (c) as different aspects of the same overall objective – to remove the discretion allowed to national governments when determining the adjustment rate needed.

    Finally my list of changes should also have included

    (g) fiscal rules to be enacted in national legislation/constitutions, not just in EU law

    I had discussed this briefly in my original post, but forgot to include it in the summary list. I don’t immediately see this as making a big difference either way. I note that the ECB want all the new requirements introduced by the treaty to be enacted as soon as possible into secondary EU law, perhaps because they don’t trust the “self-regulation” aspect of having the rules under national law, and no doubt because it fits better with the long-term political aims of the Euro project.

  15. @ Brian G You say:

    “the Fiscal Compact says that the only deviations that shall be allowed are the ones listed in Article 3(3) of the Fiscal Compact treaty itself. In effect, the Fiscal Compact is selecting a subset of the SGP exceptions (and includes them word for word), and says that these are the only ones that can be considered. For example the SGP contains the following

    The Council and the Commission shall take into account whether a higher adjustment effort is made in economic good times, whereas the effort might be more limited in economic bad times. In particular, revenue windfalls and shortfalls shall be taken into account.

    However since this does not fall into the more limited subset of treaty-allowed deviations my conclusion is that it does not apply.”

    However, Article 3 of the Compact as per John above says:

    “The Contracting Parties shall apply the rules………..without prejudice to their obligations under European Union law”.

    Being subject to EU law, the SGP itself still applies it seems and cannot be deleted. What am I missing here? Overall, the point is that the Compact is still full of legal holes and is being supported by Official Ireland in a presently uninformed manner. If a reputable journalist took that approach, he /she wouldn’t be around for long.

  16. @ALL
    ‘Exceptional Circumstances

    “In case of an unusual event outside the control of the Member State concerned….Member States may be allowed to temporarily depart from the adjustment path towards the medium-term objective…”.

    Who decides when an exceptional event has occurred? What are the voting rules in such a decision?
    Can the larger countries vote through an exceptional event or can any large country vote down an ‘exceptional event’ by virtue of its voting power.

  17. Maybe somebody might remind me about which two countries were the first to reach the S&GP? Oh yes. Those two. And the current leaders of these countries (well at least one of them) are determined to drive this through.

    The only reason that there might be a fiscal governance problem is that many EU member-states did not have enough fiscal space prior to the crisis to bail out fully the banks they’d allowed to go wild. And many didn’t have enough fiscal space because they’d used fiscal policy to its limit to avoid pursuing long overdue structural reforms.

    Then the bond market participants saw an opportunity to make money out of the mayhem – and worked on creating mayhem – and these were many of the bond market participants who weren’t able to price risk even if it was to bite them in the arse and had piled in to hopelessly regulated banks and gloriously badly-governed sovereigns.

    Some of them have been forced to take their lumps in Greece, but most have escaped scot-free and been able to keep the shadow banking system happy.

    If all EU governments haven’t worked out by now that they need to move back as far as possible from the edge of the fiscal cliff then nothing will persuade them – and certainly not this half-arsed fiscal compact where the inter-governmental approach being pursued by the Merkozy twins is butting up against the appropriate Community Method being pursued by the Commission. There are more than a few wrinkles remaining that need sorting out.

    And while Ireland remains in an official support programme (whose objective is to get Ireland to a position where this compact might be applied) and is almost certain to require an extension of this programme or a second programme, Irish voters are being pestered to vote on this nonsense to pander to right-wing and right-wing leaning voters in Germany and France whose moral sentiments are generally poorly developed.

    Irish voters should demand to sit this one out until the EU’s Grand Panjandrums have come up with something sensible and the politcial fates of the Merkozy twins have been decided, focus on securing the political and social cohesion and resolve to ensure a sustainable economic recovery and work towards being in a position where they can consent to applying a better version of this compact.

    Ireland is a small, open, REGIONAL economy, but it has still to figure what it is a region of. Adressing this question might make sense while Ireland is still in the Troika’s treatment room.

    But Official Ireland is falling over itself trying to convince voters that there is nothing of any great substance in this fiscal compact, all singing cheerfully in support of the official optical illusion that exit from the support programme and the sunlit uplands are in sight and detereminedly avoiding any consideration of the major structural reforms required – and withou which the illusion, inevitably, will be shattered.

  18. @ Joseph Ryan

    Who decides when an exceptional event has occurred? What are the voting rules in such a decision?

    Can the larger countries vote through an exceptional event or can any large country vote down an ‘exceptional event’ by virtue of its voting power.

    Maybe a long laundry list with different levels of calamity — terrorism natural, fracking, whatever – – could be drawn up and maybe not.

    In my view, this micro.. or should i say–nitpicking– illustrates how difficult it is to make any progress in addressing the flaws in the EMU.

    It ain’t the Soviet empire and if it comes down to nitpickers in 25 countries fiddling around, then Europe and the desperate unemployed will continue to burn.

  19. Fintan O’Toole asks some questions here:

    ‘Is there a gun to our heads or is there not?’

    “If we’re supposed to be a free people, we should act like one and insist on our right to be fully informed about the consequences of our choices.

    “And if we’re not, we should make the most of the only thing we’ve got left: the whore’s prerogative of haggling about the price.”

    http://www.irishtimes.com/newspaper/opinion/2012/0313/1224313202421.html

    Meanwhile Paul Krugman writes:

    ‘Let’s stop invoking Greece as a warning on deficits’

    “You may ask what alternative countries such as Greece and Ireland had, and the answer is that they had and have no good alternatives short of leaving the euro, an extreme step that, realistically, their leaders cannot take until all other options have failed – a state of affairs that, if you ask me, Greece is rapidly approaching.”

    http://www.irishtimes.com/newspaper/finance/2012/0313/1224313200766.html

  20. But hasn’t the whole point of the Fiscal Compact been turned on its head this morning by Spain’s actions?

  21. @ All

    I copy here for convenience my reply to Bryan G on the other thread.

    @ Bryan G

    You misunderstand the position that I am advancing. As far as the fiscal compact faces towards the EU i.e. is operating within the EU legal framework, there is little or no difference, a point that is being driven home in the exchanges on the other thread opened by John McHale.

    What neither of you appear to have grasped, if you will forgive me for saying it, is that the real additional substance of the fiscal pact lies lies in those elements where it is facing in the other direction viz. towards the commitments that the participants have entered into as far as their national legislation is concerned.

    This is what Merkel considers vital and exceptional, as do, indeed, her legal advisers as they have stipulated – according to Der Spiegel – that a “constitutional” majority of two-thirds will be required to get it approved by the Bundestag.

    Until this Janus-like element in the fiscal pact is fully teased out, there will be confusion as to its implications, notably in relation to the powers of the Commission. It cannot act in the second role in the same way as the first and does not have any particular powers other than that of proposition. It is “volunteering” its contribution. It would, if I have understood some of the reports in the matter correctly, be legally impossible for it to act otherwise. (The UK, to quote Cameron, was watching this aspect “like a hawk”).

    @ All

    What I am suggesting is that the text of the fiscal pact needs to be addressed from three distinct angles (i) the existing commitments in the revised SGP (ii) the elements that add to the level of political commitment by the parties to it with regard to its implementation and (iii) the commitments accepted with regard to action nationally.

    That there is a world of explanation to be done by those who agreed it rather than those trying to parse it goes with saying. It is truly astonishing, for example, that the likely next President of France should say the following in the Der Speigel article linked to by David O’Donnell above.

    “SPIEGEL: Then what exactly do you want to achieve?

    Hollande: Some provisions should be renegotiated. Take, for example, the role of the European Court of Justice. I’m opposed to it having the power to intervene on national budget votes. No parliament can agree, in my eyes, to be subordinated to a court”.

    This is a complete misreading of the actual article in relation to the ECJ but too easy a political cudgel for Hollande to resist. The ECJ can review solely compliance by the participating countries with Article 3(2).

    Hollande states “They will have to listen to me!”. If he persists on the route which he has set out in Der Speigel, it is difficult to see how a major crisis, assuming that he is elected, can be avoided.

    Spanish spreads are now wider than those of Italy!

  22. Yep, point C is a manifesto for cruel authoritarianism. As I’ve outlined in previous posts in related topics, there are numerous other problematics with the ‘Compact’ eg to do with lack of transparency, secrecy, who gets to appoint the members of the ESM governing body, sanctions and compliance issues. I agree with all of Hollande’s reservations spoken to Spiegel above.

    Soo embarrassing that Spain has achieved flexibility on its debt targets http://www.rte.ie/news/2012/0313/spain-business.html

    Compare the above to the achievements our government infected with hugtight to the banking cartel have sought never mind acquired, deferral of PN’s to extended maturity dates??

    I’m sure they regard this flexibility achieved by Spain as dissident contagion:-(

  23. @ PH “And while Ireland remains in an official support programme (whose objective is to get Ireland to a position where this compact might be applied)…”. I don’t see the officialsupport programme. It is primarily a debt service /debt collection mechanism. Culturally, the N Europeans couldn’t give a fig other than they will have their money back. Official Ireland seems to miss that completely. If you have ever seen the Dutch and Germans chase distressed loans, you will be in no doubt of this.

    @ MH Agreed.

    @ DOCM Disagreed re “there is little or no difference”.

    Disappointing that our best and finest economists have not sought to be more balanced thus far, is what and how I for one conclude on this thread. As I indicated on the other thread last night, the Irish people will stilllikely vote yes…but that’snot the point really.

  24. @ DOCM

    Re “It is truly astonishing,”

    Doesn’t astonish me. I’ve pointed out the incongruity of the role of ECJ also. Its a total anachronism to invoke ECJ to police ESM compliance. All ESM will do is dictate the letter of the law as signed up to in ESM.

    Judge: Did you sign the Compact? Are you in breach of ESM and its terms. If yes, go to jail. Its turning the ECJ into a bailiff it was never meant to be. Perhaps another court under the IMF, but ECJ with all the possibilities of political contamination, I think not!

  25. It appears that nobody wants to answer a very simple question. Why should Ireland, in an official support programme, with gross national debt heading north of 100%, aiming for a fiscal deficit of 8.6%, refusing to implement seriously the structural reforms required and very likely to require an extension of the current support programme, be required to be so concerned about these machinations? It is an abuse of the democratic process, a total waste of time and effort and is proving to be damagingly divisive and polarising.

  26. @ Paul Hunt

    Well Paul, I guess the obvious answer is that this is the start of a long-term process. So the 22 who are not in bailout programs would have wanted us in.

    @ All

    The Law of Unintended Consequences will inevitably arise at some point and thus the importance of keeping some issues general (or vague?) to allow future adaptation without going through treaty changes.

    So, all the dancers on the heads of pins should take a break.

  27. @Michael H,

    So why not let the 22 not in official support programmes (including the 14 in the Euro Area) sort this out and the programme countries can sign up before they exit their support programmes? It’s almost laughable, but certainly pathetic, that Official Ireland is devoting so much time and effort – that could be far better expended – spouting cant, hyposcrisy and bluster to persuade voters to consent to something that is not in a fit condition to be put before the people, is designed to pander to right-wing voters in Germany and France and with which Ireland is so far away from being complaint that it is an entrely hypothetical exercise.

  28. @Gavin
    re Fintan O’Toole
    “Is there a gun to our heads or is there not? If we are facing the economic equivalent of “immediate and terrible war”, there’s nothing to debate. The vote is not Yes but Yes, Sir.”
    Got it on one, Fintan. Yes, Yes and Yes, Sir. (or is it Yes, Madame)

    PS. I am voting yes. For Now.

    @ MH
    “Maybe a long laundry list with different levels of calamity…….and if it comes down to nitpickers in 25 countries fiddling around, then Europe and the desperate unemployed will continue to burn..”

    A good sesne of humour is always refreshing!

    However the ‘desperate unemployed’ had better look to their own devices to improve their situation because it is crystal clear that the New Europe coud not care less about the levels of unemployment.
    The policies being pursued have all to do with debt collection and nothing to do with allievating unemployment.
    And lets not pretend that the single maket improvements or austerity or the fiscal compact will help unemployment in any way.
    As far as I know there is not a single initiative to alleviate unemployment.

    We should always watch out for disingenious language.
    Such as the “The Stability and Growth Pact”. Now there is something to mull over. Have you seen much ‘Stability’ since that was introduced?
    Any Growth in evidence? [answere =No, In fact Eurpe has gone into recession since the ‘Stability and Growth’ Pact was introduced!!!]

    But I am voting Yes, the only reason being that there is a ‘gun’ to my head.
    Mind you, I always ‘look at the label’ now when choosing to buy something.

  29. @ Joseph Ryan
    Who put the gun to the side of our heads? Who is holding the gun? Is it loaded with blanks or real bullets? If it is loaded with real bullets how did they get into the chamber? What happens if we vote “No” which is tantamount to telling them pull the trigger? Would a “no” simply mean that we would finally have to face reality? I Assume that the money we could cadge from the IMF would be relatively small, that we will not be able to re-enter sovereign bond markets. Since taking the 67.5 bailout and using our NPRF I simply don’t see any changes in fact things are a lot worse. Regarding taking the trackers off the pillar banks? That is just another debt transfer on to the backs of the tax payer as it implies we rifle our way through our bailout funds even faster. The fact that it is being spun as a positive development can be put on a par with NAMA “only game in town” being spun as a positive development. Trackers being moved to IBRC is another stunt another great deception and great news for those that invested in BoI.

    This FC is really all about putting ourselves in line for another bailout or the more palatable version, which is, to “extend” the current program. Do you not think we have borrowed far too much money as it is? The only thing that is happening as Paul Hunt is wearing himself out telling us, is that the structural changes needed to be made have been permanently postponed. We Irish will not do structural changes as long as we have not run out of borrowing options? El Erian has spoken about Europe’s grave error in mistaking this crisis for a cyclical crisis when in fact it is structural and Ireland policy of stumbling along in the hope that the cycle will change is self defeating.

    As you are well aware, we are afflicted with perpetually weak leadership. We abhor taking painful initiatives, much preferring, to be led by the nose “vain gaiety, vain battle, vain repose” style, as we happily trot along the path of bailout after bailout. The 119% debt to GDP that Stephen Kinsella mentioned in todays IT is not sustainable nor (does it include over 120bn of contingent liabilities for PS pensions) it is the same level of odious that Greece hopes to reduce to shortly. Does anyone outside Ireland believe that we can sustain this level of “manipulated” debt to GDP ratio? Certainly in the Rogoff and Reinhart book, this level of debt was viewed as completely toxic. Already the Spanish have broken the FC before the ink was even dry because unemployment is at socially dangerous levels. The EU stumbles on.

  30. One of the purposes of the Fiscal Compact treaty changes is precisely to address situations where countries fail to meet their targets (as is happening in Spain) and to give control of the subsequent actions more fully to the EU Commission, in the particular the “nature, size and time-frame of corrective actions” to be taken.

    If you are OK with that, then it certainly makes sense to vote for the Fiscal Compact treaty changes. However remember that a year ago, and for many months afterwards, the EU Commission, in full alignment with the ECB, very strongly maintained the view that Greece’s debt was sustainable, without any PSI. Here’s what they wrote as late as July 2011:

    Fiscal discipline and privatisation receipts will achieve sustainability

    This shows the complete primacy of ideology over common sense. Eight months later, the question is now whether Greece’s debt is sustainable after a 75% writedown on over €200bn. Once the new rules are in place, you can expect them to be enforced, with common sense being a minor consideration. To quote Mr. Rehn, from today, in case the Irish have a little trouble understanding the long European legal and historical tradition (possibly being distracted by some less relevant and less virtuous Anglo-Saxon values)

    “I actually wonder why this has to be asked at all because the principle in the European Union and in the long European legal and historical tradition is – in Latin – pacta sunt servanda, respect your commitments and obligations,”

    The choice is between pushing the pedal to the floor to speed up this integration and transfer of control, or holding back on the basis that the extra control may be exercised in a way that is ideologically driven and that is not in the best interests of those subject to the decisions made.

  31. This saga is beginning to remind me of USA ’94.

    At the time, official Ireland had convinced themselves that FIFA would rig the draw to ensure Paddy gets to stay in Boston… Sure they would be mad not to… FIFA & the US need a successful world cup, and that would guarantee crowds blah blah blah…. it culminated in a headline in the Irish Times on the morning of the draw… “Boston: More than a feeling”

  32. @Robert Browne

    “Who put the ‘gun’ to our heads?”
    Fianna Fail, The Irish banks, the European Banks and the ECB.

    “Who is holding the gun?”
    The ECB and Germany but also France and the ever friendly Dutch.

    “Is it loaded with blanks or real bullets?”
    The bullets are real enough. You saw ‘The Deer Hunter’.

    “If it is loaded with real bullets how did they get into the chamber?”
    The two Brians put them there and Dail Eireann voted to close the chamber.

    “What happens if we vote “No” which is tantamount to telling them pull the trigger?”
    Ireland would have to face reality. Some Europeans would be delighted such as ‘Geradeaus, Punk, Machen Sie meinen tag’.

    “Would a “no” simply mean that we would finally have to face reality?”
    Yes. Reality is not always a welcome vista.

    “I assume that the money we could cadge from the IMF would be relatively small, that we will not be able to re-enter sovereign bond markets?”
    Very small. Send a note to Geithner just to find out how small.

    “Regarding taking the trackers off the pillar banks? That is just another debt transfer on to the backs of the tax payer as it implies we rifle our way through our bailout funds even faster.”

    Absolutely. This is a rout. The State is to be choked with private bank bond debt. The Germans know this. They were choked before with reparations. They decided to regurgitate on those doing the choking.

    “The fact that it is being spun as a positive development can be put on a par with NAMA “only game in town” being spun as a positive development. Trackers being moved to IBRC is another stunt another great deception and great news for those that invested in BoI.”

    It the way they spin ’em, you see. The 75% haircut on the BOI State investment in less than 12 months must be a record. In fact I suspect that the BOI loss was the first major contribution of the new secretary of the DOF to the State. Historic contribution I would say.

    “Do you not think we have borrowed far too much money as it is? The only thing that is happening as Paul Hunt is wearing himself out telling us, is that the structural changes needed to be made have been permanently postponed…”

    Could not agree more. This is bailout for the insiders.

    “As you are well aware, we are afflicted with perpetually weak leadership.”

    You hit the nail on the head. We do not have the leadership to forge an independent pathway out of this crisis. Or to sort out the septic tanks, or the bogs in Roscommon.

    We could ask our esteemed former Attorney Generals, who were so keen to defend individual freedom, if they believe that any individual rights are being trampled on by the imposition of private bank debt onto the State. But do not expect immediate answers. Many of these esteemed gentlemen have much more lucrative work to occupy themselves with.

    The gun is still loaded. The ECB are holding it. They intend to use it. Welcome to the New Europe, fiscal compact und so weiter.

  33. @Paul W

    I am puzzled by your criticism. Inspired by Bryan G, this post was simply about trying to probe what changes as a result of the compact, not about getting help in “shoring up” the case for it. Also, to the extent that we don’t have the necessary information, it was a call for that information to be provided.

    As to criticism of the lack of “balance” from certain economists — this is a debate. Individual economists will form a judgement on whether on balance we are better signing up to the compact or rejecting it, and make arguments to support there position. While individual economists may see both pros and cons, the overall balance in the debate is best achieved by hearing different perspectives, with each contributor doing their best to persuade. It is notable where economists do come to an overall judgement that the compact should be supported, the nature of the arguments are quite different, and there is much to be learned from the different perspectives. Philip Lane is generally supportive of fiscal rules given observed debt/deficit/procyclicality that have been observed across countries. Karl Whelan is more sceptical of rules — and especially rules that relate to the deficit — but has come to the conclusion that because of Ireland’s high debt level and resulting limited scope for countercyclical policy, and also the explicit linkage of ESM support to membership of the compact, that being part of the compact is right for Ireland. There is much to be learned from the differing arguments of other well-informed economist supporters of compact such as Seamus Coffey and Colm McCarthy. I think the debate is best served if everyone puts forward the arguments as they see them rather than striving for some artifical even handedness. There will be a role for the referendum commission in providing an even-handed outline of the different sides, but they too will be helped in that task by a vigourous debate among well-informed and opinionated supporters and opponents of the compact.

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