The Fiscal Compact and Wider European Reform

I agree with Michael O’Sullivan (op-ed in today’s FT available here) that the Fiscal Compact should be debated in the context of a wider European reform agenda and that the Ireland should positively engage in the wider reform process.  My view is that the implementation of the Fiscal Compact raises the probability that other reforms will be delivered; his ultimate position on the referendum vote was not obvious from his article.

(The FT also carries an interesting analysis article on the lessons from Iceland here.)

33 replies on “The Fiscal Compact and Wider European Reform”

On the contrary, Ireland should focus on domestic reform

Engaging with a Europe wide reform discussions and process merely serves as a distraction and a way for the Irish protected shelter to prolong their thievery.

Look at the promissory notes saga, the Anglo results etc for example. The PN saga consumed some of the most highly paid people for months, consumed government ministers time …. The end result is fees all round for insiders in BOI/NAMA and nothing of substance achieved.

Exact same with a wider reform agenda, it’ll be embraced, corrupted and suffocated by the super industry. There is nothing that Irish insiders like more than talking on about reform that is urgently needed somewhere else.
The reform agenda needs to be narrowed and focused on one domestic sector at a time. Achieve something.

This seems to be both a call for a NO vote and Yes vote as the author appears to avoid being explicit about the choice because of his day job in a Swiss bank.

So ending the ‘humiliation’ in Europe can be achieved by either thumping tables and making threats or building alliances if possible?

Who would want austerity in Ireland if it could be avoided?

There is a simple fact, apart from being a small country, we hardly have much clout to push through reforms in Europe given our current bankrupt state.

Let’s be serious: when begging for favours on the one hand, how seriously would we be taken by many members on reform?

Garry is right — end the ‘humiliation’ by taking the first steps in a long march from our own doorsteps.

@Michael Hennigan

On the contrary, we actually have a lot of “clout” and power in Europe.

If the Irish government were to messily default on its sovereign and banking debt to both official and private creditors, it is highly likely that we would bring about the end of the Euro. I am not advocating that as a course of action, but that fact alone demands thats we are at least listened to.

More realistically, given the current course of action, Ireland will eventually have to default/restructure some some of its debt, be it the PN or sovereign debt. Now, the ECB/EU can continue to stick its head in the sand and pretend that our debt is sustainable and let us slide towards Greek style mayhem, or it can proactively work to reduce the NPV of our debt burden, a large chuck of which originated as unguaranteed senior bank debt.

Currently, the government is saying everything is going to be grand and “please can we have some debt relief” at the same time.

A more appropriate course of action is to say loud and clear that Ireland will be forced to default unless our debt burden is eased substantially.

The Fiscal Compact could also be a barrier to further reform as the decision making and policy formulation process moves away form the commission and towards individual states.

Good ideas could be be the collateral victims of poor administrative structures.

Michael Noonan said that the nogotiation of the promissory note issue is very complex because all the member states are involved. We are signing up to a lot more of that with the Fiscal Compact.

Ireland should oppose the fracturing of the Union at every opportunity. The creation of the EZ separate to the union was a mistake. In my opinion the Fiscal Compact creates additional cracks in the edifice of the Union.

form -> from
commission -> Commission
nogotiation -> negotiation
union -> Union

Seriously, is there any chance of an edit function? Writing quickly and then editing after a document is printed, or viewed in print form, is the way a lot of people work nowadays.

Regarding the FT article by MOS, I completely agree with the call for a wider debate on the long-term vision for the Eurozone as well as the thinly veiled subtext that the first step to this debate is a No vote in Ireland.

I happen to agree that some set of fiscal rules along the lines of what is proposed is a good thing. However, the current set of rules, in isolation, are damaging. Not only will they not resolve the current crisis, but they will set in stone the moralizing Germanic narrative that fiscal incontinence alone was responsible for the crisis.

A treaty that encompassed a wider set of reforms is necessary. Such a treaty would have to include
1. Eurozone wide banking regulation and resolution.
2. Reinforced rules governing current account imbalances, including surpluses (the current rules are not enforced and clearly written to allow Germany off the hook).
3. A change of the ECB’s mandate to include unemployment and trade imbalances.

It is naive of Philip Lane and others to think that if we vote for the current treaty, then the more substantial reforms will follow. There isn’t a scintilla of evidence to suggest there is a shred of political support in Europe for the above reforms.

A No vote is necessary to send the EU/ECB back to the drawing board.

“The popular delusion that the fiscal compact is a cure for our economic problems is a fantasy that needs demolishing”

I couldn’t agree more. This is particularly obvious (and important) for those of us working outside Ireland. There is broad and popular perception across Europe that Ireland got into its mess because of reckless fiscal behaviour (I have had conversations with many people about this in Amsterdam, Brussels, Geneva and Berlin). The treaty provides fuel for governments across Europe to continue arguing that austerity is the answer to the Eurozones problems when it clearly is not. The unconditional support by the Irish government for conservative Euro policies will be totally counter-productive in the end.

The whole discourse surrounding the fiscal pact provides political cover for the Dutch and German government to continue their aggressive austerity programmes when they clearly do not need to. You will hear many people in the Netherlands arguing that ‘we are doing austerity’ therefore ‘you guys should to’. Politicians across Europe are selling the fiscal pact to their electorate as a mechanism to tame the periphery (including Ireland).

The overall impact is a totally warped picture of reality. And as Michael argues “the danger is that it will draw a shroud over the eurozones shortcomings and halt attempts to improve the framework”. Ireland must change its strategic interaction with the core European actors determining the policy response to crisis. The same is being argued in Spain where for the sake of a totally arbitrary number (i.e. we want 3 percent not 5.8 percent by 2012) the country is being driven into a dangerous deflationary spiral.

Spain will be in receipt of troika support before the end of the year not because of a lack of austerity but because of too much austerity. The fiscal compact is legitimising this reckless economic management strategy (that is choking off growth and the potential for recovery in Ireland, Spain, Portugal and Greece) and is only satisfying the self interested political motives of conservative right-of-centre parties in Germany, Finland, Netherlands.

Paul de Grauwe makes a similar critique of the fiscal compact in an interview I did with him two weeks ago:

It’s a start.

The gas-bagging could go on for years and good ideas can come from the hurlers in the ditch but when some of them become players, they face the problem of slowly moving ahead while trying to keep everyone with some pet gripe on board.

The European patent process has gone on for how long?; in the US President Truman proposed a health care plan more than 60 years ago and and on it goes.

If Hollande is elected in France, there will likely be a side agreement on growth.

As ponderous as the processes of the EU are, there are countries still wanting to join.

CPB Netherlands Bureau for Economic Analysis head, Coen Teulings, has called for fewer quick budget cuts and more long-term reforms but the polling figures from Italy show that support for Monti’s reforms are waning.

There is little appetite for significant change in Ireland, even though by helping ourselves, we could in time make a strong case for debt reduction.

At present, there are too many others in the same boat to do a special deal for Ireland.

The Germans may well calculate that the euro would survive without Ireland – – and it would. 

@Aidan R +1

An excellent post as usual. Not enough attention is paid to the damage we do to our interests by accepting and encouraging the German narrative of the European component of the Global Financial Crisis. It really does not help us that Fine Gael is in the EPP camp, we could do with a lot less political fraternity with the German and Dutch ruling parties now.

@Philip Lane, @John McHale

As two influential professors of economics are you even slightly worried that you find themselves lobbying for the Fiscal Compact when one of the justifications is that if Ireland accepts a flawed treaty that runs contrary to its medium and long term economic interests it will encourage the parties responsible for drafting the treaty to produce something more favourable for us and economically rational next time?

Without an incentive to change their behaviour why do we expect Germany and the Netherlands current governments (or the ECB, always in the background) to do so? Surely submitting completely to them is just going to encourage them to come out with more of the same deflationary nonsense (though the Dutch might have to come to terms with soon).

Ireland’s misfortunes, and many of the EU’s, are due substantially to the inability of policy makers and advisers to admit mistakes (which we all make, though not often on the scale of EMU) – might it be time to break the habit of the last ten years and change your minds now that the reality of our situation does not match the projections?

To reiterate David O’Donnell’s point having this referendum in May was a serious tactical error on the part of the government.

“Yet the crisis is by no means over. As John Maynard Keynes argued in The Economic Consequences of the Peace, the acts that apparently brought closure to one crisis sowed the seeds of greater economic, social and political turmoil.”

The article pretty much expresses my views. Voting against the referendum on the Fiscal Compact is a difficult decision for me. There are costs and risks associated with voiting No.

On the other hand, politicians discount future risks and costs too much, and there are certainly costs and risks associated with implementing this Fiscal Compact.

Ultimately the success or failure of our efforts will come down to political developments in Europe, rather than whether a policy bias towards austerity is prudent and correct.

The Fiscal Compact copperfastens the narrative of the feckless peripherary and the prudent core. IMHO it weakens the structure of the Union and it sidelines the Commission, the traditional guardian angel for small countries.

Therefore, I think that this treaty reduces the chances of a successful political resolution fo the crisis.

There may be more going on at a diplomatic level but it may also be the case that we are being strung along. The diplomats have not come up trumps at any stage over the long periof of the crisis to date, and domestic political concerns have trumped collegiality so far. Therefore, I think we should express our sovereign democratic views on this treaty.

@Michael H

The Euro would survive a voluntary and co-operative exit by Ireland. It would not survive a unco-operative exit engendered by a messy default on official financing. If Ireland were to default on EFSF and/or ESM funds then Germany would never again bail-out another EZ member and it would spell the end of the union.

If you think an Irish default is far fetched, just think for a moment about Ireland’s debt burden. In an optimistic scenario at the end of the current bailout program we will have the following:

– Debt will top-out at about 115% of GDP. This amounts to about 140% debt to GNP which, to all intents and purposes is the measure that is comparable with other nations’ debts.
– Private sector debt will remain at about 400% of GDP.
– Our banking system will still be in ruins.
– We will not have our own currency (obviously).

Correct me if I am wrong, but there is absolutely no example, anywhere in history where the above set of conditions have been sustainable.

Currently the only countries that have comparable debt burdens and that are somewhat solvent are Japan and Italy and Japan has its own currency and Italy very low levels of private sector debt and a primary surplus.

Its time to wake up. The problem is not (just) our deficit, it is our overall debt burden.

@ Shay

I agree the fiscal pact makes a serious political resolution to the crisis more difficult. Some seeem to think that it will lead to the issuance of Eurobonds and other neccessary reforms in Euro governance. I am not so sure. The level of economic conservatism that dominates German, Dutch and Finish policy making (and media) at the moment is really worrying. But what is more worrying is how far removed it is from reality. The more the Irish government throw their weight behind this (i.e. to be good pupils in the EPP) the more our capacity to recover diminishes. But as always in Ireland people with different (i.e. left of centre) economic analyses (regardless of their empirical truth) are treated like dissident outsiders to be ignored.

To get a real sense of the structural problems in Euroland one only has to take a brief glance at the data here:

The compact issue is not a left/right one.

Simply, in military terms, an incompetent general would pick this as the battle to fight and at this fragile time and alienate all potential allies with little short-term likelihood of benefit.

However, the downsides the rejectionists ignore is the certainty that opting for the limbo status, would certainly not help people thousands in the private sector who are at risk of unemployment.

It maybe an option in time to leave the euro, however its only a fool would claim that international speculation on that now would not put the vulnerable at risk.

Some seem to be like cultists — flummoxed that others do not believe what they believe and like religious zealots, they know the truth and have no reason to consider the downsides.

Slightly off topic but only….

On the front page masthead of the Asia edition of the FT today is a picture of a tub of ‘Sudocrem’ with the the line: ‘An Irish brand building up from the bottom’ — nice to see. I used be a consumer.

@ bazza

What you say on the debt is eminently sensible and in 1991, EU structural funds more than offset the interest on the national debt of over €6bn.

One year when I was in UCC, I worked as a navvy in London and stayed over a pub on Cable Street in the East End.

We used to try and get a regular from West Cork to sing a song in the after-hours. More often than not, he would say: “It’s too early.”

@A Regan

I agree the fiscal pact makes a serious political resolution to the crisis more difficult.

Bad politics on top of bad economics. The single redeeming feature of the Fiscal Compact is that we can access the next bailout (on suitably degrading terms) that the political consensus behind the compact all but guarantees we will need to.

Ireland is seriously weakened by our political and administrative elite having conflicted interests in these matters, torn between working to protect the status of the current European Institutions (are they “Good Europeans”?), to receive the approbation of their political allies in Europe (are they “serious people”?) or whether they should be trying to focus on Ireland’s prospects of a just and sustainable economic arrangement (are they left wing fringe elements?).

Interesting tables of imbalances there all right, Germany is the huge weight with the current flavour of EMU as the lever that pries the EU apart.

@Michael Hennigan

Simply, in military terms, an incompetent general would pick this as the battle to fight and at this fragile time and alienate all potential allies with little short-term likelihood of benefit.

Where as the wise political and business elite of Ireland and tax havens further afield advocate we cleverly avoid fighting this battle by surrendering. We shall submit our way to eventual safety.

Its “He who never fights the powerful can never be defeated by them” – Zen neoliberalism.

@Michael Hennigan

The problem with your “general pciking which battle to fight” metaphor is that the longer we avoid restructuring our debt, the more difficult it will become. John McHale has similarily written about the option value of waiting (which was technically incorrect, anyway).

If we had put our foot down at the point of paying off unguaranteed senior bank bondholders, we would have had a much better chance of winning that battle than trying to restructure the PNs. The next step in the game is the conversion of PNs into bone fide sovereign debt, whereupon the only resolution left to us will be a messy sovereign default on official sector debt.

@ Shay Begorrah

It’s certainly true that the elites have been responsible for monumental failures.

I’ve never been a member of one; sought positions on quangos or earned a shilling from so-called taskforces or had junkets paid from trade union slush funds.

@ bazza

I don’t agree that the fiscal treaty issue or earlier was the time to go for broke on restructuring.

Poking other members in the eye now serves no positive purpose.

Nothing in the Constitution is irrevocable. The people can vote on a new constitution.

The FT recently had an editorial supporting a cut in Irish debt; a bit more effort (it would be foolish to believe that the Troika are fooled on the reform baby steps so far) in serious reform, would make the argument for cutting debt compelling without having to burn the house down to roast the pig.

In interpretation of the referendum clause, an interesting example was provided from the US this week that ideology and prevailing views have a very strong influence on how any set of laws is viewed.

It’s always fun to observe intelligent people making fools of themselves.

On the health insurance mandate requiring people to obtain health insurance rather than free-riding on people who do, the extreme right-wing Justice Antonin Scalia raised the spectre of an all-powerful government that could even “make people buy broccoli” if it wished.

The chief justice John Roberts also revealed his ignorance of how insurance markets work when he said Congress could mandate that everyone has to buy a cellphone.

“No matther whether th’ constitution follows h’ flag or not, th’ Supreme Coort follows th’ election returns” wrote Finley Peter Dunne (1867-1936) in 1901, through his comic Irish pub-stool character Mr. Dooley.

Some really excellent posts above.

Ireland has no (zero) negotiating leverage in the present circumstances. The EU /ECB will not compromise unilaterally, without “incentive”. I agree with Aidan’s observations that the N. European core is very entrenched and I feel that the supporters of the status quo are being far too optimistic (foolish even) that there will be some grand bargain favourable to Ireland in the future. They are deluding themselves on this.

In the meantime, the FC is very likely to cause significant further damage to Ireland. In the absence of any other platform thus far, the FC vote at least provides the Irish people (as opposed to their rather clueless political leaders) with the clear and concrete chance to gain substantial negotiating leverage by voting no. There are substantial risks in doing so; but there also substantial (and I would say inevitable) downsides in voting yes also. However, before voting no, there needs to be a Plan B strategy for how that negotiating leverage will be used.

I for one would not advocate a protest no vote. It has to be a means to an end.

Also, before voting no, I cannot damn anyone (constructively criticise, yes), including the Govt, for trying even foolishly to negotiate to “achieve something” as Garry has said above. However, nothing has worked so far and all we have for the efforts made are examples of slap downs from Europe.

Regardless of whether there is a yes or no vote, as Bazza says above “A more appropriate course of action is to say loud and clear that Ireland will be forced to default unless our debt burden is eased substantially.” (I would say selectively default in relation to Ireland’s odious bank debt element).

Time to up the ante one way or the other.

@MH “It’s too early”…I understand.
However, no time is perfect. As Aidan R says “The more the Irish government throw their weight behind this (i.e. to be good pupils in the EPP) the more our capacity to recover diminishes.” I clearly agree with that. One shouldn’t wait for the cancer of austerity to weaken the patient to the point of no return /recovery.

@Michael Hennigan

It’s certainly true that the elites have been responsible for monumental failures.

I’ve never been a member of one; sought positions on quangos or earned a shilling from so-called taskforces or had junkets paid from trade union slush funds.

I did not mean to suggest you had Mr H. It would not be your style at all.

Nothing in the Constitution is irrevocable. The people can vote on a new constitution.

Also true, though I would strongly suspect our new masters would try to make that impossible either through European legal manoeuvrings or simply threats – we are an “economy at will” of the ECB now. If the Netherlands and Germany continue down their current political road the conservative stranglehold on European policy will become worse.

To be twee, the best way to get out of trouble is not to get into it and the Fiscal Compact represents economic trouble, political trouble and future policy options trouble. For once, lets be Denmark or Sweden and act in own best interests and not in the vain hope of influencing a Europe that has, at least temporarily, lost its progressive character.

View from Berlin

‘Shifting Sand Dunes’ (& v. poor card play on early Referendum here)

Opposition parties in Germany were quick to make political capital out of the Merkel administration’s many U-turns during a debate on the euro rescue fund and the European fiscal pact in the German parliament, the Bundestag, on Thursday. “Your red lines have, in reality, become shifting sand dunes,” Frank-Walter Steinmeier, floor leader for the center-left Social Democratic Party (SPD), said to widespread applause.,1518,824808,00.html

and it appears to have escaped local attention that a neu French Admin will emerge mid year …… so why capitulate to the dreadful Sarkozy in May? Not too late to reschedule, restructure, or even re-engineer the date of the Irish Referendum ….. [p.s. this requires the imprimatur of neither the ECB nor the Bundestag ….

Meanwhile, Sarkozy’s challenger Hollande has already announced that as president he would immediately try to renegotiate parts of the fiscal pact. From Merkel’s perspective, that would be fatal, as it could destabilize the complete financial architecture of the new European Union.,1518,824873,00.html

@David O’Donnell

“Meanwhile, Sarkozy’s challenger Hollande has already announced that as president he would immediately try to renegotiate parts of the fiscal pact. From Merkel’s perspective, that would be fatal, as it could destabilize the complete financial architecture of the new European Union. ”

…. which is why I guess Merkozy will stop at nothing to prevent Hollande from getting in. DSK was nobbled, the fragrant Christine was bought off from challenging him with the IMF job, the guy whose name I forget found himself embroiled in a court case and unable to focus on a serious challenge…. I am starting to see a pattern emerge. If I were Hollande, I would keep my eye on any grassy knolls I might be passing.

As you’re a fan of cartoons, here’s a link to my ‘stash’

@Colm McCarthy

‘The deferral of the cash payment on the IBRC promissory note that was due yesterday is unimportant. In reality, the payment has been financed for only a year, through borrowing from the Bank of Ireland against a longer-term bond. There has been no change to the level of debt outstanding. Nor is there any recognition that a substantial portion arises because of the imposition on Ireland by the ECB of full repayment to unguaranteed bondholders in Anglo and other bust and defunct banks.

This deal does not open any obvious corridor to further negotiations. The Government needs to prosecute vigorously with Europe the case that debts the ECB has imposed on Ireland not merely inhibit Ireland’s ability to deliver on the programme and re-enter the bond market, but are also an arbitrary and unprecedented imposition on a country that is already unable to finance itself.

The loss of investor confidence in European sovereign debt has been exacerbated by the ECB’s insistence that bank bondholders come first and that the resolution of failed banks must be at the expense solely of taxpayers and sovereign bondholders.’

“NO” to this odious dictatorship. In solidarity with our EU citizen_serf fellow citizen_serfs denied the franchise.


Opposition Party Warning
EU Fiscal Pact May Breach German Constitution
By Thomas Darnstädt

Germany’s opposition Left Party says the fiscal pact agreed by 25 of the EU’s 27 members may breach the constitution because — the party argues — it can never be rescinded. Legal experts are divided. But Germany’s top court may be called on to settle the issue, and to rule on Europe’s future yet again.,1518,825166,00.html


German lawmakers and the chancellor were all ears last Thursday when Gregor Gysi, the parliamentary group leader of the opposition far-left Left Party, addressed parliament. In the debate on the European fiscal pact, Gysi surprised his listeners with a few “constitutional issues” that “might” be worth “seriously considering.”

Gysi’s objections to the European pact for stricter budget discipline proved thought-provoking even for leading EU law experts. The agreement, says Gysi, a lawyer, violates Germany’s constitution, the Basic Law, because the country can never rescind it. He argued that Germany would be committed to drive with its debt brake on for all of eternity.

He may have a point. Steffen Kampeter, a senior official in the German Finance Ministry, confirmed what every reader of the treaty text will notice on the first read-through: “The treaty does not provide for a right to rescind.”

No to Austerity into Eternity!

I don’t know anything about the European Fiscal Compact Treaty so I’m grateful to find this conversation. I’m left with doubt – of course. But after reading what I could find in Wikipedia of the wording I thought it was restricting and seemed to be everlasting. Is it also impossible for us to stick to? I’ve learnt from Paul Krugman and earlier stories about Keynes that you need to spend to get out of recession. The difficulty is that it’s hard for ordinary folk, us all, to understand quickly the thrust of what economists and people in the field say.

Our need to get a further bailout is a big argument for voting Yes, but where does it all end?

At this start to my investigations I think the way to go is to put off the referendum until later.

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