A Guest Post By Gavin Barrett

@PR Guy,

It’s not for ‘programme countries’ now; it’s an attempt to prevent that club acquiring new members.

And while all this angst and fury will consume the airwaves over the next few weeks it might be a good time to pose the question: why should a constituonal amendment be required in the first place? And what needs to be done to allow these matters to be dealt with properly by the Oireachtas – since further modification of EU institutions and procedures will be required before this crisis is resolved?

Further to my post yesterday about Venizelos being a potential ‘wild card’ in Greece… have a look at this quote from him today:

“The Greek people asked for two things: For Greece to stay safely in Europe and the euro and at the same time to seek the best possible change in terms so that citizens and growth can be helped”

I think the guy’s for turning. A PASOK and Syriza (with a few others) coalition anyone?

@ PR Guy

they’re doing it so that everyone has upfront and in the open signed up to it, in one formal document. What do you reckon the scale of difference in knowledge, bith at a political as well as public level, about the fiscal compact vs the six pack is? 25:1?

I’d like to thank Gavin for explaining the legal implications of ratifying the treaty, although I suspect that such implications will be lost in the fog of the referendum. The bit that is puzzling me though is why the A-G opined that a referendum was likely required? The treaty has nothing to do with foreign policy, changes little in terms of economic policy, and if economic policy is enough to invoke Crotty then where does that leave our 65 double tax treaties on which so much FDI hinges?

“In other words, as with the debt brake, the Fiscal Treaty involves the introduction of a structural deficit target which we are already aiming for. As with the Treaty’s debt rule therefore, regardless of the economic impact of aiming for such a target – and again, this has formed a very legitimate source of discussion on IrishEconomy.ie, the fact that the target is the same before and after the coming into force of the Fiscal Treaty should mean that the economic impact of the introduction of the Fiscal Treaty’s new deficit target should be precisely zero.”

Close your eyes, John, imagine the drafting of the Stability & Growth Pact, the good housekeeping rules you mention wold be very useful. Governments should have used them to factor in their deficit, growth and budgetary policies and used savings to pay for these rules.

The fact is the fox has been and taken all the ECB chickens from the roost. These policies while they are part of the targets of EMU members such as Spain, Ireland and Greece, they are having the opposite effect intended. The austerity the policies represent are failing and being rejected by Spain’s Rajoy, France’s Hollande, Greece(without a govt, it was taken away by these policies). The policies are driving Ireland under water as we speak. False figures on jigged GDP inflated with transfer pricing and low MNC employment footprints are down to growth figures of .7%. Who knows how under the water GNP is. Ireland is entering the throes of a classic bust cycle even though its the recipient of a failed bailout.

The FC comes attached with undemocratic baggage requiring members guarantee all loans in future bailouts under penalty of being hauled before and sanctioned by The European Court of Justice. Oops, Irish taxpayers now on the hook for future Spanish bailouts that could exceed the ¢700 bn present funding of ESM ? The ESM uses majority voting and can vote against and peripheral members in the minority. ESM is above the law and cannot be challenged in court. This turns the euro into a currency union similar to the rouble. Sofar ECB has funded speculation in sovereign bonds and favoured financial services over the need to clean up abuse in markets through rogue financial service models. Not only is the ESM a manifesto for no banker goes to jail, its putting the fox in charge of the henhouse.

Re “economic impact of the introduction of the Fiscal Treaty’s new deficit target should be precisely zero” Actually, the effect of the ESM in mathematical terms is similar to dividing the Irish Economy by zero, the result is undefined. Some jigged figures on growth, coefficients and multipliers using the jigged GDP may be attempted to define it as otherwise; but the probability is that the Irish economy has been already pushed below the waterline and is presently drowning.

There is plenty of merit in John’s analysis, all things being equal, in a growth scenario. But in a country as bankrupt, debt ridden and toxic as Ireland, the merits of ‘good housekeeping’ while the Irish Zeppelin of debt, hangs burning around our necks by the troika, it is ludicrous.

McHale’s Micawber economics, one who is poor but in expectation of good fortune, should be rejected for the nonsense it is. Our debt requires immediate writedown to manageable levels. We need to leave the euro and use devaluation and good housekeeping and learn from harsh lessons 🙂

But tks John for sharing and engaging openly and for the articles/views you bring to our attention.

My comment above draws on John’s posts on this topic and I’m assuming convergence between Gavin Barrett and John McHale in their position in my earlier comment, but re IT article,

“Two possibilities should be considered: (a) a newly elected Hollande announcing (prior to Ireland’s May 31st referendum) that he is renegotiating the entire fiscal treaty; and (b) an announcement that he seeks merely to have provisions added to the treaty providing for a growth strategy.

Hollande will not choose option (a). If he did, however, the Government’s current proposed constitutional amendment would be rendered legally redundant and (probably) politically unachievable. However, option (b) is what Hollande really wants. An announcement by a newly elected Hollande that he wished to see stimulus provisions inserted in the fiscal treaty, however, would be largely politically unproblematic for the Irish Government.”

I’m therefore assuming Gavin supports the ludicrous bet that Hollande will opt for (b).

The fact we are trying to preempt what Hollande will finally decide his position on the FC will actually be is a scandalous insult to him and betrays an arrogance that Hollande must find amusing.

I won’t go into the wasteful cost of the whole process if we have Referendum 11 and the Irish Govt have to be recalled from their holidays. No doubt Gilmore is working on that one and trying to persuade Hollande just to leave well enough alone.

Oh No 😉

@Paul I think that shows a level of complacency (by the Government) as to the likely outcome of any vote. To my mind the risks of a No vote are significant – even if I think many of those Nos will be cast for all the wrong reasons. I don’t see many of the yes camp being alienated by an attempt to avoid a referendum. The die hard No camp obviously, but they’re the die hard no camp. So to my mind the better answer would have been to attempt to ratify it in the Oireachtas, trust Michael D to make the referral, and fight to distinguish Crotty (to its facts if possible) in court.

Worst case scenario you have to have the referendum. Best case you get to ratify the treaty without it.

In the current scenario we’re facing a no vote anyway without the potential upside of not having to go through this again, and again, and again.

“There is of course far more to be said about the law and the Fiscal Treaty, but not in a blog of this size.”

What?!

It seems to me that public opinion is divided in to a number of not entirely mutually exclusive categories. (It’s impossible to secure empirical evidence because those who conduct polls don’t seem to have an awful lot between the ears.)

1. Official Ireland and their camp followers who know in their heart of hearts that considerable political and structural reform is required to ensure timely and sustainable economic recovery, but who have no stomach for this and are determined to see this inconvenient referendum through in the hope that our EU partners will be suitably grateful and that something will turn up. In any event, even if the ship were to founder they’d be alright – those in steerage could shift for themselves as they’ve always done.

2. The disingenuous mainly left-wing activists or unreconstructed nationalists who beleive that a ‘no’ vote will create the conditions for an ‘alternative social and economic model’. These are blended with a core of voters who will reject anything to do with the EU every time they have a chance.

3. A large number of genuinely confused citizens who possibly relish the chance of giving the Government a kicking, but worry about the implications. They seem torn between Category 1. and Category 2. and are the targets of both. But the different combinations of cant, hypocrisy and bullshit being spouted by both of the first two categories is probably repelling quite a few of them.

4. A relatively small number of voters who believe a ‘no’ vote might usher in the political and structural reforms so badly required.

And then there’s a tiny final category too few almost to mention – and in which I would include myself – who see no need for this referendum, who wish the EU’s Grand Panjandrums would level with their voters and just get on with it and who wish to see meaningful political and strutural reforms in Ireland.

I reckon it’ll be a damned close run thing.

@Aisling,

Apologies. Hadn’t noticed your response until I had sounded off (again!).

I understand the case you’re making, but I suspect that the Government, possibly correctly, judged that if it were seen to be attempting to deprive citizens of their direct say it could deliver a majority ‘no’ vote (irrespective of the matter under consideration), if the Supreme Court were to direct (in the inevitable event of a case being brought) the requirement for a referendum.

It was a prisoner of the Crotty judgement – just as much as the Supreme Court might have found itself. On all these matters it is the Government versus the people without any effective mediation via a properly functioning parliament, effective local governance or a Fourth Estate worth that label – and with most civil society bodies either enmeshed in the government machine or jockeying for position and favour. We have to fix these things first before Crotty can be over-turned or modified.

And so we are where we are.

It would be wonderful to able to use the vote to give the first two categories I describe a kicking. But that’s not an option.

@Aisling,

The surreal – and potentially dangerous – aspect is that the ‘yes’ side is being forced to fall back on asserting that the worst conceivable downside of a yes is far, far better than the downside of a no. There is a very positive story to tell, but they would have to level with the voters first in terms of what structural reforms would be required – and this they are unwilling or too scared to do. Making a case on relative downsides is a pretty dodgy way of chivvying voters in to booths to vote ‘yes’.

In contrast the No camp can make a superficially plausible case on the relative downsides – because nobody really knows – and wave the banners of the Mythic and Transcendendent Republic and European Social Democracy to provide a positive gloss.

It should not be difficult to understand why ‘otherwise sensible people’ are buying in this clap-trap.

Smug, complacent, arrogant, hubristic Official Ireland may find that you reap what you sow. We’ve been here before in June 2008 when the domestic banking system was on the verge of bankruptcy, but nobody seemed to know – and it was such great fun to thumb the collective nose at the EU’s Grand Panjandrums.

I struggle to keep at bay the fatalism to which you seem to have succumbed.

Many thanks for all your comments.

The main topic I attempted to address in the blog was the fact that the legal obligations in terms of the Irish deficit and debt will not change under the Fiscal Treaty. Talk of the Fiscal Treaty causing 6 billion euro adjustments put about by the ‘no’ side – Sinn Fein were claiming this as late as today – are simply untrue. Their own description of ‘scaremongering’ seems apposite.)

The real consequences of a ‘yes’ vote are that things will continue on, albeit with the rules which currently apply given a somewhat firmer status, and more strongly enforced at both national and European level (although to my mind, they are already strongly enforced) That should make little visible difference to the man or woman in the street. With the lending states having been given extra reassurance of fiscal responsibility of the borrower states, we may hopefully then see the debate shift to growth measures.

Shay’s essential point that if one objects to the philosophy underlying the existing rules then one should not vote in favour of this reinforcement of them is an understandable one.

However, the consequences of a ‘no’ vote are far from merely in the realm of philosophy (and that is not meant in any way to disparage Shay’s concerns). There is a potential price tag to a ‘no’ vote. With an estimated €18 billion funding cliff facing us in 2014, we will need to borrow that money somewhere or face savage austerity and the very real prospect of default.

With a ‘yes’ vote we have the relative assurance of possible access to the 0.8 trillion ESM fund. With a ‘no’ vote, we have uncertainty, and will have to confront a reality which includes the fact that the eurozone states have gone to the trouble of declaring in two separate treaty preambles that the granting of assistance in the framework of new programmes under the European Stability Mechanism will be conditional, as of 1 March 2013, on the ratification of the Fiscal Treaty. The other member states might seek to find some other way to help us, or they might not, and if they decide to help, they might lend little and on tough conditions. The IMF might help or might not – we have already borrowed a multiple of our normal entitlement from them. We simply do not know. But the initial signs which the eurozone states have gone to the trouble of writing into two separate treaty preambles do not seem to provide a great deal by way of fuel for optimism.

Regarding the other comments:

I agree with Eoin Bond’s assessment of the likely Ollande approach.

Aisling has raised some legitimate questions regarding whether the referendum was actually needed. I suppose that the best answer we can give is that that question is not entirely clear. There were arguments in both directions. A cautious approach was always going to send the AG in the direction of advising a referendum should happen and that is what ultimately she did. We will never know if the Supreme Court would have held a referendum necessary or not.

@ Colm B

“I’m therefore assuming Gavin supports the ludicrous bet that Hollande will opt for (b).”

vs

“I agree its probably B though it still could go A”

Both of those statements are yours. Confused much?

@ All

re “but we can continue to source funds through the IMF” naivety:

*CANADA’S FLAHERTY SAYS EUROPE TOO WEALTHY FOR IMF ASSISTANCE
*CANADA’S FLAHERTY SAYS EUROPE ABLE TO FINANCE ITS OWN RECOVERY
*FLAHERTY SAYS IMF RESOURCES MEANT TO ASSIST POORER COUNTRIES

@ Bond

“Confused much?” You appear to be very easily confused :-), so I’ll explain it to you:

‘ludicrous’ in the first phrase is an adjective that qualifies the word ‘bet’; whereas, the ‘implied’ ‘ludicrous’ in the phrase, ‘I agree its probably B though it still could go A’ applies ludicrous to the choice of B, both are true, but are used for different reasons.

Get it ?

I suppose I could have used greater clarity. But keep me Sharp now. Anything else, feel free to point out. If I was to point out everything you wrote I had a problem with, I’d be writing all day 🙂

@ Bond

I presume your Flaherty IMF quote comes from somewhere like this:

http://www.telegraph.co.uk/finance/financialcrisis/9238854/The-eurozone-should-sort-out-its-own-mess.html

He doesn’t wish IMF funds used in pursuit of EMU’s ‘wishful thinking’.

But we’ve lots of ‘wishful thinking’ re second bailouts and an ESM Treaty that places a leash on taxpayers to pour money down the drain of the financial services industry.

We’ve ‘wishful thinking’ on growth and GDP and the ESM ‘fairy godmother’
waving its magic wand over the Y camp.

oops should be …our rates have been since updated….etc mostly out of embarrassment they were so out of synch with deals on Greece, Portugal

Gavin some of us would like to assess coldly the possibility that, given the chaos and high pressure political atmosphere on the horizon in the EU and inadequacy of the €500bn ESM capacity etc, at some point down the road a body could be set up having competence under the Treaty which may make a demand having the force of law in Ireland that the constitution will have nothing to say about.

Relevant considerations would be things like voting requirements for any such body.

How could say, a FCT implementation body or Tax Policy body be stopped from coming into being? What restrictions (from an Irish perspective) could be insisted upon – and how, eg how much support within the signatories would Ireland have to muster?

If it is impossible for such bodies to be set up in the future (if so,. why?), why has the constitutional amendment been worded the way it has so that they would be granted a constitutional waver, rather than just referring to the commission (note, personally I don’t think ‘because the wording has previously been used in respect of EU treaties’ would be a particularly good answer here)?

Could you help us understand how and why, just to take a topic that usually exercises the same people who comprise the ‘yes’ campaign – tax harmonisation – it is that there cannot be some body in the future which will have the authority under the fiscal compact treaty to impose tax policy in Ireland?

Germany delays ratification of the treaty.

http://www.nasdaq.com/article/germany-could-delay-esm-fiscal-pact-vote-20120509-01284

“So why do we need to do it then?”

The answer is – of far more long-term seriousness than even the austerity issue – that the treaty has been designed within a larger framework, the details of which are as yet private, including further treaties, which, as has been publicly admitted by Merkel, Schaubel and voices in the ECB, will see budgetary details determined outside nation states.
A slightly out-of-date interview conducted by Michael Portillo with the ECB Greek prime minister saw the latter publicly admit that they were heading towards federalism, in order to compete with China, etc.
Another interesting chat with some figures including a member of the Greek cabinet (as was) saw her, and assorted figures looking like the Greek equivalent of our own Irish Times, euro-sycophant cliques, quite unashamedly say that theythought that it was necessary for democracy to be suspended or removed in order for this objective to be achieved.

Interestingly, self-declared eurosceptic that he is, Portillo was a sucker for the old lie that there is widespread support for federalism & the euro across europe. The fact is, that need for democratic consensus was suspended when the old european constitution was thrown out, and according to most polls the majority across europe (about 60 %) see the EU as a negative since it moved beyond the common market days.
Any pro-federal economists, even if their wishes come true, who think that this entity will be in any way stable are severely mistaken. The desire of people in this region of the world for individual and community liberty, and for deomocracy to be at the service of this, is far too strong for an over-arching chinese-style edifice ever to succeed.

@Grumpy I think John mostly explained it but I’ll give it a shot – this is long, it is late, and you’ve inadvertently touched on one of my “nerd” areas so apols in advance.

TLDR answer is that I’m not worried, and I’m a nerd on EU Tax Law (don’t bother reading http://old.tax.org.uk/attach.pl/8664/10255/025-026_TA_1109_Stamp%20duty%20reserve%20tax.pdf)

First off on the capital call rules which seem to be confusing people. In any commercial fund the structure is such that each investor agrees a particular amount of capital which they will be prepared to put in, and often a timeline for putting it in. But until the fund finds suitable investments it does not call the capital. In this instance the investors are MSs and the investment is a MS in trouble. Much like a private equity fund say, needing to get its hands on the cash quickly if it wants to take private a public company, the ESM needs to get cash quickly if a MS is in trouble. However, if the ESM or PE fund doesn’t need the cash, then that cash is better off in the hands of the investors.

So the amount of capital which can be called from us is limited to the agreed amount in annex 1 of the ESM treaty. Any change to this would require us to agree to change the ESM treaty.

Express provision is made in the treaty for States unable to meet their capital call requirements at the time, i.e. that an additional capital call is made on other Members (subject to their agreed total capital) and that interest may be charged on unpaid capital.

This has to be viewed in conjunction with the prohibition on transfer unions in TFEU Art 125. Let’s take the example of Greece, assuming they need to draw down from the ESM, we’re on the hook for capital as the ESM has no step out procedure unlike the EFSF, and they try to default. Art 125 means that Greece will always owe the debt to the ESM so long as they remain an EU MS. They have to pay it back at some point. So if we don’t pony up the cash for Greece’s capital call, and Greece later defaults, all that is at stake for us is the interest. But Art 125 gives us a right to sue Greece for any interest we had to pay the ESM on account of them defaulting while we hadn’t ponied up the money.

So on to the taxation aspect. As John paraphrased the Treaty on European Union (TEU) (the EU’s constitution as it were) Art 4 provides that competencies not conferred on the Union by the treaties shall remain with the Member States. I could lie to you and tell you that that is the end of the story but it is not. Direct Taxation, for example, remains within the competency of the MSs since it was never conferred on the Union, but the CJEU has held on numerous occasions that such competencies must be exercised in a manner which conforms with the broader constructs of EU law. So, while Ireland gets to define her own tax base and her own tax rates, she cannot define either in a manner which breaches the fundamental freedoms e.g. if tomorrow Ireland introduced a 40% tax rate on EU branches of Irish companies while taxing comparable Irish activities at 12.5% that would restrict Irish companies’ ability to establish branches in other EU Member States and offend the freedom of establishment in TFEU Art 49. Thus far, the CJEU has only recognized the fundamental freedoms and the State Aid rules as being capable of restricting the competency of the Member States in the area of direct taxation, and in relation to the State Aid rules one could argue intentionally and necessarily so and that the MSs must have realized in creating the SA rules that they were curtailing their ability to grant certain tax breaks.

I can’t say that certainly the CJEU won’t recognize other areas as restricting the MS’s competency here, I can tell you as someone who used to make a living out of such claims that I think it unlikely any time soon.

So that’s the general rule, now on to the exceptions. There are a couple of directives which have granted competency to the Union in the area of direct taxation, parent sub, interest and royalties, mergers etc. This wasn’t snuck up on the MSs, they agreed to the directives at Council.

But, and this is a big but which needs to be borne in mind when considering e.g. the CCCTB, directives have to be based on a treaty article. All direct tax directives to date have been based on Art 115 which empowers the Council to effect directives necessary for the functioning or establishing of the common market. All direct tax directives to date, and we need to take a deep breath here around the CCCTB, have been about making it easier for enterprises to operate cross border.

The CCCTB as proposed, has many flaws, mainly in the profit allocation key. But it is designed to be elective rather than compulsory, and designed to assist SMEs branching out overseas. There are numerous surveys which indicate that tax compliance costs for SMEs are disproportionate compared to MNCs. So the CCCTB as proposed is a good, if flawed, idea. It is about reducing compliance costs for SMEs. MNCs, for whom tax planning is worth a lot more than compliance costs simply will not elect themselves in, and as the law currently stands the Union is not empowered to force them in. The Union can make things easier on businesses operating cross border. It cannot make them harder absent a treaty change granting this competency, the competency of direct taxation, to the Union.

So while I cannot give you a definitive answer that the EU will never have the power to levy direct taxes here, absent a treaty change which we’d have to consent to, or the Court of Justice making a completely new departure (and the CJEU has become noticeably less activist since the enlargement of the EU into the East) I wouldn’t be particularly worried about it, and I type this as someone who bemoans the lack of activism in the CJEU in the area of direct taxation, in recent years.

In terms of what can be done if the principle of conferral is breached there are a couple of different answers. A direct action can be initiated before the CJEU. A complaint can be made to the Commission as guardian of the treaties. In any case, given that the treaties are directly effective, they create rights for individuals so any attempt by the Union to levy taxes here would be actionable.

If tomorrow an EU body tried to levy any form of direct taxation my advice would be to write to the Commission. The costs associated with fighting any such claim then fall on the Commission rather than the taxpayer or the State.

In fact my advice wouldn’t be to write to the Commission, it would be to assume that someone like me would write to the Commission, expressing in detail why any such action would be objectionable to the TEU.

Last point, the stability treaty is granted a constitutional waiver, not a waiver from either Acts of the Oireachtas, or from EU law. Not being an EU treaty it is subject to both.

I Know my answer is long winded and nerdy at times, and I can’t definitively say that you shouldn’t worry about it. I can only say that I, as a nerd in this area, am not worrying in my capacity as a taxpayer.

@Gavin Barrett [as in my response in comments section to your IT ]

Counterpoint:

Transcript of a Press Briefing by Gerry Rice, Director, External Relations Department, International Monetary Fund
http://www.imf.org/external/np/tr/2012/tr050312.ht…

QUESTIONER: And just a separate follow up. For Greece, in the review, or actually as part of the new EFF agreement, the Fund made it clear that any financing gaps that developed, Europe had given assurances to the IMF that they would cover those financing gaps. But are there similar assurances from Europe on Portugal and Ireland for any potential financing gaps there?
MR. RICE: Well, I think really the question is best addressed to the Europeans, but I think at several points over the last several months the governments of the Euro zone have made clear their commitment to the stability of the Euro zone, including providing resources as needed to program countries, provided the programs are being implemented effectively.’

… including providing resources as needed to program countries, provided the programs are being implemented effectively. Hmmmm

MR. RICE: I won’t get into the specifics of the different programs, but again, just to repeat, and I think if you look at some of the declarations made by the European governments, public declarations over the past several months, they have made clear their commitment on the financing side to program countries. Again, provided the programs are implemented effectively. So you know, I didn’t mean to be flippant by saying ask the Europeans. But it’s just I think it’s a matter of public record.’

Time to bury the spin_dummy that NO funding will be available should the Citizenry, in its wisdom, decide to vote NO, for whatever reasons. Yes – the No funding discourse if Citizenry votes NO of the FF/FG/LP troika is as nonsensical as the economics within the Fiscal Compact itself.

Two Nonsenses do not make a Sense.

@Referendum Commission
Please note.
…
Finally:

Cost of Failing to REJECT Treaty (before a realistic deal with EC/ECB on vichy_financial system debt) WILL be Enormous

is a more suitable headline. That said, welcome to the blog – you’re all very quiet these days out in UCeeD.

Aisling ‘isn’t worried’. Blind Biddy concurs. Nuff said.

@Aisling

You’re hired. End.