Ireland votes on the Fiscal Stability Treaty on Thursday. The local debate over the last month has been highly revealing in terms of the evolving attitude to Europe and the euro.
One strand of the debate has been narrow in scope, focusing on the technical details of the Fiscal Treaty (measurement of structural balance, implications for speed of austerity). My own take is that, if the Treaty is implemented in an intelligent, cyclically-sensitive manner (consistent with the flexible, holistic interpretation laid out in the “six pack” regulations), the new fiscal framework will be a positive force, helping Ireland and other European countries to gradually exit from high debt levels and avoid destabilising pro-cyclical fiscal policies in the future. Calibrating the optimal speed of fiscal adjustment at national and European levels is no easy task, especially in periods of shifting macroeconomic conditions, and we may expect many future debates about the balance between austerity and growth in delivering the fiscal targets laid out in the Treaty. Indeed, the recent resurgence in European discussion of growth initiatives is a good example of the type of policy rebalancing that will periodically occur in plotting the fiscal trajectory that balances short-term growth concerns with medium-term fiscal sustainability. (The Treaty does not mandate any particular mix of fiscal actions and growth actions to attain the target outcomes.)
In any event, even before the EU/IMF bailout, Ireland was already planning to introduce some type of fiscal framework along these lines and the Treaty is really a marginal addition relative to existing European commitments. Importantly, having fiscal rules built into domestic legislation should improve local accountability relative to purely European regulations.
Moreover, the Fiscal Treaty is a pre-requisite for other important reforms of the euro system. Shared responsibility for the resolution of banking crises, eurobonds and joint fiscal initiatives (such as the European Stability Mechanism, expanded EU or EIB investment programmes, EU-level unemployment insurance) all build on a common platform of sustainable national fiscal policies, as does ECB support for national banking systems and sovereign debt markets. While there is clearly a strong desire for a “big bang” approach by which all of these reforms are simultaneously introduced, that is not currently on offer and does not reflect the incrementalism that characterises the EU approach to institutional reform. Rather, it is more realistic for the Irish government to engage in the hard slog of ensuring that the Fiscal Treaty is quickly followed by progress on these other fronts. To take one example, the euro-nomics group (of which I am a member) advocates the rapid introduction of ‘European Safe Bonds’ which are a type of eurobond that do not require time-consuming Treaty revisions.
Over the last month, the referendum debate has been much broader than the narrow terms of the Fiscal Treaty. As always, a Referendum provides an opportunity for a segment of the electorate to vent disappointment and anger at the current government and widespread economic distress. However, to quote Colm McCarthy, “anger is not a policy.”
Still, two interesting alternative policy visions have emerged from the No campaign. Attracting support from elements on both Left and Right, one theme has been that a No vote would strengthen the Irish government’s bargaining position in reducing the burden of bank-related debt. This argument has two limitations.
First, it fails to accept that the European governance system relies on applying common principles to all member states – bilateral “interest-based’’ bargaining between Ireland and European institutions / fellow member states is at variance with core principles of European integration. Rather, Ireland has a better chance of success through sustained lobbying for a change in European policy (most obviously, the sharing of the fiscal costs of resolving systemic banking crises). Although progress on this agenda has been frustratingly slow, the increasing urgency of addressing similar banking problems in Spain provides extra impetus behind the broad coalition (including the IMF) seeking this change.
Second, as a practical matter, a No vote would not deliver a radical change in Ireland’s negotiating stance, since the current government is in place for the next four years and there is no sign that it would overturn its current strategy. How, exactly, does a No vote force a change in the government’s strategy?
Rather, the most coherent version of this alternative policy narrative accepts that there is a substantial risk that Ireland’s bluff would be called and Ireland enters an antagonistic relationship with our European partners. Such an isolationist strategy is especially risky for a high-income country with an economic structure that is deeply embedded into global financial and trade networks. A badly-played hand could map in significant output and financial losses over time that would be far greater than any reduction in the debt servicing burden obtained through a disorderly default.
In the end, then, the narrow Fiscal Treaty debate can be framed in terms of a broader debate about Ireland’s future relationship with Europe. Although there is much to be done at a European level to build a more stable eurosystem, it seems to me that there are more downside risks to pursuing an isolationist alternative path.