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Archive for April 29th, 2012

We Irish love to own our own homes and at 75%, have one of the highest home-ownership rates in Europe. We’re also a fairly conservative people. Marry the two traits together and we become a building insurer’s dream. And most of us hand over the best part of €1,000 each year to insure our homes and their contents.

As a nation, we face a risk that in two years time, we will be unable to get anyone to lend us money to fund what will still be an ongoing gap between tax receipts and what we pay in social welfare and public sector costs. That risk has been recently dismissed as “ludicrous” by our Minister for Finance, but many doubt what he says, and believe that Minister Noonan is merely trying to build confidence and hope.

The view on here is that there is a very real chance that this country will need a second bailout programme when the first one concludes at the end of 2013. And with that in mind and considering we are a conservative nation, it naturally make sense to vote “yes” to what is being described as an insurance policy or safety net in the Fiscal Compact referendum on 31st May. However the position on here is to advocate a “no” vote and here’s why.

If your insurance broker were to offer you the pick between the following two insurance policies which would you choose? (a) a policy which covered you for all risks, entails a premium of  €1,000 and is payable now or (b) an identical policy but instead of paying now, you can pay after disaster strikes and it will still cost you €1,000. Wouldn’t you be crazy to plump for the first policy?

And in the last analysis that is the reason that a “no” position is being adopted here: if we do need a bailout at the end of 2013 and there is no other lender in prospect, then we simply hold a second referendum. It’s not as if we’re not used to such phenomena!

Of course it is a matter of dispute that there wouldn’t be any lender available to us unless we vote “yes”. Some, like Sinn Fein and Fianna Fail’s Deputy O’Cuiv claim that if we do vote “no” to this referendum, then we can stymie the whole ESM – that’s the new European bailout fund that will have €1tn available to lend to countries in distress – and if we do stymie it, then there will be no bailout fund for any EU country which is unconscionable so some solution will be devised which will allow Ireland access funding without ratifying the Compact. Others like Fine Gael, Labour and most of Fianna Fail say that access to the ESM is conditional on us voting “yes” and unless we do vote “yes”, we will be in the dark and be uncertain of how we fund the country. The view on here is that both sides’ arguments have their own merit, but even if the “yes” vote advocates are right, then all we need do is buy the insurance policy in late 2013 and hold a second referendum then.

Why vote “no”

Besides not having to adopt the Fiscal Compact yet, there are really three reasons embraced on here for voting “no”

(1) Reducing the debt burden. This country will have a debt:GDP next year of about 120% of which 40% has arisen from bailing out the banks and the remaining 80% comes from our initial debt in 2007 plus the deficits that we have run up since. There is a debate as to whether this debt level is “sustainable” or “manageable”. Economists might point you to debt over 80% as unsustainable, Deputy Stephen Donnelly oftentimes refers to Harvard research which shows that only one country in history emerged from such a level of debt without default, and that was Britain during the Industrial Revolution. On the other hand, others point us to the fact that Ireland had a similar level of debt in the 1980s which we repaid without default and which didn’t stop the development of the Celtic Tiger in the 1990s. The position on here is that managing this debt will have such a negative impact on Irish society, our health, education and security that it is unmanageable. That’s a view, others will have different views. But with this view in mind, our debt level must be cut and the obvious candidate for cutting is the residual bank debt – the €28bn of promissory notes and to a much more limited extent now, the bondholders. A negotiation to cut this debt looks like this “I will pay you 20c in the euro on the bonds and promissory notes and if you don’t accept that, then I will pay you zero”. At this stage, no-one in Ireland should believe that fairness or a 120% debt:GDP will convince our partners in Europe that they should give Ireland debt relief. After all, what Irish person is losing sleep over a man who kills himself in front of the Greek parliament leaving behind a suicide note which says he doesn’t want to live eking a life from foraging  from rubbish bins, and what Irish person is losing sleep over Greek debt which is worse than our own? So ask yourself this question – will a “no” vote improve our chances of a renegotiation of our debt, damage our chances or leave our chances the same? The position on here is that a “no” vote will improve our chances by signalling that Ireland will be inconvenient and un-European and a “no” vote in a referendum one day may become a unilateral disowning of promissory notes the next. Unless Ireland adopts a stance which at least makes clear the threat of default then the view on here is we will get no-where. And as for the ECB and the withdrawal of its support, please, at this stage the ECB is lending about 3% of its balance sheet to Ireland, pretty much in line with our economic proportions in Europe– gone are the days of unprecedented assistance when our banks received 25% of all ECB lending.

(2) Here’s the economic argument: this Fiscal Compact is taking monetary policy off the table for EU countries to use as a tool to cope with financial crises. Monetary policy concerns itself with money supply and interest rates. In this global financial crisis we have seen how monetary policy has been deployed in the UK and US to help their economies over the crisis hump – both have lowered their interest rates to rock bottom levels, both have increased their money supply using so-called “quantitative easing” and both have seen elevated inflation, over 5% in the UK though this is now down below 4%. For heavily indebted countries like Ireland, struggling to shrug off a recession, an increase in the money supply and reduction in interest rates would be how we would, in part, have tackled this crisis if we still had our own central bank. But we no longer have our own independent central bank, we have handed that institution’s role in monetary policy over to the ECB as part of our membership of the EuroZone. And the ECB has a primary objective of “price stability” or in simple terms, keeping inflation at around 2% per annum. If the ECB printed so much new money that our inflation grew by 10% in 2012 then even if there was no real economic growth, our debt:GDP would decline by about 10% from 108% to 98%. That however would not suit other economies in Europe and it appears to be psychologically repugnant to Europe’s biggest economy,Germany. You could argue that the Compact will not alter the current position of the ECB independently working to preserve “price stability”, but the view on here is that this Compact is going a step further and pre-empting a request from a crisis-hit country and making it clear they will not find any comfort in monetary policy. And that is wrong.

(3) Here’s what might be called “the Varadkar” argument : A “no” vote will rattle the cage of a Fine Gael/Labour government, a coalition with a massive majority but which has been complacent in its efforts to deal with the debt and deficit, a government which cost this country tens of millions of euro in interest by “grandstanding” in March 2011 and stopping us getting an interest rate reduction on the bailout funds for a further five months and only then on the back of Greece’s woes, a government which knew about the household charge for at least a year and yet oversaw the consequence-less fiasco whereby nearly half the households in the State have not paid the new tax, a government which showed contempt in its pursuit of the promotion of Kevin Cardiff to the European Court of Auditors and yet six months after uncovering a €3.6bn error in his Department’s calculation of the country’s debt we have yet to understand how the error occurred, a Government that has singularly failed to deal with the household mortgage and debt crisis and even this week has deferred the publication of a Personal Insolvency bill. And let’s not forget the weak-wristed efforts to reduce the burden of the bank bailout and to get a deal with Europeon repaying bondholders – yes the manifestos might have been drafted in Jesuitical terms, but these chickens come home to roost when the Government seeks our support. A “no” vote will force the many bright and resourceful deputies in both Fine Gael and Labour to take a peek through the curtain and to contemplate the vista that lies ahead after the next general election in 2016, or sooner – single-term TDs from a government that has the potential to become discredited, cast back into cufflink-less, grubby-shoed local council politics. By the way, I wouldn’t have said there is any real risk to the Coalition from a “no” vote on 31st May, the risk is more likely to come with the Budget later this year when plummeting poll figures for Labour may cause an irreparable fissure to develop between the two parties in Government

There are other reasons to vote “no” – the Compact is very restrictive and it may not be wise to bind ourselves in advance to remedies for unknown ailments, the rules would not have prevented our crisis in 2008 and its aftermath though they might have alleviated the subsequent size of the deficit and in any event we now have adopted the “six pack” rules now anyway, a key measure in the Fiscal Compact the structural deficit is not precisely defined, EU and non-Irish institutions and personnel will have a greater say in how Ireland manages its economy and as we have seen with our corporate tax and financial transaction taxes, others may have different agendas and may seek to promote their own national interests ahead of ours, we have twice suffered the ignominy of our financial affairs being available to the German parliament ahead of the Dail and on neither occasion has there been sanction though the Government is as unhappy about the leaks as anyone. As well as ruling out monetary policy as a tool to help crisis-hit countries, there is no attention given to stimulus for growth.

Why vote “yes”

The position adopted on here towards the referendum is set out above, but it needs to be said that this is not a black-and-white question by any stretch. And there are good reasons to consider a different stance.

(1) Voting “yes” will help clear the way to accessing cheap and abundant funding from the ESM in 2014. The jury is out on whether or not a “no” vote will allow us put the kibosh on the ESM fund for everyone else, and the uncertainty may damage our interests. Just this week, a ratings agency Standard and Poor’s warned that a “no” vote would have a negative impact on our credit rating “in the short term”. And that makes sense, if the market thinks there is no backup fund available to the country, it will see a greater risk of default and demand a higher interest rate if we do get back into the bond market, which we are scheduled to do in the latter part of 2013.

(2) Voting “yes” is likely to signal to international investors that all is well in Ireland and that the country continues to be a stable destination for long term investment where the people are willing to make sacrifices for the overall good of the country. Both the IDA and IBEC have backed a “yes” vote.

(3) A lot of well-respected people have given their support to a “yes” vote including. Governor of the Central Bank ofI reland, Patrick Honohan and one of our veteran economists Colm McCarthy. I don’t wish to misinterpret the positions of others but it seems on here that Professor John McHale who chairs the independent Fiscal Advisory Council, UCD’s Professor Karl Whelan, UCC’s Seamus Coffey as well as others who might be less well-known and who offered their wisdom and expertise to the special Oireachtas committee which is examining the Fiscal Compact, they all appear to adopt the “yes” position. I recommend you take a read of the Oireachtas committee transcripts linked to below, there is a treasure trove of common sense and knowledge there which may get distorted in the reported media.

There are other reasons – I could cheerfully throttle the Sinn Fein bod who thought of describing this as the “Austerity Treaty” because regardless of whether or not the referendum is passed, we still need cuts and new taxes totalling €8bn over the next three years. That is an almighty adjustment in a country that thinks it has already seen pain. It’s an average of €5,000 per household per year – it mightn’t be new taxes, it might be reduced services, but the average cost of the adjustment from 2013-2015 is in that order. Voting “no” won’t remove the need for this State to balance its books over time, and from where we are starting now, that will mean more austerity – Fiscal Compact or no Fiscal Compact. We can try to stimulate growth and carry through reforms but most of the adjustment is likely to come from austerity. And for the next 18 months at least, we will have the Troika poking around our finances with quarterly reviews as well as weekly/daily reporting, so close international oversight of our finances hasn’t been a disaster.

Because the stance taken on here is in support of a “no” vote, there is a brief rebuttal of the above – we don’t need access the bond markets until the second half of 2013 so “short term” negativity on ratings agencies’ part is of limited interest, we are rated as junk already by Moody’s because of our colossal debt. International investors for the long term are just as likely to be interested in the deterioration of health, education and security as they are in what may be just a temporary “no” vote, and as much as these well-respected people believe in a “yes” vote, there are a great many other, perhaps equally-respected who support a “no” vote. And lastly a“no” vote won’t dispense with the need for more austerity, but it may allow the adjustment over a longer period and may bolster the chances of a debt write-down.

This referendum is likely to cost the country about €4m to run. That’s one tenth of the €40m that was repaid on Friday last to unsecured unguaranteed bondholders at what was Anglo Irish Bank, a completely bust bank without branches, deposits which doesn’t transact new business. We could run ten referenda for the same cost. On 31st May I hope you will consider voting “no” but even if the “yes” arguments persuade you, we will still have a www.stabilitytreaty.ie website in 2013, we will still have the same 10-page text of the Fiscal Compact, we will still have the opportunity to say yes and buy the insurance policy if and when we need it.

Resources:

(1) The Fiscal Compact, or officially the “Intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union” – it’s 10-pages long and takes a half hour to read.

(2) The Fiscal Compact website which should contain unbiased material on the Compact – www.stabilitytreaty.ie

(3) Deputy Eamon O’Cuiv’s speech on the Fiscal Compact; Deputy Stephen Donnelly and the Fiscal Compact – parties’ views are represented in the Oireachtas hearings below. If any other independent TD issues a position on the Fiscal Compact, it will be linked to here.

(4) The transcripts of the hearings before the special Oireachtas committee set up to examine the Fiscal Compact

Meeting Witnesses
February 2nd Dr. Alan Ahearne (NUIG)Prof. Karl Whelan (UCD)

Mr. Tom McDonnell (TASC)

Prof. John McHale (NUIG)

 

February 23rd Mr. Paul Sweeney (ICTU)Mr. Seamus Coffey (UCC)

Dr. Karen Devine (DCU)

 

March 1st  Ambassador Emmanuelle d’Achon (France)Ambassador Dr. Eckhard Lübkemeier (Germany)

Ambassador Javier Garrigues (Spain)

 

March 15th Prof. Gerry Boyle (Teagasc)Mr. James Doorley (National Youth Council)

Ms. Marie Sherlock (SIPTU)

Dr. Seán Healy (Social Justice Ireland)

 

April 3rd Ambassador Dr. Tomas Kafka (CzechRepublic)Ambassador Ms Diana Zagorianou-Prifti (Greece)

Ambassador Mr. Marcin Nawrot (Poland)

Ambassador Mr. Niels Pultz (Denmark)

Mr Bill Cash, MP (Conservative Party)

Ms. Nessa Childers, MEP (Labour)

Ms. Marian Harkin, MEP (Independent)

Mr. Paul Murphy, MEP (Socialist Party)

Ms. Phil Prendergast, MEP (Labour)

 

April 4th Ms Sharon Bowles, MEPLord Lyndon Harrison

 

April 4th Prof. Philip Lane(TCD)Mr. Dan O’Brien (Irish Times)

Mr. Jim Power (Friends First)

Dr. Gavin Barrett (UCD)

Dr. John Brennan (NUIM)

Mr. Declan Walsh (UCC)

 

April 5th Mr. John Bryan (IFA)Mr. Mark Fielding (ISME)

Mr. Brendan Bruen (FSI)

Ms. Patricia Callan (SFA)

Mr. Brendan Butler (IBEC)

 

April 5th Mr. Brendan Halligan (IIEA)Ms. Brid O’Brien (INOU)

Ms. Noelle O’Connell (EMI)

 

April 5th Mr. Declan Ganley (Libertas)Cllr. Andrew Muir (AllianceParty)

Mr. Roderic O’Gorman (Green Party)

 

17th April Mr. Joe Higgins TD (Socialist Party)Mr. Michael Martin TD (Fianna Fail)

Mr. Eamon Gilmore TD (Labour)

Ms. Catherine Murphy (Independent)

 

18th April Mr. Jimmy Kelly (UNITE)Mr. Michael Taft (UNITE)

Ms. Megan Greene (Roubini Global Economics)

Prof. Brian Lucey (TCD)

Dr. Andrew Storey (UCD)

Prof. Terence McDonough (NUIG)

Mr. Ian Talbot (ChambersIreland)

Prof. Gerry Whyte (TCD)

 

19th April*** Ms. Margaret Ritchie (SDLP)****Debate not available yet
25th April Mr. Gerry Adams (Sinn Fein) 
26th April Mr. Enda Kenny (Fine Gael)
26th April Mr. Jonas Sjöstedt MP (Swedish Left Party) 
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