Another week draws to a close in the campaign for the 31st May Fiscal Compact referendum with events at home overshadowed by drama elsewhere in Europe. Today an opinion poll suggests a bounce for the “yes” side. The position on here is to advocate a “no” vote and today the online poster is being launched (click to ENLARGE).
It’s not designed so as to temporarily vandalise a telephone pole, but it does set out in a 60-second bite why a “no” position is being adopted. It’s about the debt and particularly the bank debt, the €60bn-plus of it that we have so far shouldered, but of which €30bn remains to be discharged in non-sovereign debt. You can read the background to the position on debt here but a “no” vote rocks the boat and changes the tone of negotiations between Ireland and our partners in the EU. Beyond debt, this Compact will permanently take monetary policy off the table for EuroZone countries, as an instrument to cope with crises. And by the way, the only means of cushioning the austerity that we have ALREADY signed up to, is to bulk up our inflation. The referendum is also a great and rare opportunity to give the Government a kick up the pants for some pretty poor performance. And lastly, we can re-run this referendum as often as we want; so come the second half of 2013 and if, God forbid, our prospects are the same or worse than today, then we can simply hold a second referendum. Here’s a review of the past week.
Spin of the Week
Can we re-run the referendum? Fine Gael says “no”. Common sense and tradition tells us we can re-run the referendum as many times as we wish.
How many of the 25 countries (17 EuroZone and eight non-EZ) have ratified the Compact?
“Many” says junior minister Lucinda Creighton. The facts point to just one completed ratification (Greece) and two parliamentary ratifications pending presidential assent (Slovenia and Portugal).Germany has deferred ratification. And there would appear to be a total of 22 countries including Ireland which have yet to ratify the Compact.
Can we raise €10bn per annum in a wealth tax (without taxing principal private homes)?
In 2014 we will need €18bn – in cash. To fund the deficit and repay debt – mostly sovereign bonds that will fall due. Where do we get the €18bn? The hope would be that we can access funding from the traditional bond market at reasonable interest rates. Were that not to be the case, then we really just have the ESM though we might apply to the old fund, the EFSF for an extension to our programme by June 2013 and we might also get (very) limited assistance from the IMF. But if you ask some in the “no” camp where they will get the funding, they reply they will get it from a wealth tax and higher taxes on higher earners. If you feel like challenging this proposal and have 20 minutes, then there is an excellent analysis of our wealth and the potential to tax it by Seamus Coffey here, if you don’t have 20 minutes then just stick the Sunday Times or Independent annual survey of wealthy Irish people under the noses of those advocating a wealth tax as a solution, and ask them to identify – in respect of the richest people – how they would impose a tax. You will quickly see that the very wealthiest can move their wealth very quickly to other jurisdictions and the more moderately wealthy are rich because of their companies and the only way you can tax them is through increasing corporate taxes. You could try to force the wealthy to leave their wealth in Ireland, but that is something which every other jurisdiction in the world would like, sadly basic freedoms get in the way! Seriously, try it – challenge those who suggest we can get billions from a tax on the wealthy by showing them the names of the wealth, photographs and sources of wealth and demand to know how these wealthy individuals would pay more tax. There is potential for more income there but €10bn is fantasy.
The Economics
This week has seen the so-called “Austerity Treaty” challenged by economists at TASC who argue that the 3.5% deficit which is officially projected for 2015 will need come down to a 0.5% structural deficit by 2019 and that the adjustment will involve austerity – “Indeed, by definition, reducing the structural element of the deficit will require policy action”, says TASC citing the Department of Finance. On the other side, John McHale and Seamus Coffey has been to the fore in arguing that economic growth will blunt any need for austerity and given we have three years after 2015 to get our house in order, even modest economic growth will mitigate, perhaps even totally remove, the need for austerity. The position on here remains that we will see the Mother of All Austerity under the EXISTING first bailout over the next four years. This is a graphical representation of the annual adjustment and by comparison with 2011, we will have an adjustment of €12.4bn in 2015 and that assumes growth of 2.2% in 2013 and 3% in 2014 and 2015! The sums involved are already colossal and this is what we are ALREADY signed up to. So whatever is in store post 2015 may involve more austerity depending on growth levels, but compared to the austerity already agreed it will be peanuts.
Omitted from last Sunday’s weekly review was reference to the article in the Irish Times penned by the IDA chief executive Barry O’Leary who is calling for a “yes” vote to maximise foreign investment. Whether or not a “no” vote will damage investment in the short term might be a matter for debate, but Barry is probably the closest to that particular coalface and it is with reluctance on here that his opinion is accepted. However it is less clear what a “yes” vote with a debt:GDP of 120% will do to investment in the longer term, the view here is that it will deter investment and indeed we will lose out to competitors like Poland which has a 56% debt:GDP today. If the “no” vote helps a debt write-down, then remember that even €1bn could create thousands of domestic jobs.
The Politics
Independent deputy, Shane Ross declined to respond to An Taoiseach’s barbed questioning in the Dail during the week as to what position he, Deputy Ross, was recommending to his constituents. And it should be said that not all Independents are recommending a “no” vote; Deputy Stephen Donnelly, for example, seems to be recommending a “yes” vote. Former Fianna Fail deputy leader, Eamon O’Cuiv has promised to be on his best behaviour for the next three weeks and not challenge his party’s “yes” position, at least not openly or in the media (you can read Deputy O’Cuiv’s views on the Compact here).
Opinion Polls and Betting
There was some movement in both polls and betting this week. The Sunday Business Post/Red C poll which is being published today shows the “yes” campaign has gained, up 6% to 53% from 46% a fortnight ago. “No” has slide 4% from 35% to 31%. The “undecided”s have slipped by 2% from 18% to 16%. The poll doesn’t capture the “Won’t votes”.
Meanwhile Paddy Power has changed its odds for the outcome of the referendum. The “no” side got a firm boost at the start of the week with odds for a “no” narrowing substantially from 7/4 to 5/4 but they have seen inched back up to 11/8. The “yes” odds are not at 8/15, down from 1/3 when tracking started on here nearly a month ago.
The view from outside the Pressure Cooker
There seems to have been very little coverage of Ireland’s referendum this week, perhaps not surprisingly as events this week in France, Greece, Germany and Spain have overshadowed our own little exercise in democracy, added to the fact that the Compact needs only be ratified by 12 of the 17 EuroZone countries before it can take effect, so Ireland doesn’t have a veto.
Endorsements
This has been a mixed week for endorsements. A grouping called “Farmers for No” has come out in opposition to the “yes” vote stance of the main farming organisations – the IFA, ICMSA and Macra na Feirme. The GAA has distanced itself from the “yes” vote advocated by a number of GAA personalities and says the GAA is adopting a neutral position on the referendum. A group of trade unionists has come together under the banner of The Charter Group led by general secretary of the CPSU uniob, Blair Horan is calling for a “yes” vote. On the economics front, well-regarded independent-thinker Trinity College Dublin professor and economist Brian Lucey has come out in favour of the Compact – “very reluctantly” says the Professor, but the imminent funding requirements for this State which comprise the ongoing deficit plus debt repayment/rollover seem to have sealed the deal for Professor Lucey.
Defer or Don’t Defer
It seems on here that the new clause to be inserted into our Constitution, if the “yes” side win this referendum, is idiotically narrowly constructed. The proposed new clause says
“The State may ratify the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union done at Brussels on the 2nd day of March 2012. No provision of this Constitution invalidates laws enacted, acts done or measures adopted by the State that are necessitated by the obligations of the State under that Treaty or prevents laws enacted, acts done or measures adopted by bodies competent under that Treaty from having the force of law in the State.”
So if there is ANY change to the Treaty “done at Brussels on the 2nd day of March 2012”, then presumably this clause becomes immediately redundant. And given the sabre-rattling going on between France and Germany and the betting there may be some change, it seems on here that we may well be set for a second referendum on the Fiscal Compact even if we vote “yes”.
(Referendum graphic above produced by Japlandic.com, contact here)
Great analysis NWL.
One picky point. “Barry is probably the closest to that particular coalface and it is with reluctance on here that his opinion is accepted. ”
It’s hard to see how Barry O’Leary could come out against the treaty even if he was secretly a no supporter. He is part of the Government not some independent commentator.
The concept that foreign multinationals base their investment decisions on the state of a countries finances is laughable.
If they selling into the local market it might have some bearing on the decision but given the Irish market is irrelevant to multinationals this does not apply here.
Multinationals choose regimes of ever type based on the return on investment.
They don’t care about human rights abuses, political system, pollution, climate change or anything else. They only care about ROI for their executives and to a much lesser extent their shareholders.
I am amazed at how quickly the consensus of growth projections have changed. Not long ago growth of 2% + was seen as a reasonable expectation. Not any more folks… growth of 0.5% now seen as “If you are lucky”.
As you mention inflation is seen as the answer, problem is that retirement savings will be severely eroded.
It would be ironic, if having survived the austerity and debt crisis a person is facing destitution in retirement.
Why hang around to face years of austerity, when on retirement one faces austerity all over again as your pension fund / savings will be eroded away.
There is really only one way to vote on the Fiscal Compact referendum and that is with your feet.
http://www.aussiemove.com/jobs7.htm
The table of Paddy Power odds that you have shown in the above article are now completely out of date. As of now, the market stands at Yes (1/5) and No (3/1), which is a complete U-turn on the trend your table suggests. I am sure that you will update the table and not let out of date figures distort the point you are valiantly attempting to make.
@Ken, the table is correct at the date shown which is Saturday 12th May, it will be updated next week in the usual way. The odds you show are those that pertain now
http://www.paddypower.com/bet/politics/other-politics/irish-politics?ev_oc_grp_ids=600658
@namawinelake – It is tough for me but I guess I am happy to accept that you can’t keep each post updated in real time. The thought that you might have a life outside collecting such data and analysis frightens me though!!
FYI – since last night, the odds on the PP website have now gone to Yes (1/10) and No (5/1).
Can anyone tell me, please , why Germany is getting the collywobbles?Just heard tonight that A.I.B. is pulling out of the Isle of man.
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Slightly off topic
Just a quick link form California labor folk for anyone interested
http://www.calaborfed.org/index.php/site/page/scrutinize_wasteful_corporate_tax_breaks_before_cutting_vital_services
Big trees from little acorns grow.
This poorly written article basically says, stop the tax breaks for US corps. It is a growing voice, and as Ireland does not exist in a vacuum an important one.
US corporations cannot ship jobs abroad , and, not pay tax at home. One of these has to give. Either way Ireland will suffer, but everyone’s eye is on the fiscal treaty ball.
I think you are underestimating the power of US corporations to write the laws that work for their executives. Just look at the banks.
@Paddy19
Perhaps everyone is underestimating the power of popular American sentiment (ie voters). Things are changing, people (generally) are more knowledgeable about economics and tax than they used to be. Also, I have seen the Banks help people here, with forgiveness on a large scale, in a way not evident in Ireland. When mainstream ideas catch on in the US, they are unstoppable.
Bring jobs home, stop tax breaks……… it’s in the papers, on the news, on the billboards, even on some shopping bags. And it is an election year.
There is a very old Spanish “dicho” that says: “Better to be alone than with bad company”. The PIIGS have turned this “dicho” on its head. It is horrible to be with you, but worse to be alone.
The rationale which underpins the treaty (rules that assure a stable fiscal and monetary union) is unquestionably justifiable and meritorious, the actual substance of what this aspiration involves,as constructed in the treaty, is not, and has never been, possible for developed nations. Therefore, it’s a question of voting no to ensure that we don’t commit to doing/trying to do the impossible, albeit with the best of motives. Let me explain a little on just a few key points: two fundamental and immutable elements of the treaty are that domestic governments are required to keep their deficit to below 3% of GDP and government debt is to reach a maximum of 60% of GDP(with some nice wording around measured reductions to achieve the 60% target). So, because this is a constitutionally adopted measure it means that these requirements will, we have to presume, last in perpetuity: the long run in economics ;-). Therefore, I’ve looked to the data from the World Bank about all countries to find an example of where this has been possible in the long run (taking 1995 as the start year…’cos it’s closest to when most countries started to return to the World Bank in a reasonably consistent manner) i.e. are these requirements actually possible. It’s vital to understand that one of the fundamental precepts of entering any new law is that the law must be capable of being observed (not broken). The debate has missed much of the fundamental thinking that’s needed on the issue, primarily because it has focused on the awful predicament in which we find ourselves economically and the view that the treaty is well-intentioned and provides a mechanism to support fiscal stability…not to mention the political angle, best expressed by a friend as: “Are you voting Yes, or are you with Sinn Fein?”
So…what did I find from the data…
In essence, I started at 1995 and looked for countries that had returned data to the World Bank from 1995 to 2010 (2011 not yet processed), and this turned out to be nearly every country. Then, I looked for all those countries where the government deficit didn’t exceed 3% of GDP i.e. the rule we need to keep in perpetuity. Below are those countries where I found this had happened:
Belarus
Korea, Rep.
Peru
Singapore
Switzerland
Tunisia
Quite a motley crew, with perhaps Switzerland and Singapore being the two most expected. So, the omens aren’t looking good for being able to reach the 3% rule….
The next element is the debt to GDP ratio of 60%…same methodology adopted here. So, what did I find…below are those countries who managed between 1995 and 2010 to not exceed the 60% debt to GDP ratio:
Bahrain
Belarus
Czech Republic
Estonia
Guatemala
Malaysia
Maldives
Switzerland
Tunisia
So, in the whole world only 3 countries managed in the period from 1995 to 2010 to not exceed both conditions and those countries are: Belarus, Switzerland and Tunisia…there are various structural reasons for this. But, the point, based on the evidence, is that the rules to which we are signing up have only ever been achieved by three countries…I consider that to be pretty incredible! Remember, that’s up to 2010 and since then the world economy has significantly disimproved.
So, what does this mean for Ireland? Well, the 2010 figures has us at a debt to GDP ratio of about 70% and we are now, in 2012, at about 108%…depending on who you believe. OK, so suppose we do sign up to the treaty, what will this mean if we decide that we need to reduce the debt to GDP ratio to the 60% target over a ten-year period (any period longer than that would just not be internationally credible…we would be attempting to let inflation cause the debt to dwindle to nothing…in fact ten years is being more than generous in this simulation)? Depending on which figures you take the debt is somewhere between 120 and 130 billion euro. If we want to reduce the ratio then we can affect the debt figure and/or the GDP figure. There are some differences from an economic perspective as to which approach you take but fundamentally if we want to pay the debt we need to get more money, which means growing the economy…actually it helps us to not pay the debt and to grow the economy as it reduces the ratio faster…so for the calculations this is the approach that I have used. The final piece of the puzzle is the amount of money that we are currently borrowing to run the country and this from the Dept. of Finance is forecast at about 8% of GDP for this current year…meaning we need to borrow 8% of GDP this year to fund public services…so my final assumption is that next year we completely balance the budget(wasn’t it Paul Daniels who used to say: “How about that then now?!” The calculations are based on a straight-line reduction over 10 years. The bottom line shows the year-on amount the economy needs to grow by to reach the target. Basically, we need to double the size of the economy within ten years, reducing our deficit immediately, and freezing our debt at current levels and this means we need the same growth rates as we had during the bubble-based Celtic Tiger and we need to achieve that from far worse structural position…in a nutshell, I don’t believe it’s possible! How can we then support rules that we just can’t keep?!
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
GDP (billions)
111 123.4286 129.6 136.4211 144 152.4706 162 172.8 185.1429 199.3846 216
Debt (billions)
120 129.6 129.6 129.6 129.6 129.6 129.6 129.6 129.6 129.6 129.6
Debt to GDP 108.11% 105 100 95 90 85 80 75 70 65 60
Deficit 8% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
GDP growth
11.20% 5.00% 5.26% 5.56% 5.88% 6.25% 6.67% 7.14% 7.69% 8.33%
But, I hear you say, what about cuts, surely they play a part?!!! Yes, absolutely, but cuts don’t increase GDP, rather the cuts remove the deficit, which you can see from the figures is running around 9 billion this year. So, what would a 9 billion euro reduction look like (which we would need immediately followed by Celtic Tiger growth)? Actually, it’s remarkably close to the 8.6billion that’s needed to run the country’s education system…or close enough to three-quarters of the total health care budget. Now, bear in mind that this isn’t a once-off cut, what is taken by this 9 billion cut is gone forever!!!
It’s pretty obvious that no one is talking about the underpinning numbers because the sales pitch is all about confidence, cohesion, market belief, access to the stability fund, about the rightness of having rules…it’s not about whether we can ever actually achieve what we are signing up to…And, all this begs the question of why….why are we doing this…who gains?? That’s for a different night.
I’m voting no but the argument I’m usually met with is: ‘the government will have no money to run the country if we vote no’. Followed swiftly by, ‘where will the goverment get the money to run the country?’
I’m no economist, so I’d appreciate a short and effective way to counter those arguments.
@Elaine,
The country has enough money to run itself, pay back bank debt on schedule and repay maturing debt until the end of 2013. However we will need new funding for 2014 and subsequent years, until we get our deficit under control, repay the remainder of the bank bailout and repay maturing debt. This new funding requirement is substantial, €18bn alone in 2014 for the deficit and to repay maturing debt. So it is a perfectly reasonable question to ask where we will get the funding.
Traditionally we would have gone to the international bond markets and borrowed. But since the middle of 2010, the interest rates demanded by the bond market have been 6%-plus and this is believed to be unsustainable for long-term debt, it’s too expensive. Yesterday, our 9-year debt was priced at 7.4% which is even more expensive. We – and the Government is to the fore on this – hope that by the end of 2013, that bond markets will lend to us below 5%, but at this point, that prospect isn’t looking bright despite Minister Noonan suggesting it is “ludicrous” that we mightn’t be able to get funding at reasonable rates from the bond market.
So if we can’t get access to the traditional markets, then we need get what is called “official funding” and that would come from the IMF, the EFSF and the ESM. The problem with the IMF is that we have already borrowed several times our quota, the IMF will only lend large sums if the EU guarantees it and also the IMF charges about 2-3% on top of its cost of funds, or around 5%.
The EFSF will be available until June 2013, and it is worth looking at a Dail Q&A this week which confirms the availability of the EFSF and we should be able to apply for additional funding from the EFSF up to June 2013.
“after June 2013, EFSF would not enter into any new programmes but will continue the management and repayment of any outstanding debt and will close down once all outstanding debt has been repaid. The Eurogroup’s statement of 30 March 2012, provides that the ESM will be the main instrument to finance new programmes as from July 2012. Its lending capacity will be €500 billion. The EFSF will, as a rule, only remain active in financing programmes that have started before that date. For a transitional period until mid-2013, it may engage in new programmes in order to ensure a full fresh lending capacity of EUR 500 billion for the ESM during the initial set up period.”
http://debates.oireachtas.ie/dail/2012/05/15/00099.asp
The main show in town however in 2014 is likely to be the ESM, and ratification of the Fiscal Compact by Ireland is regarded as the only certain way of accessing that fund.
If NO funding was available in 2014, then we would need a combination of the following: bond market funding at high interest rates, accelerated adjustment of the deficit which will equal more austerity, selling off more state assets and selective default on our debt.
The position on here is to advocate a “no” vote. So in response to the question “where do you get the funding from 2014″, the answer is 1. the markets 2. the EFSF with an application before June 2013 and 3. the ESM with either an exceptional arrangement for Ireland OR we do what Richard Bruton suggested we do – but which he later retracted – we vote again. And the position on here is that we do vote again if we are faced with Ireland being unable to fund itself but only in 2013. Until then, voting “no” will assist the negotiation of our debt, which is the main legacy economic problem confronted by this country today. There will be a feature blogpost on the Treaty tomorrow and why a “no” vote is necessary for a renegotiation of bank debt.
Thanks namawinelake, very well put!
Excellent arguments. Well put.