international analysis and commentary

Ireland and the Fiscal Stability Treaty: a choice between fear and austerity

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Ireland voted for the referendum on the new Treaty on Stability, Co-ordination and Governance – also known as the “Fiscal Compact” –  on May 31st. As opinion polls predicted, a wide majority, around 60.3 % of the electorate, voted yes, but the electoral turnout was relatively low with only half of the 3.1 million eligible voters coming out to express a preference. Rural areas and middle-class suburbs voted yes, while working-class areas in Dublin and the entire county of Donegal (five constituencies in total) rejected the treaty. A similar tendency was noted in the working-class areas of Cork and Limerick. An analysis of the results reveals a strong class polarization which could be explained by the fact that austerity measures taken by the government have hit the working class the hardest. Meanwhile the middle class yes vote most likely reflects this sector’s hope that support for the treaty will prevent the crisis from worsening in the long term. The Yes campaign was strongly supported by the most important Irish political parties across the political spectrum, as well as by the main newspapers and opinion leaders.

Fear has been the main characteristic of this referendum due to political pressure to avoid any incident that could compromise the probable second European bailout in 2013 – when the money from the first will run out. The words of Joan Burton, Ireland’s Minister for Welfare, effectively describe the feeling of voters, “The astonishing thing about this campaign was that lots of people voted yes with a heavy heart, and many voted no with a heavy heart. Both sides were really concerned about growth and employment”.  

The anxiety of the Irish government, and that felt in European capitals, is justified by Ireland’s controversial history with any referendum concerning EU treaties. Such referenda have always been complex and the Irish have caused some upset by rejecting two European treaties in the last ten years, and then approving them following a second round of voting. The positive outcome of this referendum represented more a relief than a victory for the Taoiseach (Prime Minister) Enda Kenny and the coalition government. What was really at stake? If Ireland had said no to the Fiscal Compact Treaty, the country would now be excluded from receiving funding from the European Stability Mechanism (ESM). Furthermore, the credibility of the country in front of financial markets and European partners could have been destroyed. Being cut out by the ESM and earning a lower political credibility would have combined to form a bleak scenario in the short term for Ireland. Politically speaking, Ireland is the only country in Europe which allows its citizens to express their opinion on the treaty by ballot. An incident in the referendum could have caused negative reactions from an already-angry public in several countries suffering of the same measures of austerity. The political fallout would have pushed the German government to embrace even more conservative and intransigent positions, making it even harder for the Irish government to convince European leaders – and the Germans in particular – about its determination to respect tight fiscal rules.

The positive outcome of the Irish referendum will help Chancellor Merkel to achieve the two-thirds Bundestag majority that she needs to approve the Fiscal Compact. Furthermore, it will somewhat placate a German public already highly skeptical towards any financial support to peripheral European countries. Ratification in the Bundestag has been delayed until after the Greek election on June17th.

Following the successful outcome of the referendum, the Taoiseach conducted several phone conversations with various European leaders, the most important among them being Merkel. The main goal of these informal discussions was to convince European leaders to partially include in any future deal some kind of direct help to share the cost of the nationalization of failed banks. Ireland is the country in Europe in which the public debt has been most afflicted by the cost of saving rogue-lender banks. After the decision to nationalize five of the six national banks, Ireland needed a bailout of 85 billion euro in 2010 – the country’s annual deficit ran over 32.4 % in 2010 and  a deficit of 8.3% is forecast for 2013. Ireland implemented strong austerity measures such as the cutting of public wages and the reduction of public employees, the reduction of pensions and other welfare benefits, and an increase in taxes and fiscal burdens. These measures are not enough to cover the debt, so turning to Europe becomes the only possible way to avoid a possible “Greek style” default.

Whether the Treaty is approved by enough countries to enter in effect or not, Ireland will face years of austerity due to the necessity to cut its deficit below 0.5 % – a target not reachable before 2017-2018. Even the most optimistic forecasts show that, considering the actual economic condition, even the old Maastricht deficit limit of 3% will be not reached before 2015. On the other hand, the Irish economy, in spite of the huge public debt, is one of the more dynamic of the old continent due to its rich array of hi-tech companies who have helped it to consistently reduce the negative influence of the bailout on the balance of payments. Nevertheless, unemployment is still 14.3% and many householders are paying mortgages not related to the real value of their houses. Hence, what Ireland, and Europe, really need is stronger and more substantial economic growth in order to encourage the political support necessary for structural economic reforms.

Against this background, the new strategy that the European Council is expected to announce after the Greek election will likely provide more support for Ireland, as well as benefiting Spain’s banking system. In any case,, whether the Irish like it or not, the future of their country will not be written in Dublin, but in Brussels or in Berlin.