The Fiscal Treaty as a Solution to the Crisis?

An email interview I did with a Spanish newspaper.

Is a referendum an acceptable way to endorse the EU policies and it´s measures?

Yes, I think so. It increases the democratic legitimacy of European decision making. It also engages citizens in the European project. Ireland is unique in that EU treaty changes require a change in the Irish constitution. This means that governments require the consent of the people before making any changes to the constitution in parliament. In general this a good thing. But it does run the risk that referendum campaigns often focus on issues unrelated to the proposed treaty change. This particular referendum was a useful means for Irish people to discuss complex technical issues such as the ESM (European Stability Mechanism). It also broadened the debate to discuss the fiscal and banking crisis, and whether a narrow focus on budgetary discipline will make any contribution to the resolution of the Eurozone crisis. In the end, the government and the Yes side, argued that Ireland must ratify the treaty to ensure access to future ‘bailout’ funds, via the ESM. This was contested. The No side argued that it was part of a bigger process that would embed permanent austerity in the Irish economy, at a time when economic growth, investment and stimulus is required. IF more member states adopted referenda on European issues, it would increase something that is often lacking in European policy making – democratic legitimacy. The European public sphere would be enhanced by democratic referenda.

Do you think a similar referendum would have been good for Greece? Why?

Yes. It would provide a mechanism for Greek citizens to discuss their relationship with European institutions. What would be more useful is a referendum on whether the Greek people accept the conditions of the Troika adjustment program. This would force everyone to consider the implications of retaining the Euro currency. It would also make the policy positions of political parties more explicit. This is what the previous Prime Minister,  G Papandreou, proposed. Merkel rebutted the idea, but has since recognized that it would be a good thing. The Greek state is insolvent rather than illiquid. Therefore, more and more austerity will contribute nothing to economic growth or reducing public debt.

In Brussels the debate between austerity and growth is emerging more and more. Does Ireland´s yes will give more arguments to the austerity vowers?

The fiscal treaty will contribute little to resolving Ireland and Europe’s economic crisis. It gives substance to the false argument that fiscal profligacy is the source of the Eurozone crisis. It is not. The sovereign debt crisis is the outcome of national states taking on the bad debt of their banks, not reckless public spending. Ireland and Spain have an economic crisis that was caused by reckless behavior by private actors in private finance markets. European private banks borrowed huge sums on the inter-bank money market and lent it to property developers. This a created colossal construction (real estate and house price) boom. This was the result of de-regulated finance, mortgage and housing markets in the Eurozone. Both Ireland and Spain had very stable budgets until 2008, even running a surplus. If the treaty had of been in place since 2000, it would have made no difference to their problems. Both spend less on public and social services, as a percent of GDP, than the EU27 and Euro average. Therefore the narrow focus on fiscal discipline masks the real problem of the Eurozone crisis – failed private banks that have made the democratic sovereign state insolvent. Fiscal deficits are the result not the cause of the crisis. The treaty is primarily a means for Angela Merkel to give herself political cover when arguing in favor of  increased European integration when she goes to the German electorate in 2013. Ireland needs economic and employment growth not a fiscal straight-jacket.

The EU measure are delaying a lot, and every week it looks like the situation in the eurozone is worst. Do you think the EU has to reinvented, rethought?

Yes, Europe is facing an existential crisis. The pace of change in finance markets has exposed the political coordination problems of Europe. There are two stark choices facing all member states, particularly the 17 countries of the Eurozone. Either they opt for much greater European fiscal federalism or return to the nation-state. Off course there are a spectrum of choices in between. But ultimately this is the political tension. Some have argued that the fiscal treaty is a stepping stone toward the ECB issuing Eurobonds and becoming a lender of last resort. This would be a step forward as it would mean that countries such as Ireland and Spain could start issuing debt in what is a national currency. Presently, given the very narrow focus of the ECB and Germany, these countries are effectively issuing debt in a foreign currency. Financial speculators will pick them off until they know that the ECB can print money if necessary (i.e. like the US Federal reserve and Bank of England). Europe needs a fiscal federal union and a defense of the social market foundations upon which it was built. It is the future of Social Europe that is in crisis. A United States of Europe that is based on an ECB that issues Eurobonds, a banking union, coordinated wage and labour market policies across member states, a significant increase in Europe’s public budget, transfers between regions, and coordinated tax policies to enhance social services (rather than pay off private debt) is one possible future. But presently there is a shift back to beggar thy neighbor policies, which is decreasing democratic legitimacy. In Germany, there is little appetite for more integration. National politicians are acting in their national interest not the European one. Jurgen Habermas once argued that European leaders should design a constitution and present it to all European citizens via referendum for endorsement. I tend to agree.

What would happen if a `No` comes out from today´s referendum? How would the EU will manage with this political storm?

The EU will continue as normal as the treaty has been designed such that no country really has a veto over its implementation. Therefore if Ireland rejects it, it will make little difference. The political storm will emerge if the EU refused Ireland access to the ESM (European Stability Mechanism) in 2013. This is what the debate has centered on Ireland. Ireland is currently access funding from the Troika which runs out in 2013. Based on current bond yields they are unlikely to access private finance markets anytime soon. Therefore they will need access to the ESM. I sense it is for this reason that the outcome of the referendum will be YES. The Irish people are being told that unless they accept the fiscal treaty Europe will turn off the money tap. I don’t think this is what would happen, but it is the strategy that the government have employed to ensure a Yes vote. If this were true, it would not say much for European solidarity or European integration.

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