Économie et Finances/États/États-membres

European Fiscal Compact approved in Irish referendum

The citizens of Ireland have accepted the European Fiscal Compact in their national referendum held on the 31st May by a 60.3% to 39.7% margin with approximately half of Irish voters turning out.

The pact, formally known as the Treaty of Stability, Coordination and Governance in the Economic and Monetary Union, primarily commits national governments to limit their budget deficits to 0.5% of GDP, or 1% if government debt is under 60% and risk is minimal. A difficult benchmark, as the only EU member states fulfilling these requirements in 2011 were Norway, Sweden, Liechtenstein, Malta and Estonia, with Ireland reporting a staggeringly low 10.7% deficit (13.1% at one point),[1] the 199th ranked in the world according to CIA World Factbook statistics[2]

Nicknamed the « Austerity Pact », the treaty has been signed by all member states except for Britain(unsurprisingly) and the CzechRepublicand is expected to come into force at the beginning of 2013 pending ratification. Alongside the budgetary commitments, it also states that any government debt of over 60% must be reduced by 5% each year, a significantly tough policy as 15 member states surpassed the 60% mark last year. This will particularly affect the future of Ireland as its government debt is over 100% of GDP[3] and reducing it at the benchmarked 5% per annum is likely to lead to budget cuts, tax increases and other unpopular austerity measures, hence the nickname. Furthermore, the pact gives the EU the power to fine any member state 0.1% of their GDP if they do not succeed in maintaining the aforementioned budgetary requirements, providing the EU with more firepower to discipline non-conformist national governments.

Ireland was the only EU member state to hold a referendum for the pact and its approval provoked a sigh of relief amongst the current ruling coalition parties: Fine Gael and Labour, who led the Irish “Yes Campaign” warning “that a No vote would lead to a Greek-style banking run, a tripling of Ireland’s borrowing costs and would plunge the country into bankruptcy by 2014.”[4] Ireland’s arm was twisted however, they didn’t seem to have much choice but to conform to EU hegemony, as rejecting the pact could “cut Ireland off from future bailouts by the European Stability Mechanism, the Eurozone’s future bailout fund. This precondition, which was absent from earlier draughts, is believed to have been insisted upon by Germany.”[5] This insistence from the mainland is a major argument of critics of the treaty, including Declan Ganley, founder and leader of the Libertas Party, part of the eurosceptic Europe of Freedom and Democracy Party, who described the pact as a “transfer of fiscal sovereignty to Brussels and Frankfurt.”[6]

It took Ireland two referendums to approve the pro-European treaties of Nice andLisbon, but this first time approval signals a change, or perhaps a resignation, in the Irish perspective that they have now gone all-in with the EU and will see it through in the hope that the light at the end of tunnel is prosperous, stable and strong. This referendum was a relatively partisan one; supporters of Fine Gael and Labour, the ruling coalition partners, voted yes by margins of 74% to 8% and 46% to 29% respectively, whereas 66% of supporters of Sinn Féin, the strongest opposition, voted against the treaty. Opposing parties were on opposing “Yes” and “No” campaigns at a much larger scale than other nations referendums such as the 2005 French European Constitution Referendum or the 2011 Alternative Vote referendum in the UK, where divisions within major parties were evident. Therefore, there is a direct correlation between the success and public support of Irish political parties and the success of public approval of EU treaties, which should not be overlooked or underestimated.

It was not just Irelandwho approved the Fiscal Pact this weekend; the Latvian parliament also approved it at a 67-29 margin with one abstention. Other nations however, are being more tentative, after all, ratifying it too early can be risky, as there’s nothing substantially litigious stopping the treaty from being amended at a later date. “At present, the German parliament has deferred their ratification process until the end of June; the new French president, Hollande, categorically stated he was unwilling to ratify the treaty in its current form and called for growth measures to be integrated; and myriad other European leaders have expressed profound reservations about its blinkered and reductive economic logic.”[7]Ireland should therefore wait and see if any major changes to the treaty have any significantly adverse effects forIreland before fully ratifying the treaty.

The referendum reveals the willingness of Irish voters to embrace the EU’s fiscal regulations, a major change from the reluctance in previous referendum regarding the EU. The pact will hit the poorest citizens and smallest businesses hard and by the next scheduled general election in 2016, the voters may have changed their minds and elect an anti-european government, so the Fine Gael-Labour coalition must satisfy both their voters and the EU to ensure a stable economy and maximize their chances of reelection. In the long term, national politics and social welfare is likely to conflict with EU economics as the ramifications of the treaty and the political commitment to the EU will be difficult to reverse, but as long as they don’t interfere with each other too badly and the government is responsible, Ireland has a lot of potential for long term success, but first they must survive the short term.

[1] BBC. Ireland votes in favour of EU Fiscal Pact. 1st June 2012. http://www.bbc.co.uk/news/world-europe-18290987

[2] CIA World Factbook. Country Comparison: Budget Surplus (+) or Deficit (-).  https://www.cia.gov/library/publications/the-world-factbook/rankorder/2222rank.html

[4] Bruno Waterfield. Irelands euro treaty vote in the balance after low turnout. The Telegraph. 31st May 2012. http://www.telegraph.co.uk/finance/financialcrisis/9304113/Irelands-euro-treaty-vote-in-balance-after-low-turnout.html

[5] William Clarke. Ireland to Vote on European Fiscal Compact. Investment Europe. 30th May 2012. http://www.investmenteurope.net/investment-europe/news/2180942/ireland-vote-european-fiscal-compact

[6] Declan Ganley. Alone, Ireland Votes on Europe. Wall Street Journal. 31st May 2012. http://online.wsj.com/article/SB10001424052702303552104577436252231545214.html?mod=googlenews_wsj

[7] Sarah Jane. Eurozone Crises Live: Ireland Votes on EU Fiscal Treaty. The Guardian. http://www.guardian.co.uk/business/2012/may/31/eurozone-crisis-ireland-referendum

3 réflexions sur “European Fiscal Compact approved in Irish referendum

  1. It’s a very interesting article; thanks for this analysis!

    I’d just disagree about the last 2 paragraphs:
    – about waiting for ratifying, I must say that I don’t believe that the TSCG will be renegotiated. European leaders may adopt a « growth compact » in addition to the TSCG, but this Treaty shall not be changed.
    – about the potential « conflict » between EU economics and Irish one, I don’t really see why EU economics would be « against » welfare. Welfare is one of the aims of the European integration and the EU is not « ultra-liberal » (unlike what eurosceptics pretend…). Furthermore, the poor citizen and the small businesses are likely to be hit much harder if a country goes bankrupt, so rules to ensure a balanced budget are, in my opinion, positive, though they might create sufferings in the short run.

    In addition, for our french-speaking readers wanting more explanations on the TSCG, we have an article about it: https://aucafedeleurope.wordpress.com/2012/05/18/comprendre-le-fiscal-compact-pacte-budgetaire/

  2. In reverse order, you’re right that the poorest citizens and smallest businesses will be hit harder in bankruptcy, that’s obviously axiomatic. The treaty will effect welfare, i wrote that in the long run it will be for the better, which you seem to agree with, but in the short run, social welfare will inevitably suffer; how else is Ireland going to reduce a 10.7% budget deficit to 0.5% at the same time repaying 5% of debt per annum? Repaying $10bn in a shattered economy, whose GDP has been dropping at approximately $20bn a year since 2008 whilst trying to balance the budget by 10% is for all intents and purposes, impossible to accomplish without affecting social welfare, but as i said, it’s for a stability and growth in the long term.

    I can understand why you’d think so, but i never implied that EU economics was « against » welfare, i wrote « conflict » with national « politics » i.e. the economic ramifications of this treaty will conflict with many aspects of Irish politics. The senior government is not a problem for the EU, they’ll relentlessly impose austerity measures regardless of social cost; it’s the governments’ voters, supporters and backbenchers, which may disagree with EU and the Irish governments economic policy and turn against them, causing conflict between national politics and EU economics

    Despite the fact i agree with you that the renegotiation of the treaty is unlikely, i included it nonetheless for the sake of analysis, it is a possibility, and it provides Ireland with a reason to wait until other members have ratified it, i recently heard that the main motivation the government had for ratifying it early was to display long term stability to attract businesses, lower bond yields etc.

  3. Pingback: Conseil Européen J-5 : où en est-on après les rencontres internationales de ces derniers jours ? | Au Café de l'Europe

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