Austerity or Stability Treaty?

The Referendum Order will be signed tomorrow and the campaign for the European Fiscal Compact Treaty will begin in earnest; the next four weeks will be characterised by political posturing, scaremongering and  a litany of falsehoods. The No side, led by Sinn Féin and the ULA (but also including a number of the largest Trade Unions in the State) have declared the treaty an Austerity Treaty, characterised by  Thatcher/Reaganite economics that will deepen rather than solve the Eurozone crisis; the Yes side, led by the Coalition government and Fianna Fáil (but supported by IBEC and the country’s Chambers of Commerce) promulgate the hypothesis of the Treaty as a treaty for stability and jobs in Europe. Such a deep dichotomy of interpretation has led to confusion and misunderstanding amongst the electorate, a Sunday Times/ Behaviour and Attitudes poll published last Sunday (22 April 2012) found that over half of the electorate did not fully understand the Fiscal Compact Treaty and that 32% did not understand it at all. 39% were undecided as to how they would vote; that 39% of the electorate will ultimately decide the outcome of the Referendum.

A Treaty that enshrines Austerity? 

From the beginning of the Eurozone crisis European leaders, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy, have inculcated in the citizenry the need for  Austerity. The ideological battle between proponents of Austerity and the champions of Keynesian economics appears to have been won by the former. The question remains: what is Austerity? The root of the word, austere, refers to an economic policy that is strict or severe in manner, attitude and appearance; of being harsh or ascetic. The real meaning of austerity is the tangible costs to society: in Ireland since the first Austerity Budget in 2008 standards of living have dropped considerably: low income families (the number of which are growing) and the unemployed do not have enough money to achieve a basic standard of living according to A Minimum Income Standard for Ireland, a report funded by the Department of Social Protection. The unemployment figures in Ireland continue to grow, currently standing at 434,800, and there appears, as yet, no policy forthcoming to stem or improve same. The forthcoming property tax, water charges and a raft of other stealth taxes will further deplete household budgets and increase the number of families with below basic standards of living. Further, one in 14 Irish mortgages is in arrears with ninety two new households joining the list a week, leaving those families fearful of losing everything in view of high numbers in negative equity. Austerity has also increased societal and economic inequality, the top twenty percent in Ireland earn 5.3 times more than the bottom twenty percent and according to Fintan O’Toole the last Austerity budget implemented by Fine Gael and Labour was more regressive than the previous three, taking 2.25 percent from the incomes of the lowest twenty percent; 1 percent from the next forty; and a mere 0.8 from the top twenty percent. Regressive flat tax increases like the VAT increase affect the poor disproportionately more than the rich. Little wonder that one in five Irish children have gone to bed or school  hungry. How does this apply to the Fiscal Compact Treaty? Opponents of the treaty, mostly left-wing parties and Trade Unions, argue that the Fiscal Compact will involve continuing with harsh Austerity budgets until the strict limits on debt are achieved. The Government have already signed up to €8bn worth of cuts by 2015 in their deal with the troika and that to implement the provisions of the Fiscal Compact would involve a further €6bn worth of cuts in the near future: further cuts to essential public services, further cuts to the budget of the Department of Social Protection, further increases in pre-existing taxes and imaginative new taxes; further numbers of families, essentially, below basic standards of living. To achieve 3% of annual budget deficit and a national debt budget of no more than sixty per cent of GDP (currently 120%) somebody will have to pay, and it is my fear that those who will have to pay will be those who have been paying all along: ordinary workers, families and the unemployed.

But, Austerity Works- right?

No. Christine Lagarde of the International Monetary Fund (IMF) and former champion of Austerity as French Finance Minister, along with representatives of the World Trade Organisation (WTO), World Bank and the Organisation for Economic Co-Operation and Development (OECD) all agree that Austerity in and of itself is not the answer to the Eurozone crisis. These, the global economic establishment, have declared that governments across Europe (and globally) can only manage debt reductions in ways that encourage growth and create jobs: to reduce inequality through labour reform and progressive tax measures. Ireland has experienced four years of Austerity and thus far unemployment has not been reduced (in Spain and Greece similarly draconian Austerity has caused youth unemployment to exceed 50%);  rather than a reduction in the national deficit these years of Austerity have seen the deficit rise from €13bn in 2008 to €20.5bn in 2011. So Austerity hasn’t alleviated the unemployment crisis, hasn’t ameliorated the national debt crisis and has exacerbated social inequality: why are we continuing with this masochistic, self-destructive economic policy? Because the received wisdom from Europe (particularly Germany) is that profligate over-indulgence and spending in the periphery (as opposed to economic frugality at the core, read: Germany) is the primary cause of the Eurozone crisis and the periphery must now pay the price for its collective excesses to ensure that contagion doesn’t occur. This argument is not substantiated by examination of the facts. The evidence illustrates that deficit spending was not prevalent among the periphery pre-crisis, that Ireland recorded surpluses throughout the period and that Germany, far from being a paragon of virtue, recorded fiscal deficits in excess of the Maastricht criteria (alone with Greece); similarly national debt ratios illustrate Ireland at a healthy 36% of GDP prior to the crisis whilst France and Germany both exceeded the Maastricht criteria of 60% of GDP. Pat Rabbitte, of the Labour Party, recently called on the ECB to “come out in public to acknowledge that Ireland took a hit in order to prevent the contagion in the European banking system and that we deserve some recognition for that”, this illuminating quote from Rabbitte is much closer to the truth as to why Ireland and other countries in the periphery are on the receiving end of a German-led fervour for Austerity.

“A Treaty for Jobs and Stability”; European Referenda Deja Vu:

The Yes side, led by Austerians Fine Gael, Labour and Fianna Fáil (supported enthusiastically by IBEC) have begun the campaign by proliferating an easily dis-proven fallacy: that this treaty will bring stability to the Eurozone and protect and/or create jobs in Ireland (and Europe as a whole). On this issue there must be no equivocation or obfuscations: there is no provisions within this treaty that encourage stability or growth or which will create jobs. Growth and job creation are borne out of government stimuli; government stimuli are conspicuously absent from the Fiscal Compact. I would challenge any supporters of the Treaty to elucidate through reference to the text of the Treaty (available at top of this blog) how this Treaty will protect or create jobs in Ireland or Europe. There is hope that apparent President-elect in France, Francois Hollande, will demand a re-negotiation of the Treaty to include stimuli programmes in the hope of encouraging growth and creating jobs, however, there are at present no such provisions, thus, the Treaty cannot be passed on a vain desire for future jobs that are not provided for therein. To assert, as the Yes side have done, that the Treaty will lead to Eurozone stability is a falsehood too many. It is clear from the provisions of the Treaty that the signatory states, rather than stabilising, will be heaved in to further disquiet, societal inequality and much worse and painful austerity measures. It is inconceivable that a further €6bn of cuts (bringing the total of future cuts to €14bn) for Ireland can do anything other than to further depress a floundering economy. The Fiscal Compact will do nothing to solve the causes of the Eurozone crisis; the Compact is a response to the effects rather than the causes of the Eurozone crisis. The causes are as follows:

1) Germany operated at the core of the European banking system lending excessively to the periphery states which were always at a competitive disadvantage relative to German strength;
2)Other countries borrowed German savings to pay for goods that Germany makes but doesn’t want, making Germany a significant lender;
3) When this borrowed cash flows in to peripheral countries, such as Ireland, prices go up further worsening competitive imbalances including the cost of labour, housing prices etc;
4) The banks operated with a short-term vision; they saw greater supply of savings from within Germany and greater demand for loans outside of Germany;
5) The side effect of this is increased tax revenues on the periphery and increased Government expenditure; when the collapse happened revenues collapsed and there is a fiscal problem.
6) Excessive lending leads to current account imbalances and the current account deficits on the periphery led to more severe economic contraction and damaged banking systems with increased risk of contagion to the core.

Thus, the Fiscal Compact will not bring stability until the causes of the Eurozone crisis (rather than its effects) are properly understood and corrected.

The Fallacy of Denied Assistance in the event of a ‘No’ Vote: 

Over the course of the following referendum campaign the primary tool of ‘Yes’ side scaremongering will be the fallacy that Ireland will be denied any emergency funding should it so require in the event of a ‘No’ vote. Government ministers (Michael Noonan, Eamon Gilmore  and Enda Kenny chief among them)  are aware that the economics of this treaty are dire and that there are few reasons to ratify the Treaty, aside from fear of Germany; thus, they are promulgating the idea that Ireland will be isolated and helpless in the event that it requires a second bailout. First, it is surprising to me that the Government seem to have forgotten their own guarantees to the people that a second bailout would not be required under any circumstances and that we would be returning to the markets later next year. Further the idea that Ireland would be entirely isolated in Europe and that European leaders would allow the Irish economy to sink and thus default on its debt to European banks causing the dreaded contagion is ludicrous. Fianna Fáil were coerced by our esteemed European “partners” to accept the first bail-out to avoid contagion to the core- they will not allow it to happen under any circumstances. Should Germany recklessly refuse any emergency funding to Ireland when the inevitable happens the Government can easily apply to the IMF for assistance. This is corroborated by a front page article in today’s Sunday Times which quotes an IMF representative as saying there is “no reason” why the IMF would not lend money to Ireland if it required assistance and that “any IMF member nation can make an application to us for a loan”. When questioned whether there were any reasons the IMF would refuse assistance to a member nation  the representative stated that only non-members of the IMF are precluded from applying for loans and non-membership is the only conceivable case for refusal. So, should the state require a second bailout (which this Government has steadfastly denied it would) there would be funding available, in all probability from the ESM, but also from the IMF.

The only reason proffered by supporters of the Treaty for its ratification is the threat  that Ireland would be cast adrift from Europe, as well as emergency funding should it vote ‘No’ despite the many and varied reasons why a ‘No’ vote is better for Ireland. Interesting that our European partners have coerced Ireland into damaging austerity measures to avoid contagion of the banking crisis and now they claim that Ireland should vote ‘Yes’ to avoid contagion of opposition to the Fiscal Compact in Europe (Professor Zaki Laidi in yesterday’s Irish Examiner): perhaps Europe needs to be reminded that Ireland is not its buffer against crises; perhaps Ireland needs to assert its own national interests. It appears that opposition to Austerity and the Fiscal Compact is growing, both in Ireland and Europe: the 58% rate of non-payment of the household charge could portend to a greater level of protest in Ireland whilst the Dutch and Romanian governments fell this week as their people rejected Austerity; lastly, the probable election of Francois Hollande in France may signify a change of direction. Ireland can lead this rejection of Austerity and Europe’s change of direction in economic policy. All it requires is a ‘No’ vote on 31 May.