Friday, June 01, 2012

A victory for Merkel: Irish voters approve fiscal suicide pact

The "No" advocates are conceding that the Irish that the referendum on Angela Merkel's fiscal suicide pact is going to pass. The vote on the Intergovernmental Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union was Thursday. Although votes are still being counted, it seems to be passing by the margins indicated by pre-election polls, on a low voter turnout: Referendum set to be passed by comprehensive margin Irish Times 06/01/2012

Angie's fiscal suicide pact basically outlaws Keynesian economic stimulus policies and in practice gives Germany (Angie) a practical veto control over the national budgets of the participating countries. The big battle over the treaty will be this month, as French President François Hollande pushes for amendments to treaty to include fiscal stimulus before France will approve it.

Two trade unionists from the British-Irish union UNITE testified about the effects of the treaty before the Irish Oireachtas' (Parliament's) Sub-Committee on the treaty on 04/18/2012 (the Irish Parliament is formally called the ). One of the two, Michael Taft, described what he sees as six problems with the fiscal suicide pact:

The fiscal treaty will require substantially more austerity measures in the medium term. ... This level of austerity on top of what the Government has already planned could cut the nominal GDP growth by up to 2% and this, of course, will result in lower employment, driving up the live register and cutting wages and incomes.

The fiscal treaty will depress growth in the eurozone. ... Most eurozone countries will have to undergo some form of fiscal consolidation over the next two or three years which, in some cases, will be quite substantial. The German Institute for Macroeconomic and Economic Research estimates the effect of this fiscal consolidation on eurozone growth to mean that it will average a 0.5% each year up to 2016. That is how far down eurozone growth could be driven if the fiscal treaty provisions are implemented. ...

Even the Government regards the structural deficit as unrealistic. The structural deficit is a hypothetical. It is derived first by comparing actual GDP with the hypothetical potential GDP. From this, the output gap is derived - another hypothetical. To determine the structural deficit, a cyclical sensitivity measurement is applied - yet again a hypothetical. A structural deficit rests on layers of hypothetical measurements inside a model with variables that cannot be observed in the real world. ... Under its model, the EU projects that by 2014, the Irish economy will actually be overheating, that is, that we will be back in a boom. This is not only unrealistic but it is absurd. However, the Government should explain why it is calling on people to give constitutional force to measurements and hypotheticals which it has dismissed as highly uncertain and unrealistic.

The fiscal treaty will limit the amount of counter-cyclical measures future Governments can employ during downturns. Take the example of the Irish economy falling back into recession later this decade. Under the fiscal treaty, we will still be required to run primary surpluses, that is, the budget surplus, excluding interest payments. Given this constraint, it is unlikely that automatic stabilisers will be allowed to operate in full, never mind proactive fiscal measures to counter the downturn. Nor should we rely on provisions for temporary departures in the event of a severe economic downturn. Spain is heading back into a full blown recession and yet no temporary departure is being allowed. The treaty has little to do with a sustainable counter-cyclical macroeconomic framework and all to do with self-defeating deficit reduction via deflationary fiscal adjustments.

The treaty will perpetuate instability in the eurozone - in the first instance by depressing economic growth during a period of stagnation. This will undermine confidence in our economy’s ability to generate future revenue needed to repay its debt. Again, witness Spain. Increased austerity measurements are only pushing it into and not away from a bailout as market confidence is drained. If a number of temporary departures are granted out of necessity, combined with changes in structural deficit measurements so as to allow countries to more easily achieve their targets, this will undermine confidence in the actual framework itself. We saw this when the European banks underwent not one but two stress tests. Market investors had no confidence in these tests and eventually the ECB was forced into an unprecedented release of €1 trillion to prevent the European banking system from freezing up. If investors believe the fiscal compact is being similarly manipulated, the process will perpetuate the crisis.

The debt reduction rule will lead to an unsustainably low level of government debt, falling to levels of 20% of GDP or less. Government debt provides a secure investment for financial institutions, in particular pension funds and if this is removed such funds will be forced to introduce higher risks into their profiles and may end up creating bubbles in equities and property. [my emphasis]
The Irish Times' live blog 06/01/2012 on the referendum vote count reports:

[Anti-treaty Left nationalist party] Sinn Féin deputy leader Mary Lou McDonald says it was clear throughout the campaign that the Labour party was on the wrong side of the argument when its traditional supporters were considered. “The Labour party were on the wrong side of the debate in respect of the trade union movement right across Europe and the wrong side of the debate laterally even in terms of their own sister parties across the EU,” she said.

"Austerity hasn’t worked and [Labour Party leader and deputy prime minister] Eamon Gilmore knows that as surely as I know that. They have promised big and we want to see them deliver on it. We will be reminding them of all the promises and assertions they have made."
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