The Fiscal Compact Treaty, In Ireland's best interest?

national | eu | opinion/analysis Monday April 09, 2012 09:20 by Sonya Oldham - People's Association Watchdog

Does the Fiscal Treaty benefit Ireland?

Would the ESM and Fiscal Compact have prevented the recession?

Not according to the Economist; The pact’s rigidity would make recessions worse, and the new fiscal rule would not have kept Ireland or Spain out of trouble.

Not according to the Davy Report (Bloomberg: Conall Mac Coille, Chief economist); The fiscal compact would have had no bearing on the collapse in Ireland's public finances had it been adopted at the inception of the euro.

Would it improve the situation now?

Not according to the Economist; If private investors aren't taking losses, then other governments are stepping in to make good on obligations. That, in turn, will worsen their fiscal outlook.

Not according to Paul De Grauwe (Centre for European Policy Studies Brussels); The ESM will apply a relatively high interest rate, countries that apply for financing will be subjected to a tough budgetary austerity program. Thus, with each recession, countries will be forced to reduce spending and to increase taxes. Investors who anticipate this will raise the interest rate on government bonds, thereby making the recession worse.

Not according to Constantin Gurdgiev Economist; There is nothing within the Pact that would facilitate either Portuguese or Irish economic stabilization and recovery. When it comes to dealing with the current crisis, the new Pact contains no tools for achieving structural reforms required to arrive at sustainable public finances. No country has been successful in restoring fiscal and external balances after a decade of twin deficits.

And what about the future, will it solve the crisis?

Not according to the Davy Report (Bloomberg: Conall Mac Coille, Chief economist); Markets are unlikely to be reassured by a target that cannot be independently verified or agreed upon by official institutions.

Not according to Paul De Grauwe (Centre for European Policy Studies Brussels); Will the establishment of the ESM shield the Eurozone from future crises? My answer is unambiguous. It will not. In fact it is worse than that. Some of the features that have been introduced in the functioning of the ESM will make it more difficult for a number of countries, in particular Ireland, to attract funds in private markets. These features will have the effect of increasing rather than reducing volatility in the financial markets.

Not according to Constantin Gurdgiev Economist; In medical analogy terms, this week’s Fiscal Pact signed by the 25 EU Member States, is equivalent to a misdiagnosed patient (the euro area economy) receiving a potent cocktail of misprescribed medicines.
In other words, the Fiscal Pact is neither a necessary, nor a sufficient solution to the ongoing crisis of the euro area insolvency. Moreover, it saddles the euro area with a choice of only two equally unpalatable alternatives. The first choice is compliance with the Pact that will lead to a situation whereby a one-policy-fits-all monetary framework will be coupled with an equally mismatched one-policy-fits-all fiscal framework. The second choice is business as usual, with continued reckless borrowing, internal and external imbalances and ever deepening links between the sovereign finances, the ECB and the banking sector balancesheets. In other words, there is a choice of either pushing Euro area down the deflationary, stagnation-inducing deleveraging spiral, or leaving it in the current modus operandi of reckless borrowing. Crucially, the idea of the Fiscal Pact as a tool for resolving the structural crisis faced by the Euro area is equivalent to doing more of the same and expecting a different outcome. Both alternatives are internecine for Ireland, and both increase the probability of an eventual collapse of the euro over the next 5-10 years.

What about the people? will the most vulnerable be protected?

Not according to Paul De Grauwe (Centre for European Policy Studies Brussels); The new financing mechanism that is being set up in the Eurozone will rob countries of their capacity to protect those hit by the recession. This is a major setback that will reduce the social and political basis that is needed to keep the Eurozone alive.

Not according to the Economist; If it grows at a depressed pace or declines, ask who is taking the big real losses. Governments are trying to force losses onto households in order to avoid a financial blow-up.

Will it benefit Ireland economically?

Not according to the Economist; Countries now targeted by markets to reduce government spending and raise taxes have been thrown into recession and are falling short of targeted deficit reduction. The 'Fiscal Compact' treaty would penalise this deficiet to the tune of 1%of GDP, causing further economic pain.

Not according to Constantin Gurdgiev Economist; Ireland will be one of the worst impacted economies in the group. In 2012, Ireland is forecast to post a structural deficit in excess of 5.5% of potential GDP. To cut our structural deficit to 0.5% will require reducing annual aggregate demand in the economy by some  €7-8 billion in today’s terms. Debt reductions over the period envisioned within the pact will take an additional €12 billion annually. For an economy with huge private sector debt overhang, paying some 12% of its GDP annually to adhere to the Fiscal Pact is a hefty bill on top of the already massive interest bill on public debt.
The Department of Finance estimates that in 2015, Ireland will have a strucutral deficit of 3.7%. Bringing that down to 0.5% would mean €5.7 billion worth of extra cuts.

Constantin Gurdgiev Economist; In short, the Pact our Government so eagerly subscribed to is at the very best a continuation of the status quo. At its worst, Ireland and other member states of the Euro are now participants to a fiscal suicide pact, having previously signed up to a monetary straightjacket as well.

People's Association Watchdog (PAW), irelandpaw@gmail.com,