Despite Yes Vote, Fiscal Treaty Outcome Still Uncertain

The people of Ireland have spoken. But what exactly have they said? The vote to accept the Stability, Coordination and Governance in the Economic and Monetary Union – or, more snappily, the fiscal treaty – was certainly decisive: around three in every five ballots cast were in favour of the treaty. There were no great regional differences in the ‘yes’ vote across the country. Turnout was low, but not drastically so.

Yet, despite all this, it difficult to say what the implications of the yes vote will be, both for Ireland and for the rest of Europe. As the results rolled in on Friday lunch team, a sanguine Eamon Gilmore told RTE News at One that the referendum result will provide a platform for Ireland to get back to the magical ‘g’ word, growth.

The Tanaiste, sadly, gave no indication of how accepting a treaty designed to enforce ever-tighter fiscal strictures across a Eurozone in the midst of a deflationary cycle would bolster the Irish economy. Indeed on its own terms the treaty is more likely to cost Irish jobs than provide the scaffolding for employment growth.

The treaty, ostensibly designed to alleviate the Eurozone crisis, commits member state governments to maintain budgets that are either balanced or in surplus. Under the terms of the treaty, annual structural deficit that exceeds 0.5 per cent of Gross Domestic Product will run the risk of a fine from the European Court. Meanwhile, government debt is not to exceed 60 per cent of GDP. Any state whose debt is in excess of this figure must reduce it by an average rate of one-twentieth per year.

On BBC Newsnight last week, Paul Krugman gave a succinct, acerbic analysis of the folly of cutting public spending (the main motor of growth in a contracting economy) during a time of depression. ‘Austerity in these conditions doesn’t even work in fiscal terms, because it shrinks the economy now and also shrinks the economy in future,’ the Nobel Prize winning economist said, before going on to compare the behaviour of UK and European governments to the medieval practice of bloodletting the ill.

The latest Euro treaty does little to address arguably Ireland’s greatest problem: the tsunami of household debt contained within the country’s failed banking sector. Writing in the Financial Times recently, Irish economist David McWilliams noted that both Ireland and Spain had lower public debt ratios than Germany when the crisis hit in 2008 – the problem is that private debt had soared during the boom. Since Ireland joined the euro a little over a decade ago, levels of household debts more than doubled.

If treaty is, in Eamon Gilmore’s words, to ‘stimulate the economy and create jobs’, it will only do so to the extent that it helps to create greater cohesion within the Eurozone and, ultimately, a change in German policies.

The fiscal compact makes no provision for much needed initiatives to ease the burden on indebted states and individuals, such as the issuing of Eurobonds, the adoption of an expansionary monetary policy or European-wide backing for the banking sector. Some, or all, of these measures will need to be enacted if the Eurozone to return to something akin to economic health.

In the end, Ireland’s comfortable yes vote was motivated as much by fear and uncertainty as any belief in the intrinsic wisdom of the treaty itself. A bad-tempered campaign, marked on both sides by accusation and counter-accusation did little to assuage an electorate that has every right to be worried, having witnessed a cataclysmic boom and bust, a protracted EU/IMF bailout and, now, a flatling economy.

A closer look at Thursday’s vote also reveals a growing rift in Irish society, between those at the razor’s edge of austerity policies and those relatively more cushioned. Solidly working class constituencies, such as Dublin North-West, voted No in far greater numbers than middle class or rural areas. This should be a huge worry for Eamon Gilmore and his Labour party, whose support has halved to just 10 per cent since last year’s general election.

Ireland’s yes to the fiscal treaty is unlikely to change the course of the crisis in the Eurozone, but the referendum could mark a turning point in Irish politics. Sinn Fein, the driving force behind the well organised No campaign, seems to have established itself as the anti-austerity party. Opinion polls put support for the republicans at 24 per cent, behind only Fine Gael. If Ireland’s economic outlook does not improve in the coming year, the next election could really change the country’s political map.

This article originally appeared in the Irish Post.