29th February 2012
Yesterday the Irish government announced that it will be holding a referendum on the latest European Union plans for a fiscal compact. However there is already a consensus building that in the words of 1066 and all that this is a good thing and the vote should be yes. Even in announcing the vote the Irish Taiosearch told everybody this.
"I believe it is in Ireland's national interest that this treaty be approved"
No doubt most of the Irish political class and media will fall behind this plan. However as their decisions, such as the 2008 guarantee of Ireland's banks, have so far been nothing short of disastrous if anything that alone should tempt people to vote no! The book "Ship of Fools" chose its title well.
An Elephant in the room
This is the issue of no votes on European issues in Ireland. Irish voters rejected the Nice referendum in 2001. It was passed following a re-run in October 2002. The Lisbon referendum was rejected in 2008, before also being passed a year later.
However I do not think that they should give up trying and this time they are much less likely to be forced to vote again as an Irish yes vote may not be required as only 12 of the 17 Euro states need to approve it.
What is the fiscal compact?
It is a similar concept to the Growth and Stability Pact of 1997. If you are thinking about the sanity of repeating something that failed you are already on the right track! Indeed the rule now is that a "balanced budget" is required rather than the previous maximum deficit of 3% of Gross Domestic Product. Although this being the Euro zone they do not consider a budget to be balanced at zero.
"This will be achieved if the annual structural government deficit does not exceed 0.5% of nominal GDP"
And also if you do exceed the target you will be fined which will mean that you go further over the target! The March Hare would love that bit but I can already see Alice's brow frowning at the illogic.
Err can Ireland achieve the target anyway?
I think that there is a danger of the March Hare dominating this debate. If Alice were here now she would point out the latest forecasts from Economic and Social Research Institute. They tell us that as a percentage of her Gross Domestic Product her fiscal deficit was 31.3% in 2010, 10.1% in 2011 and will be 8.6% this year and 7.5% in 2013. You may have spotted that none of these are anywhere near 0.5%!
Even worse the progression towards the target is rather slow and if there are any "surprises" may not happen at all. Indeed it relies entirely on Ireland being able to export which is a laudable but risky matter to rely on. If we look at Ireland's own economy then private consumption is expected to fall by 1.8% this year and 1% in 2013 and public expenditure is planned to fall by 2.5% this year and 2% in 2013.
In the meantime according to the same set of figures Ireland's general government debt is expected to be 115% of Gross Domestic Product this year and 120% next. At this point one might recall that in the Greek bailout 120% was seen as a threshold which it implied was one between solvency and not.
So problem one is that Ireland is voting on something which in any realistic horizon looks unachievable.
Actually it is worse that you think
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