"Irish Voters are unlikely to endorse a European Austerity Treaty in 2012" by Nat OConnor

Irish democracy may become Europe’s focus in 2012, if the Merkel-Sarkozy ‘stability and growth union’ proposals are put to a vote of the Irish people. Any change to the Constitution of Ireland requires a referendum. The Irish Attorney General will examine the final wording of the fiscal compact in March before advising whether these proposals require constitutional change. But even if she concludes that a popular vote on this is not required, her decision may be challenged in court.

Every EU treaty to date has required a referendum, as they transfer sovereignty from the Irish people to the European institutions. Even if the fiscal compact is not strictly a European Union treaty, it may have the same constitutional implications.

The two most recent EU referendums were initially rejected by the Irish people. Following further information and guarantees, they were subsequently passed.

Results of Irish Referendums on European Treaties[1]

As the poll results show, Irish support for EU treaties has waned over time. Lower turnout at referendums has coincided with less support for treaties. However, the subsequent votes in favour of Nice and Lisbon cannot be explained by increased turnout alone. The clarification and guarantees sought by the Irish government were necessary to assuage public doubts and were influential in changing people’s minds. For example, the Lisbon treaty re-run was accompanied by a guarantee that the Irish government cannot participate in any future European army, to preserve Ireland’s military neutrality.

Even without the complicating factors of economic collapse and austerity, the trend is against the Irish people voting in favour of EU treaties without being first convinced of their merits. In the particular case of the fiscal compact proposals, there are reasons to believe that any referendum would be difficult to pass. This would, at a minimum, delay the implementation of the new rules in Ireland’s case, and could encourage public demand for referendums in other affected countries.

Many people in Ireland are outraged at the way in which private banking sector debts have been transferred to the taxpayer, in blatant contradiction of the principles of fair competition and the normal operation of market economies. Bondholders and other investors in Irish banks should have been badly burned, but instead the blanket guarantee given to Ireland’s banks by the previous government brought about a massive socialisation of private debt, which has imposed heightened austerity measures on the general population, above and beyond what would have been required to repair the damage from the property crash in the domestic economy. The nationalisation of banking debt risks bankrupting the country and – in that context – statements from European leaders that are seen as arrogant or domineering towards Ireland are likely to fuel opposition to any European treaty.

Leaving aside the politics of EU referendums, there are solid economic reasons to be sceptical about the fiscal compact from an Irish perspective. The Irish economy collapsed in large part due to internal problems. The property sector was massively over-heated due to tax breaks, speculation and the availability of cheap credit. Yet, throughout the boom, Ireland excelled at meeting the Stability and Growth Pact targets, keeping its deficit well below three per cent and reducing its national debt to as low as 25 per cent of GDP in 2006. Anyone relying on these indicators to judge the sustainability of the Irish economy was entirely misled. In that context, the Irish example gives good reason to be sceptical about the benefits of enshrining the same targets in the constitutions of European member states.

Moreover, there is a much more profound mistake being made, if the final proposals are anything like the current ones. It is bad practice for any government to enshrine legislative and policy detail in its national constitution. Yet that is what is being proposed in the fiscal compact, which essentially seeks to outlaw counter-cyclical fiscal policy in favour of an ideological preference for pro-cyclical policies that, the evidence suggests, are likely to exacerbate any future recessions. The separation of constitutions from legislation may seem like a subtle distinction, but it is crucial to maintaining broad support among parties and people generally for their national constitution and the institutions created by it. If one party uses its time in government to put its preferred policies into the constitution, this invites the next government to remove them again. This politicises constitutions in a way that is dangerous for democracy. The mandate of governments does not extend to dictating policy beyond their term in office. Seeking to use constitutional provisions to do so is profoundly undemocratic.

Such constitutional niceties matter in Ireland, not least to those who may take the government to court to force a referendum on any treaty. However, the attitudes of the vast majority of Irish voters are likely to be more significantly affected by the current state of the economy. Politics and economic policy in Ireland are currently dominated by the deficit and the scale of the national debt.

Given the ECB’s singular focus on low inflation, there is little scope for high nominal growth to alleviate debt. It is therefore a mathematical question whether or not a country’s debt burden is too large to repay. As pointed out recently by Henning Klodt of the Kiel Institute for the World Economy, the repayment of Greek debt would require a surplus of over ten per cent of GDP which “not a single industrialised country has ever achieved in recent decades.”[2] In the Irish case, some argue that national debt (which will exceed 100 per cent of GDP) should more accurately be seen as a percentage of GNI, which is significantly lower than GDP, in which case, repayment of at least the banking component of the Irish national debt on current terms looks even less feasible.

Others have written about various viable proposals for solving the Eurozone crisis in a more sustainable manner than that being proposed in the Merkel-Sarkozy fiscal compact. Such proposals include some form of Eurobonds, debt write-down and large-scale purchase of national bonds by the ECB. Such policies do not even require fiscal transfers between member states in the long-term, as an adjusted annual contribution of EU member states to the EU’s funds or European-level taxes (such as financial taxes) could be used to compensate for short-term imbalances.

The European Central Bank is crucial to any solution. There is growing acceptance of the need for it to function as a lender of last resort. Other changes to its mandate should also be considered, such as the goals of sustainable output and full employment alongside controlling price inflation. Giving a banking licence to the EFSF is another suggestion worth investigating, if the ECB mandate cannot be sufficiently broadened.

If the Irish are to be persuaded to vote in favour of any new European treaty, there will need to be a transformation of what is being proposed. The European crisis has been dominated by national interests, which have weakened the more enlightened self-interest of every member state in helping each other to recover. Not only are there direct benefits (such as the 50 to 60 billion euro benefit to Germany from euro membership in the last two years – according to German development bank, Kreditanstalt für Wiederaufbau [3]), but the strengthening of the EU economy as a whole would increase demand for members’ goods and services. Alongside the economic arguments, there also needs to be a re-articulation of Social Europe, with a message of solidarity and support for the creation of sustainable jobs in every member state. Many Irish people are already suffering from a series of harsh domestic austerity budgets. They are highly unlikely to vote in favour of a European treaty enshrining further austerity.