Wednesday, 18 April 2012
Sub-Committee on the Referendum on the Intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union DebatePage of 3
Chairman: This sub-committee is now in public session. I remind everybody - our members, our guests and those in the public gallery - that their mobile phones need to be switched off. It is not good enough to put them in silent mode because they will interfere with the broadcasting equipment. I ask people to turn them off now, please.
I welcome everybody to the fifth meeting of the Sub-Committee on the Referendum on the Intergovernmental Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union. Following the decision of the Government to hold a referendum on the treaty, this sub-committee was set up by the Joint Committee on European Union Affairs, and its intention is to host an extensive, informed and balanced debate on the treaty and on issues regarding both Ireland and the European Union. This week we are hosting an intensive series of meetings. We had some of the main party leaders in with us yesterday and we asked people about their views on the treaty. This morning we will focus on the realities of what the treaty means for Ireland - understanding the facts. Addressing the committee this morning are: Mr. Jimmy Kelly from the UNITE trade union; Mr. Michael Taft, also from UNITE; Ms Megan Greene from Roubini Global Economics; and Professor Brian Lucey from Trinity College. Before we ask them to make their presentations, I must mention the issue of privilege. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are about to give to the committee. If they are directed by the committee to cease giving evidence and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence related to the subject matter of today’s proceedings is to be given, and asked to respect the parliamentary practice to the effect that they should not criticise anybody inside or outside the House by name or in such a way as to make him or her identifiable.
Mr. Jimmy Kelly: On behalf of UNITE I thank the committee for the opportunity to put forward the union’s perspective on the fiscal compact treaty. It is important that this process has an input from as wide a range of people as possible. We have pride in the process that is being engaged in here and in the fact that the citizens of the Irish Republic have a view and are entitled to express it in a referendum. I do not think we should apologise to anybody for having those rights.
The eurozone economy and the European project itself are put at grave risk by this treaty. It addresses the wrong question and therefore comes up with the wrong answer. The crisis does not stem from recklessness in State spending but from the recklessness of financial institutions. This crisis is unfortunately still continuing. In Ireland we are all too aware of the direct cost of reckless banks and property speculation. We are also aware of the economic burden this recklessness has imposed on the State in terms of unemployment, falling incomes and collapsed tax revenue, and we are aware that had the fiscal treaty been in place ten years ago it would not have averted the disaster in Ireland nor changed budgetary policy one bit. Instead, the fiscal treaty targets the State and the public sector with a set of rules based on arbitrary targets and hypothetical measurements.
I want to be clear why this treaty is bad for workers and why workers should reject it. The fiscal treaty will lead to further austerity measures, which no one doubts. UNITE estimates that this could result in an additional €8 billion or more in spending cuts and tax increases over the next few years. This will have a significant impact on workers’ living standards.
It would cut economic growth which will inevitably lead to lower job creation. Currently, more than 14% are employed and another 10% are under-employed or can only find casual work. Even more alarming is that the IMF, in its last review in March, estimated that even by 2017, unemployment will be above 10%. Additional austerity over and above what the Government is already planning will depress domestic demand even further. This will slow the already low level of job creation. We will be facing into a decade of high unemployment and emigration.
The European Commission has projected that even in 2015, real wages will still be falling, that is, wages after inflation. Between 2012 and 2015, average real wages are projected to fall by nearly 0.5% each year, which will reduce domestic demand and job creation. This will put downward pressure on wage growth. We will have a situation where inflation is eroding workers’ living standards at the same time as the Government is increasing taxation and households are trying to escape from extraordinarily high levels of debt. This is a recipe for continuing growth and falling living standards.
Additional austerity measures will mean even more cuts in investment, public services and social protection. Lower investment will mean fewer jobs created. Additional cuts in public services will further undermine already inadequate health and education services for workers and their families. Cuts in social protection will, in addition to falling real wages and increased taxation, take even more money out of workers’ pockets, whether that is cuts in child benefit, unemployment benefit, pensions or illness and sickness payments. These are the three reasons UNITE is calling on workers to reject this treaty. It will lead to lower job creation, more real wage cuts and degraded public services and social protection.
This is the reason the European trade union movement is also opposed to the treaty. We know that austerity does not work. We know that the very premises of the fiscal treaty are counterproductive to the point of absurd. To date, Irish Governments have introduced €25 billion in spending cuts and tax increases and yet debt is still rising and the deficit remains unacceptably high. We have one of the highest levels of unemployment in the EU 15. We have the third highest level of material deprivation in the EU 15, with poverty levels rising at a phenomenal rate. Three quarters of a million people are at risk of poverty, with hundreds of thousands more living just marginally above the official at risk poverty level. We have fallen back into recession, with domestic demand falling at the fastest rate since the dark days of 2009.
Now we are being told that all we have to do is more of the same and things will improve. We ask, is this credible? Does anyone really believe this? It is worth noting the significant number of economists from across the political spectrum who have criticised the treaty and its provisions. They have criticised both the measurements and the targets. Indeed, there is very little positive that can be said for the treaty. Few believe it will work or that it constitutes a sound economic approach to the crisis we face.
However, some Ministers have attempted to coerce the Irish public by claiming that if we do not pass the treaty, we will be left without any institutional funding in case we cannot return to the markets. This is despite the fact that Ireland is entitled to continued funding under the current European Financial Stability Fund, something which was unequivocally supported by the Heads of eurozone Governments last year and as recently as 29 January this year after the new European Stability Mechanism was set up. In their statement, which was highlighted by the Minister for Finance in the Dáil only a few weeks ago, they stated, “We will continue to provide support to countries under a programme until they have regained market access provided they successfully implement their programmes”.
In addition, Ireland complies with all the conditions for renewed IMF funding in the event we cannot return to the markets. The issue of Ireland’s future financing is a non-issue. We will not be stranded or isolated. Were the EU to deny the funding to which Ireland is legally entitled, it would defeat the very purpose of the new European Stability Mechanism because in such a scenario, it would be unable to safeguard the financial stability of the eurozone, the only purpose for the establishment of the ESM.
The debate should be open and honest. It should not be undermined by scare tactics nor should the Irish people be insulted by sound-bite appeals to our desire for stability and recovery, which the fiscal treaty cannot deliver. We should be told the truth, the cost of the treaty should be laid out for the people as should the cost to Ireland and the eurozone in terms of austerity, unemployment, poverty, falling incomes and economic stagnation. If this were done, UNITE is confident the people will reject this treaty.
Mr. Michael Taft: On behalf of UNITE, I would like to raise six points in regard to the fiscal treaty. The fiscal treaty will require substantially more austerity measures in the medium term. With the Government estimating the structural deficit at 3.7% in 2015, we will need to reduce that to 0.5%. This could require fiscal adjustments, that is, spending cuts and tax increases of €8 billion on top of the current fiscal consolidation schedule which amounts to between €8 billion and €9 billion. 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. This will have an impact on our external demand. 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. It is, therefore, essential that the Government provides its own estimate of the additional fiscal contraction needed to meet the structural deficit target, the impact this will have on the domestic economy and the impact it will have on our external demand or exports from the sustained fiscal consolidation in the eurozone.
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. That is why it is said that if one asks ten economists to come up with a structural deficit, one will get 20 different methodologies and 40 different results. It is little wonder then that the Government labelled the EU Commission’s method for measuring the structural deficit as highly uncertain and unrealistic, and for good reason. 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.
The fiscal treaty will undermine productive economic growth. Let us assume the fiscal treaty was in place at the start of the Celtic tiger boom. Between 1990 and 1997, the Irish economy suffered from severe structural deficits, up to ten times the amount that would be allowed by the fiscal treaty. In addition it increased public expenditure well in excess of its long-term growth rate while at the same time cutting tax revenue. It did everything in violation of the fiscal treaty and the revised stability and growth pact. During that period, however, the then Government ran budget surpluses and reduced overall debt at a faster rate than required under the fiscal treaty. When we fast forward to 2007, we had structural balances and even surpluses. Under the fiscal compact rules, the Government could have increased public spending and-or cut taxes even further and still remained compliant. We know the outcome of that. This clearly shows the incongruity of the fiscal compact rules. During a period of productive economic growth, the treaty would have depressed growth and employment, however, this same treaty would have validated an economy which was overheating on speculative growth.
Regardless of a “Yes” or “No” vote, Ireland has guaranteed access to institutional funding. The main source of future institutional funding is the programme we are currently in, the European Financial Stability Fund. Ireland has until July 2013 to make application for a further round of funding. The legal right to this funding is guaranteed by intergovernmental agreement and reaffirmed by the heads of the eurozone governments. Though Ireland has exceeded its quota of financing under IMF rules, we comply with all four conditions for an exceptional waiver. This will clear the way for a second round of funding from the IMF. Those who drafted the European Stability Mechanism, the ESM treaty, wisely inserted clauses that provide manoeuvrability in negotiations with any eurozone country in need of financing, regardless of the fiscal treaty. In particular, they inserted references to new financing under the ESM, which would have been unnecessary if all the financing under the ESM was strictly conditional on a “Yes” vote. Clearly they factored in a situation whereby a second bailout for Ireland or indeed Portugal would constitute rolled over rather than new financing. European governments are not going to risk the financial stability of the eurozone by isolating any member state from both market and institutional funding, for this would contain an incalculable contagion effect. Even a hint that this might happen would have sever severe destabilising consequences. For these combined reasons, the doubt is not whether we will continue to access institutional funding, but whether we can avoid a second bailout under the current deflationary policies that the Government is pursuing. In this regard, the signs are not good.
Ms Megan Greene: I thank the joint committee for inviting me to speak. In my presentation, I will outline why the fiscal compact is so incredibly misguided and then I will give the reasons that it is overwhelmingly in Ireland’s best interest to accept it anyhow.
There are many myths surrounding the eurozone crises, the biggest one is that this is a fiscal or a debt crisis. Above all else, this is a balance of payments or a growth crisis. The fiscal compact does absolutely nothing to address the growth question in the eurozone, particularly in the weaker countries. This fiscal compact has been touted as the first steps towards a fiscal union and in and of itself it is nothing of the sort. Essentially the fiscal compact is the way that Germany and the other core countries can insist that all of the other countries in the eurozone look much more like Germany. What that actually achieves is that it institutionalises this asymmetric adjustment in the eurozone, whereby the core countries are not adjusting at all but the peripheral countries are doing all the adjustment. All that does is ensure the peripheral countries are going to go further into recession. That does not help with the growth strategy for the peripheral countries in particular.
The fiscal compact has already been undermined by Spain in the first instance. Spain has already pushed back on the fiscal target it agreed with the European Commission and got away with it. That is partly because Spain has agreed that it would still hit its target for next year, a deficit of 3% of GDP. It is very unlikely that Spain will hit its targets for this year or next year, but to date, the European Commission has not pushed back. It seems there is slippage on these fiscal targets leading up to the fiscal compact. Furthermore the Netherlands will have a very hard time meeting all of the requisites of the fiscal compact. Finally, if Mr. Hollande wins the French election, he has said that he would like to renegotiate the fiscal compact.
There are severe questions about the legitimacy of the fiscal compact. Let us not forget that the punishment for not actually reaching the targets set out in the fiscal compact is fines. On the face of it, it is absurd to foist a bigger debt burden on a government that cannot meet the targets. The fiscal compact is completely misguided but as I said, I think Ireland should support it. There are two main reasons for my assertion. First, one must look at the cost of Ireland not supporting the fiscal compact and understand it. If Ireland does not support the fiscal compact, the fiscal compact will still go ahead, but the implications for Ireland are great. Ireland will need a second bailout. Let us look at the growth dynamics beginning with domestic demand that I have included in my powerpoint presentation. Domestic demand is still contracting. In fact, the contraction over the past four quarters only accelerated as last year went on. This is likely to continue, given that unemployment is stubbornly high and rising.
Ireland is entirely reliant on foreign demand for growth. I have provided some of the Roubini Global Economics forecasts for GDP growth in Ireland’s biggest export markets and, as members will see, they look dismal. It is unlikely that Ireland will benefit from significant foreign demand. I have also included our growth forecasts for Ireland, which as members will note, are significantly lower than the Government’s. I have tried to recreate the Government’s forecasts using our models and could not do it.
The second reason that Ireland must support the fiscal compact is that the eurozone crisis is back in full force after a slight lull after the ECB’s three year long-term refinancing operations. Bond yields for Spain and Italy have risen again. I think Greece will probably choose to exit the eurozone as early as the end of next year and that Portugal will be 12 months behind it. Ireland will have a significant choice about how it will return to sustainable growth. Given that Ireland’s growth model is based on Ireland serving as a springboard for multinational companies looking for access to the wider EU market, Ireland needs to remain on good terms with its EU partners and protect its relationship with the EU, more importantly even than protecting its relationship with the eurozone. If Ireland were to vote down this fiscal compact treaty, it would be putting its relationships with other EU countries in jeopardy.
I have previously expressed my concerns about the fiscal compact and the treaty underlying it. These concerns are primarily in relation to many of the issues regarding estimates, which Mr. Michael Taft has raised. In effect, this is a compact - which in my personal, but not my professional opinion - is being driven by domestic German politics, primarily, and is an attempt to make us more Germanic. It is trying to use something which is inestimable in order to achieve something that is unattainable. That does not mean I am against it. I too, like Ms Megan Greene, think there are compelling reasons we should think long and hard about signing up for the treaty.
The brief we were given was to look at the effects this treaty would have on Ireland. I wish to make five points. At present, we as a state are broke. This is not an ideological issue, it is an arithmetic fact. The ideological issues revolve around how we will pay for the fact that we are broke. Anything that moves us towards a situation where on the current side we achieve some sort of balance over the economic cycle, however defined, is something for which we should be grateful. There was a proposal tabled by a Senator that would have achieved a set of soft fiscal rules. That has not been voted down by the Government, even though it was tabled by an Independent Senator. That shows the Government’s absolute commitment to formalising good fiscal housekeeping. That is to be lauded. If this fiscal compact goes forward, the trajectory of debt that will be achieved in a steady state is too low. Too much Government debt is a bad thing - as is too little. If we look at the figures, the problem is that to move from 115% of debt to gross domestic product to the steady state that would be implied by our historic growth rates, even to the 60% rate we would be allowed, would require getting rid of the equivalent of the entirety of the national debt we had in 2010. This is an enormous task for any state. In 1981 I did a course in macroeconomic statistics taught by the eminent John Bristow. We talked about sinking funds, which have gone long since, with the ark. We no longer pay off debt, nobody does, but just hope to God something will happen so that it becomes less of a burden. We will have to pay down debt for the first time since the 1950s.
There has been scant analysis. Mr. Taft raised the issue of the effects of the fiscal compact on the bond market. We will be looking at the equivalent of €2 trillion of safe government assets being taken out of the European sovereign bond pool. Not only will this force pension funds into other asset forms but a bond bubble manifests itself as low interest rates, given the inverse relationship between bond prices and bond yields. Low interest rates in nominal terms, combined with the assumption that the Bundesbank manqué which is now the ECB will continue its inflation hawk approach, will result in a form of financial repression. It is a soft form of it but financial repression it will be, through negative real interest rates. There are huge implications for capital flows across the wider European economic area, for example, in regard to Switzerland, gold, the Norwegian currencies, etc., as people desperately seek safe haven assets to buttress pension funds. We will be undermining the future health of European pension funds at a time when they are deeply underwater.
It will depress demand in Europe. Even countries such as Austria, the Netherlands and Germany, well-run countries under every conceivable criteria from a macroeconomic perspective, will be required to engage in further and unnecessary fiscal retrenchment which, as Ms Greene pointed out, can only result in depressed demand above and beyond that which would be appropriate, given this stage in the economic cycle.
Whether this would have got rid of the credit boom is an issue that has created some discussion. At a purely macroeconomic level it might well have done so. An alert mechanism report was issued in February in which, basically, one looks at countries and sees whether they are hitting their targets under a series of about eight headings. The macroeconomic high-level figures are one element but, below that, how are they being achieved? If one looks at the eurozone countries over the past ten years, as has been done by Citibank and as reported on Monday in the Financial Times, it would have been quite evident from about 2004 onwards that Ireland was getting into trouble. Herein lies the problem. What we are dealing with here is political economy of the first water. We could well imagine a particular Taoiseach suggesting that, “Ah sure, a few hundred million is nothing”, referring to a fine, to allow us to continue with the unique methodology Ireland had achieved for economic growth. Under the alert mechanism report, the fines would have been about €150 million to €200 million had the fiscal compact been in place and had we been breaching it in the way we were. Is the political system - the political economy system - capable of transformation to allow this to happen and to allow us to move towards the writing down of the amount of debt we will have to have?
This brings me to my final set of points. There is a whole pile of issues in regard to the fiscal compact that bear on domestic competency. This is competency in the technical sense of the ability to do a job. We are all very aware of the macroeconomic issues. I will look at four issues. First, we will have to either accept the EU Commission estimates on the structural budget. That is an econometric concept. I am not aware of any other country in the world that has ever put an econometric concept into a constitution. As someone with a minor degree in econometrics, I do not know whether I should be proud of or horrified about that - probably horrified.. If we do not accept those EU Commission reports we will have to create one ourselves that is independent. This will require substantial intellectual and financial investment into the ESRI, or universities, or a new quango or somewhere else. Do we have the competency to do that in the broad sense?
Second, if we do not have that, or even if we do, do we have the competency in a technical sense at a negotiating level to argue the case? It is absolutely clear that because this is a conceptual model there will be divergences. When our model diverges from the Commission’s and we say “We are okay” and it says “No, you are not”, will we have the competency to argue that?
Third, will we have the competency to argue post hoc? If, for example, one looks at the IMF, Davy Stockbrokers and Constanin Gurgiev have some very nice pictures - pictures tell 1,000 words and they are available in the presentation - of the re-estimation. One can find upon re-estimation, using the figures that were actually available rather than the pretty figures that were there at the time, that we were in surplus or deficit at a time when we might have thought we were in deficit or surplus and had acted thereupon. There is, therefore, a competency issue about our ability to argue that case thereafter. I would have to say that the evidence so far in regard to our ability to argue technical issues at a European level and achieve a result that is appropriate for the Irish taxpayer and citizen has not been stellar.
We have a final point in regard to domestic competency, and it is the highest issue of political economy that we can face. This is one leg, at best, of a stool. While one can balance upon a one-legged stool, it is a constant balancing act. There are at least two, if not three, other issues that would be appropriate. Ms Greene has alluded to the fact that this is not in of itself a step towards fiscal union but it is a logical next step. As a European policy, we have decided to have an independent monetary approach and on balance I agree that is the appropriate thing to have. I can disagree with the policy but I agree it should be independent. We will now, in effect, have the single European fiscal policy. Two issues are missing, however, that would normally be part of a broad Government fiscal approach, namely, the issue of transfers and taxation. To have a proper fiscal union, towards which this is the second stage, after the monetary union, will require discussions on transfers and tax. If we are unwilling to give any form of ground on tax, is it likely we will get concessions in regard to the transfers that would be appropriate either into or out of this country in regard to a full fiscal union?
To cut quickly to the chase, I have one question in particular. Is it accepted by all that there is, or was, a need for regulation or oversight in the fiscal system applicable in each of the eurozone countries and throughout the European Union, including this country? If so, is this not the best means of introducing a regulatory system that will be observed by all so that there will be an incentive within each of the member states to ensure that no state breaches guidelines in the way that was done in regard to the Stability and Growth Pact? Before anybody says that pact would not have had any effect on the situation we face now, that is not the question. The question is whether this is necessary and if it is, is the proposal before us not an improvement?
It is correct to say the country is broke and this has been noticeable for a considerable period. The evidence was there ten years ago and in 2008 everyone said we should do something about it. It was too late at that stage. I ask guests to address the question. What is the best means of ensuring Europe and Ireland do not find themselves in the same position in ten years’ time? Is this strategy not the best means?
I refer to Professor Lucey’s reference to Davy Stockbrokers. There is a lot of theory in this debate. I remember Davy Stockbrokers being quoted on a regular basis over the past ten years making predictions that did not come true. With no disrespect to Davy Stockbrokers, it was well wide of the mark. It was based on theory and, admittedly, we are faced with a lot of theory. Unfortunately, the population of the country and Europe is faced with real-time reality, not theory.
Deputy Paschal Donohoe: I welcome the speakers and I thank them for their diverse contributions. One of the strengths of the committee system is that we should bring in people with different points of view on what is going on. It is up to us to decide what to do with the points of view to integrate them into our work.
Professor Lucey outlined the impact of the passage of the stability treaty in terms of bond market behaviour. Is it not likely we will see strong changes in the way the bond markets operate in the coming years, regardless of the passage of this treaty? Bond markets will price risk in a way they have not done in the past. The scale and size of those global bond markets and capital flows across boundaries could shrink. A change in global capital markets could drive many of the changes we need to make, which Professor Lucey has questioned. Regardless of this treaty, are we not likely to see a profound change in the behaviour of people who are have lent to the sovereign states in this crisis?
My question for Ms Green returns to her assessment of the situation. Regardless of what happens to Ireland, if other member states need bailouts or second bailouts, are we better off inside or outside of this treaty?
My question for Mr. Taft refers to the first paragraph of his statement. He says that we could be looking into a doubling of the austerity measures the Government has planned over the coming years. That is objectively incorrect because if that sentence means there will be a doubling of the austerity measures over the coming three years, is it not the case that the external aid programme we are in trumps the impact of the operation of the stability treaty in the near term? Mr. Taft can correct me if I am wrong. Is it not the case that a country in an excessive deficit procedure, as we are, will not face the full impact of this treaty until 2018?
I find it ironic that Mr. Kelly’s presentation says that if we cannot access other sources of funding, the IMF will help to support us. So many other members of Mr. Kelly’s movement in other countries have been critical of the role of the IMF. People are increasingly saying that if we cannot get funding from other members of the external aid programme, we can rely on the IMF. Will Mr. Kelly comment on whether this is an irony?
Mr. Kelly highlights the statement about how we can continue to provide support to countries under a programme until they have regained market access, provided they have successfully implemented the programmes. That is what this is all about. Given that implementation of these programmes will be onerous, is Mr. Kelly saying we can access funding from the IMF and not have to take hard measures in return? Perhaps Mr. Kelly can clarify this.
I have a light-hearted question for Professor Lucey. He described an assessment as not being in his professional opinion but in his personal opinion. What is the difference in case I ever need to make such a distinction?
Senator Kathryn Reilly: I welcome the witnesses to the committee. What is Mr. Kelly’s opinion on the argument that the wording of the referendum leaves it open to the Government to take it or leave it after ratification so the “Yes” vote would leave us bound by the economic rules within it? Mr. Taft’s figure of €8 billion in the extra austerity programme if we accept the treaty has been quoted and derided by some members. Can Mr. Taft explain the logic in arriving at this figure? Can he put this in context in terms of the front line cuts already made and the new charges introduced?
Over the past number of weeks witnesses before the committee have said that this treaty is not the solution but only part of it. Can Professor Lucey outline what he believes the solution should be? Is there any evidence the EU is looking at the wider solution and taking hard decisions about the structure of the eurozone? Other speakers mentioned access to alternative funding. Can Professor Lucey comment on these remarks? Should the Irish people reject the treaty, can the State access funding beyond the current programme?
Mr. Jimmy Kelly: There is a need for regulation. There is a need for it when one looks at what was done in the banking world. I do not see the Government doing what is needed on regulation. Regulation is also needed to protect workers. One of the protections promised arising from fundamental rights in the Lisbon treaty concerns union recognition. The Government must bring this forward. There is also an EU directive on pension protection funds that should be in place in the Republic of Ireland. The Government is out of line with the EU directive and we are heavily involved in trying to get it corrected. Regulation is needed but needs to start with the people who brought us to where we are. Regulation includes bringing people to account before the law. The people who delivered us to a country that is broke, to use the language used here, must be brought to account for what they have done in law. That is not happening. I agree with the need for regulation but it must start with the people responsible for the crisis. This treaty will not correct the disgrace foisted on the people of this country by those running it. I do not see them brought to account and the EU treaty, if passed, will not correct that from happening again.
Regarding funding from the IMF, part of the powerful argument that will be made in the debate we are facing into in the coming weeks is that those on the “No” side will bring us to a point where, in terms of the need for a second bailout, we would have nowhere to go. That will be the context in which that argument will be put forward. I do not like the IMF, no more than I like people who run the banking system, but I refute the argument being made that if we reject this treaty we will be isolated and will not have access to funding.
There is more agreement now among people and organisations that this is a bad treaty. There is a huge build-up of personal opinion to that effect. The “No” argument appears to be that it is a bad treaty which is not good for the country or for Europe but we are stuck with it and we will probably have to vote “Yes” because the consequences of voting “No” are isolation and not having access to funding. That is the context in which I make that point.
There is no denying that the treaty is about further austerity, and we need to change current Government policies which are leading to further austerity. We cannot pretend that the two are not linked. We are being driven towards further austerity which will not get us out of the mess we are in. Without investment, growth and all the other measures we have been arguing for we will only get deeper into austerity and debt and will not get out of that under current Government policies. Agreeing to the treaty without changing current Government policy and austerity will not get us to a position where this country-----
Deputy Bernard J. Durkan: Austerity is deemed to be public enemy No. 1 in some quarters of the country. What is the alternative to making cuts if the household, business or institution is over-borrowed? From where can we borrow to replace it?
Mr. Jimmy Kelly: The Taoiseach outlined in an address to the nation that we, the citizens, were not responsible for the situation we are in now. That acknowledgement means that we do not send a bill for this mess to ordinary working people and those at the bottom of this system. They cannot afford the austerity being foisted on them. We must send the bill for this current mess to the people who are wealthy. That is the principal difference between what we are saying and what the Government is saying. Continuing with austerity measures that foist the crisis onto the people at the bottom is not acceptable. The only people who can afford to pay for getting us out of this mess are the people who have the wealth. Those are the people the Government must target. As far as we are concerned, that is the issue. The point I was making before the intervention is that all of these issues are inter-linked. What is happening with the EU treaty is linked to what the Government is doing and in our opinion what the Government is doing is driving us towards the need for a second bailout.
Mr. Michael Taft: I will take up the related questions Senator Reilly and Deputy Donohoe put forward. First, regarding how one arrives at a figure of €8 billion in terms of fiscal consolidation, it is an estimate. If we were to do a simple slide rule on the difference between the projected structural deficit in 2015 and the target we would have to make, that difference would be €5.7 billion in 2015. However, we know that cutting spending or increasing taxes by that amount will not reduce the deficit by that amount and therefore the Department of Finance’s debt sensitivity analysis can help us get to some understanding of what a level of fiscal contraction would mean on both growth and the deficit because they determine that for every €2 billion of fiscal contraction - austerity - we cut growth by €1 billion and, as a consequence, the deficit does not fall by as much as one might anticipate.
This action just deals with the overall balance. It does not deal with the structural deficit. We have to read the tea leaves, so to speak, and use both the EU and the IMF projections on the structural deficit to see what proportion of the general deficit is likely to lead to the structural deficit. We must not forget that when we cut public spending and engage in austerity we not only cut the economic growth but also potential GDP. We cut the productive capacity and, unfortunately, too little attention has been paid to this issue during that period. Our estimate is approximately €8 billion. It could be €7.5 billion or €8.5 billion. I can send the committee the calculations for people to examine and criticise but at least they will be on paper and I will be using it-----
Mr. Michael Taft: Second, it would appear that 2018 will be the target for Ireland. However, there is the transitional period which we would have to work out as part of the development of our MTO with the EU Commission, and we do not know what that is. That is not a bad thing. These are issues that need to be worked out in any case. We do not know the exact pace of additional fiscal consolidation in which we will have to engage in whatever year. However, if we take 2015, our projection is that we would need an additional €8 billion, which is a doubling of what the Government has already scheduled. It does not matter if it is 2015 or if it has to be done in parts to 2016, 2017 or 2018 because everyone, including those who support the treaty, are agreed that we will be looking at austerity budgets well into the latter half of the decade. We will be looking at primary and probably actual surpluses for a long time. Our fiscal policy will be squeezed for a long time. While it may not be permanent austerity, as someone suggested, it will seem like that for at least a generation.
Third, to reply to Deputy Durkan, there is no question about the need for macroeconomic co-ordination, and it is not just about how much countries spend and tax. There must also be co-ordination in terms of their level of domestic demand, and there must be co-ordination between the surplus and deficit countries because the deficit countries are being told they must fix it on their own. A proper fiscal and monetary union would ensure there is that greater co-ordination but this treaty is the wrong way to go about it.
The macroeconomic score card, in theory, helps and there is nothing in particular one might dispute in that regard as part of a mix. However, it is woefully inadequate. It only has long-term unemployment as a social factor that drives a political economy. It does not have issues like income inequality, poverty, material deprivation or environmental deterioration. These are issues the EU already measures. It would have been quite easy to put those in but, most importantly, it does not have an emphasis on growing potential GDP, that is, growing our productive capacity. We should never forget that this treaty is not about the macroeconomic counter cyclical co-ordination nor about a growth strategy. It is merely about a deficit reduction strategy.
Ms Megan Greene: In terms of whether regulation is the answer, I would say yes and no. In terms of public finances, we must not forget that we already had something that looked like the fiscal treaty. It was called the Stability and Growth Pact. Germany and France were the first two countries to violate it, and we have seen how successful the Stability and Growth Pact has been. I do not believe the fiscal compact is the answer.
In terms of public and private finances, we need more regulation but it cannot be at the national level. We have already tried that and it does not work. We need some kind of eurozone-wide financial regulation, which could help.
In terms of the best way to ensure we do not end up in the same place ten years from now, if by “we” the member means Ireland, it is simple. Ireland needs growth, and to ensure growth Ireland must stimulate domestic demand but the Government’s hands are tied given that it must retrench. Therefore, a stimulus is out of the question. However, there are measures that could help stimulate growth in Ireland. Most of them need to come from other EU countries or at EU level. The EFSF could provide funds not to bailouts but to the European Investment Bank to invest in peripheral countries in particular. This could help stimulate domestic demand. Stimulus could come from the core to the periphery, but unfortunately this is very unlikely. The euro depreciating massively to par with the US dollar could facilitate growth, but every time the euro starts to depreciate Mr. Bernanke opens his mouth and speaks about quantitative easing. Therefore, unfortunately this is also unlikely. The ECB could provide massive amounts of quantitative and credit easing which is not on the table either.
In terms of the eurozone not ending up in the same position, there are two answers to this crisis. One is fiscal transfers and the other is eurobonds and neither will come into effect any time soon, certainly not in the timeframe necessary to draw a line under the crisis.
On whether Ireland is better off inside or outside the fiscal compact given that we expect bailouts for other eurozone countries, the EFSF will lend until the middle of this year at which point the ESM will take over. If Ireland does not vote in favour of the fiscal compact it will not receive any ESM funding. An argument is being made that the IMF is being more sensible with regard to Ireland than the ECB or the European Commission. There is no way the IMF will break ranks with the troika and independently provide Ireland with financing. If Ireland does not vote in favour of the fiscal compact it will face a buyer strike when it must return to the markets in late 2013 or early 2014, at which point Ireland could face a hard default in the absence of any external financing.
Professor Brian Lucey: I will take the light-hearted question first. There is a great tradition in academia whereby when one is asked a hard question one defers to one’s non-attending co-author. I cannot do this here. With regard to personal versus professional, personal is when one wants to say something for which professionally one might get slated by one’s peers. It is very contingent.
Professor Brian Lucey: I know it sounds like Homer Simpson saying weaselling is what separates man from all animals apart from the weasel. It goes to a second question raised by Deputy Durkan. Davy Stockbrokers is not selling bonds on the back of the February report and this is a crucial issue. It is dealing with simple facts, and the simple facts are not about the issues of theory. Mr. Taft alluded to the theoretical distinctions but the estimates of structural deficits in the IMF world economic outlooks in 2003, 2007 and 2011 are wildly different not only for projected figures but also for where we have better data. One of the great unspoken dirty secrets of national accounts is that they get revised. This is perfectly appropriate. The CSO makes initial estimates after which people do what they do. The CSO spends years looking at estimates. It is three to five years before we get a final answer on what happened, definitive to the level of human endeavour and the number of statisticians one can put to it. However, we are being asked to base our figures for the future on imperfect data not only for the present and future but for the past. This is the issue raised by Davy Stockbrokers on which my graph is based.
Regulation is always a good idea if we adhere to it. Ireland had very good banking regulations and many laws on the Statute Book. One of the greatest sports in Ireland is evading, avoiding, finding ways around and ignoring the law. It is not that we are a particularly lawless country but we have not yet internalised the fact that they are our laws. This is my personal rather than professional opinion. We can have all the regulations we like but if people do not adhere to them they are no use. The absolute hard fact is that the moment the fiscal treaty becomes a bar to German or French growth they will ignore it in the same way they ignored, quite properly from their perspective, the Stability and Growth Pact. In a union where disproportionate and asymmetric adjustment is being forced-----
Professor Brian Lucey: They will ignore it and then they will seek to change it. They ignored the Stability and Growth Pact and changed it to this. They will ignore this and change it to something else. I am not bashing Germany or France; it is just what big countries do because they have room to manoeuvre which we do not. We could be Estonia, Cyprus or Portugal. Smaller countries are at a disadvantage in the political economy of the European Union. This is a fact. Regulation is great if everybody plays by the rules but we need more game theoreticians rather than macroeconomists. I am very serious about this. In my professional opinion we have not seen enough quantitative political science thrown at the games - in a technical sense - that can be played around this issue.
Deputy Donohoe asked about the bond market issues. I absolutely agree and changes will be made with regard to the bond market. However, I do not think any of the changes will result in an absolute shrinkage of the bond market. They will result in a shrinkage in reliance on bond financing at corporate and national level. What we are looking at is a requirement to absolutely shrink the pool of assets. Deputy Donohoe raised very interesting questions and my point was that as policymakers, people in the markets, analysts and academics we need to start thinking long and hard and much more openly about the implications of the fiscal treaty for the bond markets above and beyond these real issues.
Senator Reilly raised the issue of wider solutions and alternative funding. Alternative funding is potentially and theoretically there but it is a matter of political economy as to whether it would in fact be there. Having rejected the treaty we could well find ourselves in the bizarre situation where having been the poster boys for austerity, if you want to categorise it as that, facing into a hard default. It would be an absolute unmitigated political disaster for all concerned but it would be the logical outcome.
We hear persistent mutterings from various French politicians about their desire for harmonised taxation. It is never clear to me how much of this is driven by domestic French political considerations, and a desire to hide the fact the effective tax rate in France for a large corporations is approximately 4% whereas ours is quite transparent and is close to the headline figure of 12.5% for most of the companies. My colleague Dr. Stewart at the school of business has done some work on this which is worth reading.
Our fingers were burned at European level on the European constitution. It will be quite some time before a desire at European or eurozone level for a wider proper fiscal and monetary union will return. Therefore, this is a very partial and at this stage from that perspective not necessary, approach to it. It would be nice but I do not think the political will is there.
Deputy Bernard J. Durkan: I thank the witnesses. I understand people’s frustration and anger because we are not getting an immediate result and retribution for the misdeeds of the past. Unfortunately we are in the position we are in and as John Steinbeck pointed out a long time ago anger does not always solve the problem. We know the people did not cause the problem, but the problem with excessive borrowing in this country arose during the period when the institutions of the State were in supervisory control. Does this not in some way imply the nation has some responsibility? Most of the wealth was generated by property, the price of which has sunk to a level not seen for a long time. Where can we identify the wealth needed to ease our current problems?
Mr. Michael Taft: First, we must take responsibility for our supervisory and regulatory failures even though the IMF in its 2006 financial stability report signed off on them as fine. We must also take responsibility for a fiscal policy that has not worked. There is no point repeating that we have a huge deficit. Everyone has been saying that since 2009. Despite five austerity budgets we continue to have a huge deficit. The point is that austerity fails to reduce deficits.
Mr. Michael Taft: On wealth, I accept there is a need to identify new wealth. A property tax, if well designed, can raise money. UNITE would like to see a comprehensive property tax on all housing and financial property, which even the Minister for Finance has stated could raise a considerable amount. We must never forget that the pot of gold is not about one tax or one spending cut over another, rather it is about growth and investment. We will either invest ourselves out of this crisis or will remain mired in it. Growth will provide the pot of gold.
Mr. Michael Taft: Fortunately, no. We are fortunate in that the Government has €20 billion, €5 billion by way of the National Pensions Reserve Fund and €15 billion in cash balances. It intends to use between €5 billion and €6 billion of those cash balances in 2014-15 to pay down our debt. UNITE would suggest that rather than use that €5 billion or €6 billion to pay down the debt the Government should invest it. The Nevin Economic Research Institute, which is ICTU’s new think tank, recently published a report wherein it identifies the sources of funding, including pension fund assets, cash balances and private pension funds, which can be incentivised to invest in commercial return infrastructure, EIB and Council of Europe Development Bank, to launch a sustained and substantial investment drive which can bring about growth.
Deputy Paschal Donohoe: I would like Mr. Kelly to comment on Ms Greene’s observation that the IMF will not break ranks with the other lenders and will not, therefore, be willing to lend to Ireland. Also, does he accept that even if Ms Greene is wrong and the IMF does lend to Ireland there will be conditions attached to that lending?
Mr. Jimmy Kelly: We can access funding from the stability fund, as we are currently doing. Greece obtained its second bailout through that mechanism. The EFSF and IMF combined can provide us with funding. On the Deputy’s specific question, I believe Ms Greene is wrong and that the IMF will lend to Ireland.
Mr. Jimmy Kelly: In UNITE’s opinion, the IMF will facilitate further funding to Ireland. I have no doubt about that. The conditions attached to such lending will be, as always, based on ability to pay. The IMF is no different except that it is bigger than certain banks. One can get insurance for anything on the planet. What is important is whether one can afford to pay. The conditions attached will take account of where Ireland is at. I am making the point that any conditions will be linked to current Government policy. If we continue to pursue austerity programmes our position in terms of seeking further borrowing will worsen. The powerful argument which the Government will use during the referendum campaign is that people should support the treaty even if they believe it is bad as not to do so would put Ireland in an isolated position. UNITE argues that Ireland will not be isolated and will have access to further funding through the IMF.
Mr. Jimmy Kelly: The IMF has clearly stated that policy is decided by Government, which has not been totally truthful in terms of what has been imposed by the troika or the IMF. UNITE would argue that whatever conditions apply will be decided based on what Government is doing, which actions we believe are worsening our situation. Rather than growing us out of the current mess we are the Government us putting us in a position that means we can afford to repay.
Deputy Paschal Donohoe: I am making the observation that Mr. Kelly and his colleagues in the trade union movement worldwide have been intensely critical of the role of the IMF in generating austerity and that even if he is correct many believe he is wrong that the IMF will take the place of other lenders and adopt lending practices that will be different to those which it applies in every other country in the world.
Mr. Jimmy Kelly: I know that. I do not believe that the European Union will allow Ireland to become isolated, in particular if the impact of that would mean default. The Deputy knows as well as I that Ireland will not be allowed enter that space because of its effect on the remainder of Europe. The referendum on the fiscal treaty is clearly in defence of what the Republic needs to do and to tell Europe. That point was made earlier that when this affects the bigger countries they will do what they want to do.
Deputy Paschal Donohoe: Ms Greene, who has been correct more times than she has been wrong, has predicted in her observations on what is going to happen the opposite of what UNITE suggests will happen.
Mr. Michael Taft: No, it is unlikely to do that. What is likely to cause additional austerity measures within the period up to the end of 2013 is, as happened yesterday, the IMF substantially revising downward future growth projections because of the impact of austerity. There is a strong chance that additional measures will be thrown at us. In answer to the Deputy’s specific question, this is not required within the current programme. However, there will be a deadline of 2015, 2016 or 2017.
Chairman: We have had a comprehensive debate. On behalf of the sub-committee I thank all the witnesses for presenting before us today and for answering our questions. The sub-committee will suspend now for 15 minutes following which it will be addressed by Mr. Seán Murphy, Chambers Ireland, Professor Terrence McDonough, NUI Galway, Dr. Andrew Storey, University College Dublin and Professor Gerry Whyte, Trinity College Dublin.
Chairman: I remind those present to ensure their mobile telephones are switched off as they interfere with the broadcasting equipment. Using them in silent mode is not good enough; they actually need to be switched off.
I welcome everybody to the second session of today’s meeting of the sub-committee. This session is to focus on the realities of what the treaty means for Ireland and understanding the facts. Addressing the committee this morning will be Dr. Andrew Storey from UCD, Professor Terrence McDonough from NUIG, Mr. Ian Talbot from Chambers Ireland, and Professor Gerry Whyte from TCD.
I remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses, either by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they give to the committee. However, if directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with today’s proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person by name or in such a way as to make him or her identifiable.
Dr. Andrew Storey: I thank the committee for its invitation to address it this morning. Writing in Monday’s New York Times and reprinted in yesterday’s The Irish Times, the Nobel prize-winning economist Professor Paul Krugman commented on the crisis in Spain in particular and in the eurozone in general. He stated:
Another Nobel prize winner for economics, Professor Joseph Stiglitz, has described the European response to the crisis as a “mutual suicide pact”. Their comments are echoed by yet another world renowned economist, Dr. Nouriel Roubini, who is probably most famous for having correctly forecast the economic crash. He stated:
Krugman, Stiglitz and Roubini reflect a widespread view that the EU has misdiagnosed the economic crisis. The proposed new treaty seeks to assign that misdiagnosis the status of constitutional law. It is akin to a doctor prescribing an inappropriate treatment to a patient and then legally debarring the patient from exploring any alternative treatment. This is the reason that opposition to the treaty is growing across Europe.
It is important that I draw the committee’s attention to some of the voices of opposition, given the fact that the voices heard by the committee to date have been broadly supportive of the treaty. The most high profile of these oppositional or partially oppositional voices is the likely winner of the French presidential election, Mr. François Hollande, who wants to renegotiate the treaty in some way or other. A former Minister of Justice in the German Government is pursuing a constitutional case for a referendum on the treaty and has stated: “I am all for Europe, just not one determined by political elites.” A former Minster for Finance in the Netherlands, who is also a former director of the IMF, has called the treaty “unreasonable and dangerous”. From the other side of the political spectrum, the Social Democratic Party in Sweden has argued that “Sweden should not transfer power to decide on financial policy from Riksdagen [the national parliament], nor give the European Court of Justice the possibility to decide on sanctions on the basis of the Fiscal Compact”. Also in Sweden, the legal expert of the national trade union confederation has stated:
The stance of the Swedish trade unions is in line with that of the European Trade Union Confederation, ETUC, which has notably supported every previous EU treaty but is opposed to this one. It stated:
Likewise, the Portuguese campaign for a debt audit, representing a group of civil society organisations with which I work closely on another issue, has called for a “No” vote. The Corporate Europe Observatory, a highly respected watchdog group that monitors the impact of big business on EU policy agendas, argues:
That last is a vital point because, according to Professor Patomåki, “unending budgetary discipline is anti-democratic”. He also stated: “It is clear that voices all across Europe and beyond, and from all across the political spectrum, are opposed to this treaty.”
Of the issues highlighted by the voices in question, the most fundamental is democracy. After the agreement of the treaty’s wording, Chancellor Merkel stated: “The debt brakes will be binding forever” and “Never will you be able to change them through a parliamentary majority”. Elsewhere, she has spoken of the new fiscal rules as having “eternal validity” and of how “Europe would not function anymore if it changed course after every election”. Perhaps it is because we are approaching the 100th anniversary of Bram Stoker’s death, but this language calls to mind the creation of a vampire, which is an apt metaphor. We are trying to create an immortal creature that aims to enshrine permanently a particular set of economic policies across the eurozone. In another allusion to the undead metaphor, the treaty remarkably contains no provision for its own amendment or termination.
Regardless of one’s view of the efficacy of the particular policies being set in stone - I would argue that they are regressive and likely to lengthen and deepen the recession - putting them in place in treaty form is profoundly debilitating for democratic deliberation and practice. Even if one favours these policies, would one not prefer to win the argument by virtue of persuasion on a level playing field instead of having the rules rigged in one’s favour? Does one want to grant the European Court of Justice, but not the European Parliament, a role in supervising economic policy choices?
This committee represents a welcome initiative to subject Government policy to democratic oversight. In this sense, it is the polar opposite to a treaty that would take crucial aspects of Government policy out of the realm of democratic debate and into the hands of unelected technocrats and judges.
Professor Terrence McDonough: I thank the committee for its invitation. We may need a second bailout in 2013. As the treaty is currently worded, a “No” vote would forbid us from accessing funds from the European Stability Mechanism, ESM. It is claimed that this situation will result in disaster. Even if we believed that the treaty was a serious mistake, it is argued that we have a gun to our head. Will the denial of access to the ESM fund lead to disaster? I want to deal with this threat directly before considering the merit of the treaty itself.
In the event, Ireland will have a number of options. First, Ireland is small but scary. A disorderly Irish default would threaten the stability of the European banking system. A European Central Bank, ECB, intervention to restabilise the system would be considerably more expensive than a second bailout of a comparatively small country. It is highly unlikely that Europe would ignore its self-interest to spite the Irish electorate. Funds would be found outside of the ESM.
Second, Ireland has the option of borrowing from the IMF rather than European institutions. Third, Ireland could set about closing the budget deficit. The Irish tax take as a percentage of GDP is well below the EU average. Taxes on wealth and high incomes are considerably underexploited.
A fourth possibility is the restructuring of debt. The Anglo Irish Bank promissory note payments alone constitute €3 billion in any given year. A fifth possibility which has not been sufficiently discussed is the issuance of innovative debt instruments. This should eliminate the risk premium which makes it difficult for Ireland to re-enter the markets at this time.
Any one of these options alone has the potential to address substantially the budget gap in the event of a second bailout and a failure to access ESM funding. A judicious combination of these strategies would easily finance the resulting gap with little disruption. The sky will not fall in the event of “No” vote.
If a “No” vote will not lead to disaster, are there positive reasons to vote “Yes”? Many pro-treaty arguments are primarily intended to be calming and reassuring in nature, telling the electorate that a “Yes” vote is the safe and conservative course. In fact such a pact is historically unprecedented and a dangerous experiment. We have been assured that the requirements of the treaty are simply measures encouraging good fiscal housekeeping. Keynes’s observation of the paradox of thrift is introductory macroeconomics. A household which cuts back spending in bad times limits its accumulation of debt. A country or, in the case of the EU, region which cuts back spending slows its economy, damages growth, shrinks its income and makes savings less not more likely. Budgets need to be adjusted over the business cycle. Aggressive budget balancing at the bottom of a depression is simply counter-productive.
A second argument intended to reassure an apprehensive electorate is that the treaty has no practical effect because we have already agreed to much of its substantive content in the form of the EU six-pack regulations. These regulations underwent insufficient consideration and debate, are relatively recent and their deleterious effects have not yet had time to impact. The implementation of the 0.5% structural deficit rule in the new treaty is considerably more stringent than any of these existing regulations and the treaty contains new enforcement mechanisms.
A third contention is that the treaty will create stability in Europe and the eurozone. According to the European Commission, reducing structural deficits to the target levels in 2013 would mean at least €166 billion in cuts and extra taxes. Europe is on the verge of a double dip in the recession. If anything, the treaty’s provisions will contribute to pushing Europe over the edge.
A fourth argument is that the treaty will create confidence in the economies of Europe and Ireland. One does not invest in countries which have lost their ability to stimulate their way out of depression or deep recession. In the current economic conditions, this treaty and its provisions will seriously undermine confidence.
Let us consider what is on the table. Deficits should be a maximum of 3% or less in many circumstances. This seriously compromises governmental action to end recessions. Debt should be 60% of GDP. If debt is greater than 60% it will be reduced by one twentieth per year over the following 20 years. This would start in 2018 when the bailout terms expire. Even after we reach this target, Ireland will be forced to run primary surpluses over interest payments on the national debt for many years, bleeding steam out of the economy. If these conditions are violated, control over fiscal policy is ceded to Europe and the European Court of Justice.
Take a country at the bottom of a depression. Force it to run budget cuts and tax increases year after year. Force this same policy on its neighbours and trading partners. Run this into the foreseeable future and hope it results in stability, confidence and recovery. This is emphatically not the safe option. It is a dangerous experiment without historical precedent. The common sense retailed by the Government and established commentary on the fiscal stability treaty is at right angles to reality. There will be no disaster in the event of a second bailout. It is the adoption of the budget provisions of the treaty which is risky and dangerously experimental.
What would a real fiscal stability pact comprise? What do we and Europe need to recover in the context of the eurozone? First, debt should be financed by eurobonds. Second, the European Central Bank should be willing to buy these eurobonds to finance deficits and control interest rates. Third, a portion of Irish sovereign debt should be written down or paid off by the ECB. Fourth, the EU needs a tax financed budget to transfer expenditure to underperforming regions. Fifth, trade deficits should be corrected by reform in trade surplus regions.
It is sometimes argued that the treaty is a first small step in the direction of a programme similar to the one outlined above. It would be more accurate to say that it is a strategy adopted instead of these necessary changes. It is mistakenly argued that the adoption of these budgetary rules will make eurobonds, European Central Bank reform, debt relief, a transfer union and policy change in surplus countries unnecessary.
If the Irish people are against permanent austerity, they should reject this treaty. The walk away option is not a disaster. It is not worse than the status quo with an added austerity treaty. We need to bargain harder and with deadly serious intent and if the Government will not do this, the people must do so by rejecting this referendum.
Mr. Ian Talbot: I thank the Chairman and the committee for their kind invitation. Chambers Ireland represents more than 50 chambers of commerce around the country, with a diverse membership base. Membership is made up of small and medium enterprises, retailers and multinationals, all of which are driven by the desire to do business, create wealth and employment and better their local, regional and national communities.
We fully recognise the need to restore order to the national finances, regain competitiveness, secure the future of surviving jobs and enterprises and, crucially, create the conditions to secure new investments and, in turn, new jobs for all our people. Our members and their families feel the impact of the downturn on a daily basis through the loss of customers and jobs, as well as the, hopefully temporary, loss of loved ones to emigration. We want to see conditions improved to the point where confidence drives enhanced levels of economic activity in the country. Economic activity will in turn create new job opportunities for our families, neighbours, wider community and work colleagues.
In creating these conditions, we have to deliver confidence. Without confidence we will not persuade businesses and citizens to invest in their future or encourage multinational businesses to increase their investments in this country, and we will not get the new jobs that would flow from such investments. Will a “Yes” or “No” vote in the forthcoming referendum make potential investors more likely to invest in Ireland? In our view the result that is more likely to enhance confidence levels in Ireland, support employment, secure the funding needed to pay for the State services we have chosen to deliver and, hopefully, make Ireland a more attractive place in which to invest is a “Yes” vote.
We came to our conclusion after the following analysis of the treaty. The fiscal compact treaty offers greater potential for domestic economic stability while reducing the threat of a future financial crisis. It will reduce the potential for governments to engage in pro-cyclical spending because future governments will be required to run budget surpluses in the good times. Two fiscal crises in the past 30 years have shown us how such a mechanism would have helped Ireland in the past. A “Yes” vote will ensure Ireland has access to the European Stability Mechanism funds if needed and will offer a more predictable means of returning to the international bond markets. It will also ensure no additional austerity will be required in coming years as Ireland delivers on the targets already agreed under the EU-IMF programme. For these reasons, we support a “Yes” vote.
The crisis that affected Ireland has largely been the result of weak financial sector regulation and the failure to deal with economic imbalances such as the loss of competitiveness and overdependence on the construction sector for tax revenue. Our pre-budget submission in 2006 pointed to the need to develop a sustainable medium-term strategy that would achieve a more balanced revenue base given the huge revenues being sourced from stamp duty and VAT, which were €2.7 billion and €15.6 billion, respectively, in 2005. Both of these taxes benefited from buoyant construction activity but when they collapsed the Government had to grapple with the resulting hole in the Exchequer finances. This hole has not yet been filled despite four years of major budgetary consolidation.
Better monitoring of governmental decisions in the 2000s would have acted as a brake on expenditure growth and the consequential loss of competitiveness, the result of which we are dealing with at present. No one in Ireland would ever like to face these circumstances again.
In our view, the enhanced EU government model offers the potential for closer financial regulation, which will ensure governments across the Union adhere to fiscal policy, and therefore would help in preventing a recurrence of the factors that contributed to the current crisis. It will require greater openness between member states and the EU Commission, and will facilitate improved linkages between economic and fiscal policies.
The so-called six-pack of measures, which came into effect at the end of 2011, has already led to major changes in economic and fiscal governance in the EU. A major output from the economic governance reforms is the yearly alert mechanism report which concentrates on macroeconomic imbalances. This report presents a score card which seeks to identify economic instability in areas including the current account balance, unit labour costs, percentage of world trade, credit growth and domestic property price increases. If change is recommended by the Commission, then these recommendations must be implemented. Given what we are going through right now, is this really a bad thing? From our perspective the expenditure control rule would have been particularly helpful in the years prior to the crisis as the then Government would not have been able to engage in double-digit expenditure growth built on the back of unsustainable tax revenues.
In our view, the fiscal compact treaty contains little new material in terms of the rulebook on fiscal governance. It seeks to ensure that the revisions to the Stability and Growth Pact have stronger legal foundation by enshrining them in an intergovernmental treaty. We note that the fiscal compact is also flexible given that it lists exceptions to the structural deficit rule. These include where a country is experiencing periods of severe economic downturn or undertaking significant structural reforms. It follows that Ireland will be able to argue why it should not be exempted from a structural deficit target if circumstances demand it in the future.
I will now cover some specific matters relating to Ireland. A vital issue with which all citizens will have to grapple is that the treaty stipulates that only countries which sign up to it will be able to access the ESM. Access to the ESM is a vital safety net for Ireland when we have completed our funding programme. Without it we will have less choice and more uncertainty regarding future sources of funding, which in turn would undermine confidence in Ireland.
We also agree with those who argue that the terms of the treaty are unlikely to have any major implications for Ireland over the medium to long term. This is because the overriding fiscal policy priority for whichever parties are in government in the future will be to bring our debt levels to below 60% of GDP and sustain the return of our economic sovereignty that will come from our ability to secure new funding from the international debt markets. In the short term, Ireland’s fiscal policy will be determined by either delivering on our agreed funding programme with the troika or doing what is necessary to achieve sustainable bond yields in the international bond markets. It follows that this treaty will not involve any additional austerity over the coming years. It will simply ensure that the Government spends wisely, saves for the future and secures our economic sovereignty by ensuring an end to the boom-to-bust-to-crisis cycle that we have endured twice in the past 30 years.
We in the chamber movement want to see conditions improved to the point where confidence drives enhanced levels of economic activity in the country. This will in turn create new career and job opportunities for our members’ families, our neighbours, our wider community, our work colleagues and our businesses. In delivering on these conditions, the first thing we must deliver on is confidence. We recognise that less risk and less uncertainty does not mean that there are no risks and no uncertainties in Ireland at present. Clearly there are risks, but we in the chamber movement believe that we must work together as citizens and businesses who live and operate in this economy and society to reduce the risk of another major economic crisis.
None of us wants this and our view is that, on a balanced analysis, a “Yes” vote is more likely to reduce these threats. In the context of the referendum, if asked the question whether a “Yes” or a “No” vote is more likely to deliver enhanced levels of confidence in Ireland, in our view voters will have to conclude that a “Yes” vote is the best option. For these reasons the chambers network will be vigorously supporting a “Yes” campaign. For example, our colleagues in the Dublin chamber are producing a synopsis of the reasons a “Yes” vote will be so important. We will be supporting our affiliated chambers via research gathered from a wide range of experts on the issues associated with the treaty. Affiliated chambers around the country in every constituency will, in turn, issue strong communications in support of a “Yes” vote and act as spokespersons for the local business community on why a “Yes” vote is more likely to be good for Ireland. A “Yes” vote is the best option as it is more likely to deliver enhanced levels of confidence in Ireland.
Professor Gerry Whyte: I thank the Chairman and the sub-committee for extending this invitation to me. My presentation will be considerably briefer that those of the other witnesses. As those presentations have indicated, the debate on the fiscal compact treaty raises important questions of economic policy in respect of which I do not have any expertise and on which I would not presume to comment. I mention one technical point from the perspective of a constitutional lawyer looking at the wording of the forthcoming referendum.
As part of the fiscal compact treaty the signatory states undertake to enshrine in national law rules requiring national budgets to be balanced or in surplus. The treaty further requires that those relevant national laws shall be “provisions of binding force and permanent character, preferably constitutional”. Let us assume for a moment that the referendum is passed and the Oireachtas was engaging in an exercise of providing for these national rules. If it was intended to provide for such rules in legislative format, then clearly the referendum would be perfectly adequate for purpose. There might be a question as to whether a legislative status for such rules complies with the treaty requirements that the provisions be “of binding force and permanent character” because legislation of its nature can always be amended. If, however, it was hoped to enshrine these rules at a constitutional level, the formula used in the amendment would not be fit for that particular purpose.
The amendment uses the formula which has been used in the past with other changes to the Constitution relating to the European Union. That is to say that it offers protection from constitutional challenge to laws enacted, Acts done or measures adopted by the State protecting them. That formula would not encompass any change to the wording of the Constitution so that if it was intended to introduce into the Constitution a specific rule limiting the budgetary deficit, I do not believe this amendment would achieve that. It will protect a legislative formulation of that rule but will not protect any attempt to amend the Constitution to insert such a clause. If it was intended to have that clause introduced into the Constitution, a further referendum would be necessary. It is obviously a political decision as to whether the Government would go for a legislative formulation as distinct from a formulation of constitutional status.
Deputy Paschal Donohoe: I will address my comments to Professor McDonough and Professor Whyte. I thank all the witnesses for their contributions this morning. Professor McDonough suggested that in the absence of Ireland being able to access a future European bailout mechanism, we would have the scope to access funding from the IMF. I wish to read out something the professor wrote in an article entitled “Long Wave Theory and the Debate on Globalization”. He stated:
That is what he wrote about the track record of the IMF. In an article in February 2011 Dr. Storey, who is sitting beside Professor McDonough, stated that European leaders might want to consider whether they can depend on the IMF to act as a monitor let alone an arbiter of good macroeconomic policy for member states. He went on to state that:
I wish to put a general point. Professor McDonough referred to the option of Ireland being able to access IMF funding in the future. However, he and others who have been advocating this option have been harshly critical of the role of the IMF and of the role of conditionality.
It has long been argued by a certain school of thought that the IMF destroyed economies and eroded democracies. The same school of thought is saying that in the event of a “No” vote we can depend on the IMF to support Ireland. I put it to the witnesses that there is an inconsistency in that school of thought.
The other inconsistency I ask the witnesses to address is in regard to the general role of the European institutions in the crisis to date. The aforementioned school of thought has argued that the European institutions have been too harsh on Ireland, have not been sufficiently pragmatic and have relied on a particular economic philosophy. However, it goes on to argue that they will change their minds in the event of a “No” vote and will adopt the policies that have been the exact opposite of what they implemented in Ireland and other EU member states.
I ask the witnesses to address these inconsistencies regarding the IMF and the role of European institutions. Do they expect them to find a new spirit in their conduct towards Ireland which has not been apparent heretofore?
I contrast Professor Whyte’s remarks with the vampire analogy presented by Dr. Storey. It is also my understanding this is not going into the Constitution. The Dáil will be given the ability to implement a number of legal instruments with which future Governments must comply. That is a huge deal and I am not willing to understate it. However, is it not the case that a new Government composed of, for example, Sinn Féin and the United Left Alliance would have the option of changing that legislation if it no longer wished to implement it? That would have grave implications for where Ireland stands in the future but it is within the competence of any Government with a mandate from the Irish people to change legislation and deal with the consequences. I ask for comment on whether that is feasible.
Deputy Seán Kyne: Does Professor McDonough agree that nobody claims this is the be-all and end-all in terms of the response to the crisis? He mentioned a number of possibilities, the third of which was closing the budget deficit, and stated:
Does he accept that the Government is pursuing the issue of property taxes and charges in order to close this gap? He referred to the Anglo Irish Bank promissory notes, in respect of which the Minister for Finance is making progress. There are a number of irons in the fire to deal with the economic crisis.
In describing what a real fiscal stability pact would contain, he suggested that debt could be financed by eurobonds. Does he accept that enactment of this treaty would make it more likely that Germany, as the main country with concerns about eurobonds, would be more likely to approve them?
Dr. Storey referred to a number of different people and their views. François Hollande has indicated that he will renegotiate the treaty if he wins the French presidential election but he also announced that he would reduce the pension age and hire additional teachers. Does Mr. Storey accept this will not reduce France’s deficit and that such strategies have brought us to our current deficit position?
Does he really agree with Professor Patomåki from Finland that the treaty is hostile to the basic principles of democracy? Every country has the right to elect its government. Fiscal discipline is something that every country should be pursuing anyway. Our own history of fiscal indiscipline has led to a number of problems. Surely we should follow the example of saving money during the good times in order to alleviate economic difficulties and promote growth during bad times.
Senator Kathryn Reilly: Much of what I intend to say has been addressed previously but I will put my comments in my own way. When I asked Professor Brian Lucey in the earlier session about alternative sources of funding, he indicated that they were theoretically available but Ireland’s potential to access them would be determined by the political economy of the day. Underlying that point is a comment by a former German Minister of Justice, who stated that he was all for Europe but not one that was determined by the political elites. Professor Lucey suggested that the moment the treaty becomes a bar to German and French growth, these countries will ignore it or seek to change it in the same way as they approached the Stability and Growth Pact. In this context, how accurate is the statement by Angela Merkel that the treaty is valid and binding forever and can never be changed by a parliamentary majority? Is it permanent, binding and valid forever until Germany and France decide the opposite?
How does Dr. Storey respond to those who suggest the treaty is not as strict as it might appear or that it is possible for governments to get around its terms given that it is not being placed at constitutional level?
Deputy Bernard J. Durkan: I thank the witnesses for expressing their views, even if I might not agree with some of them. When a business or a country discovers it has borrowed and spent too much, what measures would Professor McDonough and Dr. Storey support? Would they support reductions in spending or a requirement that all in the household or business adhere to a particular project to ensure that savings are made? Alternatively, would they continue as before?
The thrust of their submissions has been that we need more spending on stimulus to encourage growth and employment. Should that be an end in itself or should austerity be a means to that end? In order to create international confidence in our economy, is it not better to introduce the constraints and cuts in the first instance?
Keynes has been mentioned several times. Keynesian economic theory was put into practice in this country in 1977. We were working out of an economic crisis caused by an oil crisis and it was decreed that we should stimulate the economy in accordance with Keynesian economics. I did not agree with that at the time and it turned out to be a disaster because within 18 months the country was broke and the IMF was knocking at the door. Is it not better to go along with the compact, recognise that we have to make economies and create a good international image?
Based on the submissions we have received those representing the business sector - those involved at the coalface - have predominantly been very supportive of the treaty on the grounds of creating confidence for the country’s economy, creating employment, and as a means of ensuring that others in the Community as well as in this country would observe good fiscal strategy and economic policy in the future.
Senator Terry Leyden: I welcome the witnesses. I am delighted at the regional involvement of the universities through Professor McDonough even though I do not necessarily agree with him. I cannot see any benefit in voting “No” on 31 May. Why should we turn our backs on the European Stability Mechanism? Why should we rely on the IMF? What political or economic benefits would accrue to the country from rejecting the amendment in the referendum? Nothing said so far has convinced me to change my mind. From a political point of view, as the only country having a referendum of the 25 member states - two of the 27 have opted out - and of the 17 members of the eurozone, we have a tremendously important political advantage by voting on 31 May. We have a psychological benefit from the point of view that we are taking over the Presidency from 1 January 2013. So we are going in there with a very strong mandate. Those count in Europe. I speak as a former Minister of State with responsibility for trade who was involved at the time of the introduction of the Single European Act. Our standing in Europe then was and now is very strong. Our standing in Europe is very important and on balance I would prefer to be on the “Yes “ side and take advantage of the status we have than to be on the “No” side, thereby creating uncertainty and hoping that after we had turned our back on the European Stability Mechanism the IMF would be available to be kind and generous to us.
I take Professor Whyte’s point, which is very interesting. As Deputy Donohoe has said, it is one with which we can sympathise in a sense. Why was it decided to have a referendum? That is a good point. The Attorney General, after consideration, put her case to the Government, which decided - she can only advise the Government and cannot direct it. Having received her advice on balance it took the decision that it would be preferable to have the referendum than to have the uncertainty of the possibility of a referendum forced by the courts. The Supreme Court may have decided a referendum was necessary. If that was the case, the political advantages to Government would have been reduced as it would be going to the electorate having been forced to do so by the Supreme Court. That is a political decision. The Government does not publish the advice of the Attorney General as per precedent. The Government rightly decided that it should continue to be the precedent. The advice of the Attorney General is advice to the Government that it either takes or does not take and not advice that is published.
I can see the professor’s point of view which he put very well. The fact is that it is based on legislation. The Taoiseach announced again this morning that the legislation will only be debated after the decision is made on 31 May. The legislation will not be passed by the Houses of the Oireachtas before it becomes a reality that we must have the legislation. The legislation will then be based on a mandate from the people to introduce the legislation. I do not believe anybody would argue with what the professor is saying, but from a strategic and political point of view we are better off giving the decision to the people and then take the consequences rather than being forced to do so.
I thank Dr. Storey and Mr. Talbot for coming and thank them for their contributions. I hope the contributions at this committee will get the widespread coverage they deserve, but I doubt this will happen because the media are tired of the whole process at this stage. They want to get on with the business and get on with the vote on 31 May. Other issues, including water charges, are taking precedence over discussion on the fiscal treaty.
Chairman: I have a question for Dr. Storey. I presume he will accept the fiscal compact will happen. We cannot stop it regardless of what we do in the referendum. Bearing in mind that all the measures in the six-pack apply to us regardless of what we do in the vote, what would be the benefit in Ireland rejecting the treaty?
I have a question for Professor McDonough. At the moment we have a budget deficit of approximately €15 billion per annum. His presentation states that a judicious combination of the strategies he outlined would easily finance the resulting gap with little disruption. The last budget took €3 billion out of the system and I can assure him that we did not do it with little disruption. It caused considerable disruption as he will see from the ongoing problems many members of our society are having. Even a €3 billion reduction in the amount of money in the system is causing heartache. He stated that a third possibility would be to set about closing the budget deficit taking a €15 billion shock out of the system. What impact would that have on civil society from the point of view of economic growth, law and order, and governance? Does he believe we could actually take that amount out in one year? The Government’s strategy is to close the deficit but to do it in a gradual way trying to be as fair, balanced and reasonable as possible.
Dr. Andrew Storey: I thank the members of the sub-committee for their very valuable contributions. I particularly thank Deputy Donohoe. I am reminded of Oscar Wilde’s comment that the only thing worse than being talked about is not being talked about. It is always gratifying for an academic to know that somebody somewhere reads his or her writings even if it is only to pick holes in his or her arguments.
I take the Deputy’s point about the IMF of which I have been very critical. My background is as a development studies person vis-à-vis the global south and I have been very critical of the International Monetary Fund in Africa, Asia and Latin America. I draw the following analogy. When Bayern Munich plays any other team in the Bundesliga, I will support that other team because Bayern Munich is such a corporate outfit and such an elitist club. However, I supported its team in the match against Real Madrid last night because I regard Real Madrid as a greater evil in terms of its history. That is relevant in terms of the IMF versus the EU. I have used the analogy before. I do not think it is a case of the IMF being good cop to the European Union’s bad cop, but I believe the IMF is a lesser bad cop to the EU’s bad cop. That goes across a range of issues including, for example, burning bondholders. We know the IMF was prepared to see some write-down on bondholder debt when the troika came to town. By no means is the IMF something I would support in many cases, but it has a less pernicious record vis-à-vis the handling of the euro crisis than the European Union.
Regarding Deputy Kyne’s comment, it is important to restate a point that has been stated a number of times in this committee. Fiscal indiscipline did not cause the Irish crisis. The Irish crisis was caused by the decision to nationalise the private debts of private banks. The European Commission’s calculation indicated that Ireland did not have a structural deficit until 2007. Therefore, had the fiscal treaty been in place, it would have done nothing to prevent the Irish crisis from emerging. I do not argue that the treaty abolishes democracy but in important ways it hollows it out. It takes certain areas of economic decision making that in my view should be the focus of democratic deliberation and debate at election time and between elections and transfers them into a legal technocratic sphere.
I take Senator Reilly’s point. As with the Stability and Growth Pact, it is likely that larger countries, such as Germany and France, will drive a coach and horses through the treaty at some point in the future. My worry is that by the time that happens, a lot of damage will have been done in terms of austerity for several years.
That brings me to Deputy Durkan’s point about timing being crucial. I also take the point that what was implemented in the late 1970s was a cack-handed Keynesianism that was appealing to political populism, rather than any strategic programme of investment. The legacy of the abolition of rates is still with us in terms of the disastrous non-funding of local authorities. There are strategic ways of implementing a stimulus that are not discredited by that example. Timing is crucial.
At the moment it is calculated that 23 of the 27 EU countries are running a structural deficit. If they all have to start moving towards a surplus, or a deficit of no more than 0.5%, at the same time, it will send the European economy into an even greater tail spin than is currently the case. We could, as the Deputy said, go along with the compact now in the hope that in the long run things will get better. However, to quote Keynes again, “In the long run, we are all dead”. My worry is that if we implement these policies now in the hope of future gain, a lot of people in this country will not have a future. They will not be here, or they will be unemployed or facing even more serious consequences.
As regards the Chairman’s comments, I agree that this is not like the situation regarding the Lisbon or Nice treaties. Ireland cannot veto this treaty but what would be the benefits of not signing up to it? One of the benefits would be that we would not be bound by its terms. Therefore, no other member state could, for example, take us to the European Court of Justice for failure to uphold a completely specious and unrealistic structural deficit target. That in itself would be a benefit.
Deputy Bernard J. Durkan: As regards the nationalisation of private debt, does Dr. Storey accept or reject the fact that such debt, public or private, occurred under the supervision of the institutions available in this country at the time? They were supervisory institutions at departmental, regulatory or Central Bank level. I was one of the people who would have asked that question at the time but I knew there were going to be consequences. In the event of the Government of the day deciding to default and saying “Let it all fall”, what would that have done for the international credibility of the institutions of this State?
Chairman: Dr. Storey mentioned other countries being able to bring us to court for not upholding the measures. Other countries can bring us to court if we do not transpose these measures into national law, but not concerning whether or not we then uphold them. I wanted to clarify that point.
Dr. Andrew Storey: I take that point of clarification. We are not here to talk about the debt, obviously. Wearing another hat, I am involved in a campaign called “Anglo - not our debt”, which has been calling for the suspension of the promissory note repayments. That decision was taken with the acknowledgement and under the supervision of the various supervisory authorities, all of which got it spectacularly wrong in many ways, both in the run up to the crisis and in terms of the immediate response to it. In recent months, I have been arguing that there is a strong case for cancelling a portion of that debt and in particular the portion of the promissory notes.
Dr. Andrew Storey: I think we could get distracted here. I have made this argument before and I am happy to come back to the committee on this matter again. I am conscious, however, that other people need to get back in as well. I think the promissory note repayments could be cancelled with no deleterious consequences. I would refer the committee to a website called notourdebt.ie, which provides details on how that can be done.
Professor Terrence McDonough: Time being of the essence is always a problem in responding to a whole series of questions. I would very much like to treat them with the seriousness which they all deserve. They were quite thoughtful. I acknowledge that the Government is involved in attempts to close the existing deficit. The property tax issue raised by Deputy Kyne is an interesting one. That is because the kind of property tax which is currently on the table is a tax on the property which is owned by an ordinary citizen - that is, the family home. Property is a much broader concept than that, however. I would endorse the imposition of property taxes but they should be not only on the kind of property which an ordinary person might own, but also on other forms of property, primarily financial, which a more well-to-do citizen might own. If property is taxed across the board, I would have no problem with the imposition of property taxes on homes as well as on other property.
I do not think eurobonds are more likely as a result of this treaty. The intent of the treaty, mistakenly, is to make eurobonds unnecessary. I do not agree with that analysis but I think that is, in effect, the origin of the German support for the treaty.
As regards the IMF question, I share Dr. Storey’s delight that some of this material is emerging from the depths of academic publications and entering into real political debate. My point is simply that a “No” vote will not be a financial disaster because a number of alternatives can be pursued. Among those alternatives is IMF funding. I am not saying that this is the alternative which would be the most desirable one, I am merely saying that it is there and can be pursued should the Government choose to do so in the event that ESM funding is not forthcoming.
I emphasise that there are other options. The closing of the debt was raised by the Chairman, Deputy Hannigan. The current deficit is €15 billion. We would not be forced to consider closing the debt until 2014. The Government’s projection for the deficit at that point is €8.5 billion, although I do not want to minimise that figure. As President Eisenhower once said, “A billion here, a billion there, and pretty soon you’re talking about real money”. Nevertheless, €8.5 billion is not €15 billion. It is not a huge sum in relation to the crisis which we have experienced to date. It is certainly not a huge sum in regard to European financing. It is possible to close that substantially by using tax measures which we have not considered to date, specifically, taxation on wealth over and above property, which could potentially bring in €2 billion quite easily. In addition, a third rate of tax, lower pension relief contributions, standardising tax reliefs and having mortgage interest for landlords, could all bring in another €3 billion or so.
Taking the tax level in Ireland up to the EU average - simply bringing it from its current rate of a percentage of GDP - or rather the rate projected for 2015, would realise €7 billion. In light of these figures, closing the €8.5 billion figure is not a disaster. The argument is not that it would not be disadvantageous to some extent - not that it would not be painful - but I am simply arguing that it is not a disaster.
Debt restructuring is something that seriously has to be put on the table. We could talk about innovative debt instruments in more detail in another context but it is also possible to raise money that way. In the abstract I could make a case that even one of those things could bring in the €8.5 billion. However, I do not recommend that we simply rely on one of them to do so. It would be much easier, better and less disruptive if we followed, perhaps, President Eisenhower’s advice and brought in a billion here, a billion there and a billion elsewhere. If we added up innovative debt, plus some debt restructuring, plus some closing of the deficit, some borrowing from the IMF and some funding from Europe, we could easily close the €8.5 billion. That is my argument, not that it is a bed of roses relying on the IMF for money because it certainly is not.
I have been somewhat shocked that the European Union has been more stringent than the IMF in its conditions for lending. I have a vivid memory of the debate when we were discussing monetary union and I am quite surprised that no one else seems to have this memory. What I remember from the debate is that most economists were of the view that monetary union without fiscal union was a mistake but that it was a political necessity to join the monetary union and be at the heart of Europe. I accepted this argument that when the time came the EU would respond to the crisis of monetary union without fiscal union by implementing fiscal union, that is, EU taxes and budgets, a transfer union, as it is sometimes called on the Continent. We have not seen that. I do not think we should move forward on a treaty which is an economic mistake but a political necessity. We have been in this position before. Monetary union without fiscal union was an economic mistake and we were told it is a political necessity but the result has been disastrous. I do not think we should repeat that mistake with this treaty.
Mr. Ian Talbot: There were no specific questions addressed to me but I wish to reiterate the point about confidence. We had a euro crisis last September and October driven by developments in other countries such as Spain and Italy. The word on the ground from our businesses around the country was that we have very sophisticated consumers who put their hands in their pockets. The CSO figures released a couple of weeks ago confirm that we went back into recession in the last three months of 2011. The ECB solved the problem ultimately on about 29 December and moving into 2012 we have seen surprisingly good VAT returns which suggests that consumers are spending a bit more because there is not a euro crisis at the moment. We have seen reports earlier this week that savings rates across the economy continue to increase in spite of the increased burden of taxes and concerns about a new household charge and so on. We have very sophisticated consumers; when they are worried they keep their hands in their pockets. A “Yes” vote will give them a little more confidence to go out and spend.
Professor Gerry Whyte: In response to Deputy Donohoe’s question about the legal implications of a subsequent Oireachtas repealing national legislation containing the proposed budgetary rules, the answer to that question would be that legal consequences would flow from such a move not at the level of domestic law or before the domestic courts but at the level of international law. Article 8 of the treaty envisages that if a member state or a signatory state fails to enshrine these rules in national law, then either the Commission or another member state may bring the matter before the Court of Justice and ultimately the Court of Justice may impose a financial sanction if the state continued to be in breach of its duty. Legal consequences would flow, certainly, albeit not at the domestic level.
Deputy Paschal Donohoe: I thank Professor Whyte for that clarification. Of course it would then be open to a government to organise another referendum asking for the country to repeal this intergovernmental treaty. It is frequently the case that countries opt out of, change, or exit legal arrangements between themselves and other countries. Would it be theoretically possible for a government which was completely opposed on a philosophical basis to a measure to get a mandate from the people and then to exit this treaty by means of referendum and legislation?
Professor Gerry Whyte: The answer would have to be that the situation is unclear. International law is not an area in which I have particular expertise but I have seen discussion of the treaty by international lawyers, including Darren O’Donovan from UCC law school. He has raised the question as to whether it is possible to withdraw from the treaty if the treaty is ratified and signed. There is no explicit provision in the treaty providing for withdrawals or, indeed, for the making of reservations. I could not say that a subsequent referendum could definitely ensure Ireland’s withdrawal from the treaty. The treaty itself does not make provision for withdrawal.
In respect of Senator Leyden’s comments, in his absence, I am happy to have the opportunity to clarify that in my opening comments I did not mean in any way to question the judgment of the Attorney General in advising the Government that a referendum was needed. From the perspective of a constitutional lawyer and leaving political considerations to one side, it seems to me that the majority decision of the Supreme Court in the Crotty case required that a referendum be held on this particular treaty because the treaty does involve transferring powers from the Government to Europe. I believe the Attorney General’s decision was the correct one from a constitutional point of view.
Deputy Paschal Donohoe: I wish to compliment Dr. Storey on his presentation. Anybody who can draw upon Bram Stoker, Bayern Munich and a number of other references in his or her description is to be applauded. Professor McDonough, I think, referred to President Eisenhower and he shares the skill of using analogies. I take my hat off to anyone who can employ these analogies in such a technical discussion. I wish to use an analogy of my own which is a reference to the film, “Jerry Maguire” in which Cuba Gooding Jnr. says to Tom Cruise, “Show me the money”. This is also the question here. Where will the money come from to fund public services? More specifically, where is the guarantee of the money to fund public services in the future if we are outside? It is not sufficient to say we will have theoretical options. Mr. Talbot referred to the period of last September to December and its impact on consumer confidence. Every day I received telephone calls from constituents asking what they should do when the euro collapses. Telling people that theoretical options will be available for us to get funding to fund our public services is not a concrete answer to give to a nation state.
I refer as an example to what Professor McDonough said that closing a gap of €8.5 billion gap would not be a disaster. By that stage we will have taken €32 billion out of the economy, to find another €8 billion across one year would be the equivalent of this budget, the previous budget, the next budget and the budget after that, all in one move. He says this would not be a disaster. I ask him to reconsider that view, in the context of the impact of all the other budgets - of which he has been so critical - on consumer confidence.
Deputy Bernard J. Durkan: I will not do so. Some US economists have been promoting and promulgating that notion over the last four or five years. However, although that theory was applied in the United States, it did not work; there was a property-based economic downturn there as well. A number of states within the US, even though they work within those constraints, have gone close to going bust over the last 30 years. I can think of two in particular. Therefore, I do not agree with the theory that was mentioned. Would Professor McDonough accept that what Europe really needs is to be going in the same direction? We should not be poles apart. We have to be within reach of each other in terms of fiscal and monetary policy, and that should be the right way to do things.
For an open economy such as Ireland’s there can be suggestions of a doomsday situation of total shutdown, such as that described by my colleague a few minutes ago. What would be the effect on a country such as Ireland, which depends so heavily on international trade and exports, if we had, for example, a situation such as that which has prevailed in Greece for the last six months? What would that do to our international reputation?
Professor Terrence McDonough: Greece was mentioned at the end of those comments. Certainly, Ireland does not want to be in the same situation as Greece, which has been dealt with in an extraordinarily incompetent way both by the Greek Government and at EU level. I would not defend anything that has been done in this regard up to now. To describe the alternatives would require us to go into quite a bit of detail about the particular situation faced by Greece and would not necessarily be terribly enlightening in terms of an Irish analogy.
With regard to the “show me the money” question, it is not the case that any of the alternative options is particularly painless. However, the provisions of this treaty, which require a roughly balanced budget, a cap of 3% on deficits - a cap which Germany and France were unable to meet even in good times - a reduction of debt from about 120% of GDP to 60% of GDP over the course of 20 years, and structural surpluses even after that, are extraordinarily painful over a long period. Such provisions have never been tried. They have been consistently turned down in the United States in the form of various balanced-budget amendments by Republican Congresses, because they are a bad idea. However politically attractive it was to the supporters of Bush or Reagan, they never passed a balanced-budget amendment because they knew it would be an economic disaster which would play out over the long term. That is what we get in the event of a “Yes” vote. What we get in the event of a “No” vote is the question of where the €8.5 billion will come from in 2014. What I have simply argued is that there is not just one possibility in this regard. There are potentially five possibilities for obtaining this €8.5 billion, including concrete possibilities - promises from the EU or promises from the IMF - and the possibility of closing the budget deficit, which I admit would be painful, but I do not think would be as painful as this treaty will prove to be over the long term. I do not advocate taking out the whole €8.5 billion. There are other possibilities, including my fourth and fifth possibilities, the restructuring of debt and the issuing of innovative debt instruments.
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