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Analysis

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The Eurozone crisis became evident when Greece was frozen out of the international bond markets in 2010 and the EU and IMF intervened. At this point EU leaders believed the problem to be purely a Greek one. It was argued that the Greek government had borrowed and spent recklessly, had run up excessive debts and deficits and markets no longer believed that they would repay their debts.

The solution proposed was to impose austerity on Greece to force it to get its deficit into line with the Stability and Growth Pact criteria and to provide funding in the form of loans from EU member states and the IMF until such time as the international bond markets were willing to lend to Greece at an acceptable rate.

When Ireland and then Portugal were frozen out of the international bond markets in 2010 and 2011 EU leaders took the same view and applied the same proposed solutions.

While the circumstances surrounding Ireland’s forced entry into the EU/IMF programme in November 2010were different to that of Greece and Portugal the policy prescription from the EU and IMF was the same. Ireland had always met the Stability and Growth Pact criteria and had run budget surpluses, structural deficit surpluses and had a low Debt-to-GDP ratio in the period preceding the economic crash of 2008.

However the cost of the bank bailouts in 2009 and 2010and the additional risk to the state arising from the banking guarantee and NAMA meant that the markets also believed Ireland might not repay its debts. Emergency loans were provided for Ireland on broadly the same austerity terms as Greece and subsequently Portugal.

At this stage the view of the EU leaders was that this was a crisis of the Eurozone periphery, caused by reckless spending, borrowing and bailouts of the banking system. It was viewed as a debt crisis to be rectified by a heavy dose of austerity.

The EU established a temporary bailout mechanism known as the European Financial Stability Facility (EFSF) which had a lending capacity of €440bn. Monies from this fund would be provided to ‘programme states’ on the basis that their governments would adhere to strict policy prescriptions and monitoring by the European Commission, the European Central Bank and the International Monetary Fund.

The EFSF was to be replaced in 2013 with a permanent bailout mechanism known as the European Stability Mechanism (ESM) with an initial fund of €500bn. While the details may have differed, the basic premise and function of the ESM was the same as the EFSF.

However by the summer and autumn of 2011 it became increasingly clear to EU leaders that the problem was not contained to the periphery. Core Eurozone economies including Italy, Spain, and France and to some extent Germany were all coming under pressure from markets who increasingly believed they would have difficulty repaying their debts.

The funds available to the EFSF were too small to provide any meaningful safety net either for the larger economies or the markets should the likes of Italy or Spain get into trouble.

In addition to the rising cost of state borrowing in the Eurozone core, banks in the core economies were also experiencing difficulties of their own as a result of high exposure to peripheral Eurozone sovereign debt. In response to the growing crisis a number of solutions were proposed.

The first, agreed at the crisis summit in July 2011, was to increase the size of the funds available to the EFSF by raising funds on the international markets, supported by guarantees provided by EU member states.

The second was to bring forward the start date of the ESM to 2012 in an attempt to reassure the markets that the EU was serious about resolving the cause of the problem.

However when this failed to provide the necessary funds three alternative scenarios were proposed all involving the European Central Bank (ECB).

The first was that the ECB would lend money to the European Financial Stability Facility to provide the necessary financial safety blanket needed to reassure the markets. The second was that the ECB would lend money to the IMF, which would provide the safety blanket.

Finally the European Commission proposed ‘Eurobonds’ as a mechanism to raise money on the international markets, which would be used to provide the safety net.

However at successive European Council summits in 2011 EU leaders and the European Central Bank were unwilling or unable to agree on which combination of these measures should be implemented.

By December 2011 many economists, commentators and politicians believed that the Euro was close to collapse. At a controversial crisis summit on 9 December 2011, 26 EU leaders agreed a new set of proposals, which they hoped would resolve the crisis.

Because the British Government would not support the proposals the other 26 leaders decided to operate outside the EU treaties. They proposed the creation of a new ‘fiscal compact’ aimed at reducing member states’ debt and deficits.

On 30th January 2012 the Treaty was adopted by 25 leaders, with the government of the Czech Republic joining the British government in not supporting it. The formal signing of the Treaty took place on 2nd March 2011.

The agreement was broadly criticised by economists and commentators. Even those who supported its contents argued that it would not address the causes of the currency crisis.

Once again EU leaders failed. They focused on the symptoms of the crisis rather than the causes.

Preamble:

A three-page preamble outlining the aspirations and existing obligations for the Signatories such as ‘ever-closer coordination of economic policies’, ‘sound and sustainable government finances’, ‘price stability’, ‘strong sustainable growth’, ‘need [for] deficits to remain below 3% of GDP’ and ‘government debt is below or significantly declining towards 60% of GDP’.

The preamble states that it is the objective of the Eurozone heads of state and government to ‘incorporate the provisions…as soon as possible into the Treaties on which the European Union is founded’.

The preamble states that ‘compliance with the obligation to transpose the “Balanced Budget Rule” (i.e. not running structural deficits of more than 0.5% of GDP) into national legal systems through binding and permanent provisions, preferably constitutional, should be subject to the jurisdiction of the European Court of Justice’.

Significantly, compliance with the balanced budget rule contained in the treaty is stipulated as a condition for receipt of funds under the European Stability Mechanism, the EU’s permanent bailout mechanism due to come into operation in 2012.

Article 1:

Signatories agree to ‘strengthen the economic pillar of Economic and Monetary Union’, to ‘strengthen the coordination of policies and to improve the governance of the Euro area’. It also states that the treaty ‘shall apply in full to the Contracting Parties whose currency is the euro…’ and under certain conditions to member states outside the Eurozone.

Article 2:

Agreement must be ‘in conformity’ with EU law.

Article 3:

Outlines the rules and exemptions to budgetary discipline, including those relating to balanced budgets and circumstances in which temporary deficits are allowed; providing more detail on the operation of the 0.5% balanced budget rule; outlining some exemptions for over-indebted countries; outlining an automatic correction mechanism in place to force countries in breach of the balanced budget rule to amend their budgets on recommendation from the Commission and for this mechanism to have a ‘binding and permanent character,preferably in constitutional law’; detailing the role of the Commission and Council in enforcing the balanced budget rule; and providing definitions of ‘deficit’ and ‘exceptional economic circumstances’.

Article 4:

Requirement to reduce government debt by5% per year when it exceeds 60% of GDP. The 5% reduction is on that portion of the debt above the 60% threshold.

Article 5:

Strengthens the excessive deficit procedure, i.e. the mechanism used by the EU to compel Member States to meet their debt and deficit targets. This involves a legal obligation to enter an Economic Partnership Programme, the details of which would be drawn up by the European Commission detailing Government plans to reduce debt and deficit based on EU law.

Article 6:

Commitment to improve reporting of national debt and to provide reports to the Commission and to other Member States.

Article 7:

Obligation to support Commission proposals where 0.5% deficit ceiling is breached, and new reverse Qualified Majority Voting blocking mechanism. Under existing EU rules the Commission can only intervene if a qualified majority of the European Council agrees on such a course of action. Under the changes proposed in the Treaty Commission intervention would be automatic unless a qualified majority votes against such action. This is called reverse QMV.

Article 8:

Mechanism for one EU member state to take another member state to the European Court of Justice for breaching the Agreement; obligation on signatories to comply with European Court of Justice judgments. Failure to comply brings a penalty payment of up to 0.1% of Member States GDP. (This would equate to €160m on the basis of current Irish GDP)

Article 9:

Commitment to ‘enhanced convergence and competitiveness’ and support for ’Euro Plus Pact’ (a set of rules agreed by the European Council in November 2011 dealing with coordination of fiscal and budgetary policy in the EU and, among other things, committing Member States to wage restrictions, reduced job security and an increased retirement age).

Article 10:

Commitment to use ‘enhanced cooperation’ on unspecified matters (enhanced co-operation is a mechanism provided for in the EU treaties that allows small numbers of member states to proceed with policy initiatives without the support of all 27 member states).

Article 11:

Commitment by member states to share ‘major policy reforms’ with each other and with EU institutions in advance of their implementation and to coordinate such reforms.

Article 12:

Creation of new informal Euro Summit meetings involving euro member state leaders, the president of the Commission and the ECB (with its own president elected by summit with a simple majority), to meet at least twice a year. This is a non-EU structure attempting to manage EU institutions and policies.

Article 13:

Commitment to hold meetings of members of national parliaments with their European Parliament counterparts.

Article 14:

Requirement that twelve member states ratify Agreement in order for it to come into force.

Article 15:

Allows for additional EU Member States to sign up to the Treaty.

Article 16:

Clause allowing treaty to be incorporated into EU law within five years at most without going through the Ordinary Treaty Revision Procedure.

There are a number of key areas of concern:

1. Permanent obligation to comply with the rules of the Treaty:

The ‘Balanced Budget Rule’ will be binding, permanent and preferably constitutional.  This is in the preamble and Article 3. If implemented, this will mean that there will be a constitutional requirement and a binding international legal requirement to meet the debt and deficit rules. This means austerity budgets and severe debt reduction targets in perpetuity. These obligations could only change if they were removed from the Irish constitution in a subsequent referendum and if all of the countries who have signed the Treaty agreed to amend or repeal it.

2. Tougher deficit and debt rules:

Article 3 constitutionalises the new 0.5% structural deficit target meaning that as a general rule the government should not exceed that 0.5% ceiling. At present the target ceiling is a 3% Government deficit. The Government deficit is the gap between spending and revenue minus one off expenditures such as bank recapitalisations. A structural deficit is the Government deficit adjusted to take account of what is known as the business cycle, that is growth and recession over a period of time. There is no agreed method of calculating the structural deficit and many EU Member States dispute the method used by the European Commission. It is also subject to retrospectivere vision as a result of over optimistic forecasting. 

Article 4 strengthens the existing Stability and Growth Pact 5% per year debt reduction target for member states whose debt-to-GDP ratio is above 60%. This means that they will have to reduce the excess debt by 5% annually until they are within the 60% ceiling over a period of time agreed with the European Commission.

Taken together, the combined effect of the debt and deficit targets in Articles 3 and 4 will be very severe on heavily indebted economies such as Ireland. While they will not apply until after Ireland meets the EU/IMFprogramme targets in 2015, they will have a medium and long term impact on the ability of Governments to choose options that may be in the countries best interests. If implemented fully they will mean austerity for more than a decade and possibly in perpetuity.

3. Greater powers for Commission and Court of Justice:

Articles 5, 7 and 8 provide for additional powers for the European Commission and legal jurisdiction of the European Court of Justice to police and enforce compliance with the debt and deficit rules. There are significant departures from existing EU Treaty law in these articles.

The Commission is given new powers with respect to the Economic Partnership Programme’s to be imposed on member states involved in an excessive deficit procedure.In effect this means that if the European Council and European Commission is not satisfied with the progress of a Member State in meeting the debt and deficit rules, the Commission can impose a detailed programme of structural reform similar to those currently contained in the EU/IMF austerity programme, even where a Member State is borrowing on ordinary terms from the international bond market.

The Court is given extra jurisdiction to determine whether Member States are complying with the debt and deficit rules of the Treaty and the implementation of the excessive deficit procedure. Article 8 allows a Member State to initiate legal proceedings against another Member State if they believe the Member State is not complying with the terms of the rules. Significantly the Court could impose fines of up to 0.1% of GDP which at 2011 GDP levels in Ireland would mean approximately €160m.

4. Enhanced Cooperation:

Article 10 includesan undertaking to make greater use of enhancedcooperation; this is the mechanism whereby smallernumbers of member states can move ahead with policyreforms. The article doesn’t reference any particular areaof policy but if the signatories wanted to move on issuessuch as Common Consolidated Corporation Tax Base ora Financial Transaction Tax (proposals currently beingpursued by the Commission) it would be via this article.

5. Incorporation of Treaty into EU law:

Article 16 is an attempt to transpose the contents of the intergovernmental treaty into EU treaties by the backdoor after a period of five years. The legality of such a move is deeply questionable. It is also clearly an attempt to circumvent the ordinary revision procedures of the EU that govern Treaty change and the democratic safeguards contained in this procedure.

6.  Linking ratification to ESM eligibility:

This addition to the preamble of the Treaty is believed to be at the request of the German government and in response to the inclusion of the word ‘preferably’ in the clause concerning placement of the balanced budget rule in member states’ constitutions. It was followed up with a similar amendment to the European Stability Mechanism Treaty which when ratified, will give legal effect to the permanent EU bailout fund. 

It is nothing short of a blackmail clause intended to frighten people into supporting a Treaty they would otherwise reject. 

Importantly the Irish Government could have opposed this amendment to the ESM Treaty but chose to fully support the link between ratification of the Austerity Treaty and accessing future ESM funds.

Indeed, the requirement on the Government to ratify the amendment to Article 136 of the Treaty on the Functioning of the European Union, which gives a legal basis to the ESM, gives the Government a veto over the ESM Treaty itself.

The Government chose not to use this veto to block the blackmail clause. It can still use this veto to have the blackmail clause removed, until such time as both the Article 136 amendment and the ESM treaty are formally ratified by the State.

However, it is also important to stress that the blackmail clause, and its threat that emergency funding will be withheld if a country rejects the Austerity Treaty, is an empty threat.

The primary function of the ESM as outlined both in the EU Treaties and the ESM Treaty is to provide funding to member states where such funding is “indispensable to safeguard the financial stability of the Euro area as a whole.”

The blackmail clause is an additional eligibility criteria inserted into the recitals of the ESM Treaty. A recital is not an article of the Treaty. It does not have the same legal status as an article. The primary mandate of the ESM as outlined in the EU Treaties or the body of the ESM Treaty will determine whether any Eurozone member state secures emergency funding. The blackmail clause cannot be used to alter this mandate.

If Ireland remains frozen out of the markets at the end of 2013 denying emergency funding would be in direct contravention of the EU Treaties and the ESM Treaty.

Even worse it would not only undermine the stability of our domestic economy, it would undermine the stability of the Eurozone as a whole.

This is a risk that no European politician would be willing to take.

The European Council will not refuse emergency funding to any Eurozone member state in the future irrespective of the member states final position on the Austerity Treaty.

To do so would be in contravention of European law and potentially destabilize the Eurozone. It would also contradict a commitment given by the European Council in their summit statement of 21 July 2011 when they said they were, “determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes.”

It is also important to point out that if Ireland is unable to return to the sovereign bond markets by 2013, as envisioned by the EU/IMF deal then clearly the austerity programme will have failed in its primary objective. The idea that it would be good for Ireland to enter a second bailout programme on the same, if not more severe terms, as the first one, makes no sense.

Ireland does not need more austerity and bank bailout linked EU/IMF loans. We need a change of direction aimed at investing in jobs and growth.