PIGS, TURKEYS AND THE EURO 1207 XLI

PIGS, TURKEYS AND THE
EURO

At least the Irish turkeys (with the exception of one sub-set)
did not vote for Christmas. In the end the
referendum on the Fiscal Treaty passed comfortably. The outcome can best be
described as prompted by enlightened self-interest. The campaign was singularly
uninspiring, with much heat being generated over our sovereign right to borrow,
as if borrowing is a virtue.

Ireland continues to stagger along,
borrowing $400 million per week just to keep the country functioning. As long as
the electorate, and through them the politicians, are unwilling to cut the
welfare benefits we have chosen to pay ourselves, and to cut numbers and
services in the public sector rather than the wages we pay, the country will
have to go on borrowing, the debt will mount up and the interest payable on it
will continue to rise.

This is the reality. The Fiscal Treaty offers the
prospect of securing future funding at advantageous rates when our current
monetary life support system ceases with the end of the Troika supervised deal
after 2013. The brave talk is that Ireland will then “be able to re-enter the
markets.” One commentator has wryly observed that this means, in effect, that we
will leave our own friendly credit union and go to the moneylender down the
street. The moneylenders (sorry, the markets) were unwilling to lend to us in
November 2010, hence the Troika bailout.

There
is every possibility, even likelihood that a second bailout will be necessary,
and in any event who can guess where Ireland, or the Euro, will be by 2014. The
importance of the yes vote was that we did not shut the door prematurely on a
potential source of future cheap money and the treaty’s opponents were unable to
address that point. Indignant whinges about bullying and lost sovereignty cut
little ice in a situation where we are obliged to borrow. Until the books are
balanced this will continue to be the case.

The sub-set that bucked the
trend was the urban working class vote, which appears to have voted no in
considerable numbers. This has been interpreted as marking a growing
polarisation of the Irish electorate along class lines. Perhaps, though it might
simply be a sense of disenchantment among some who voted Labour last year,
contrasting its strong stance during the election campaign with its performance
in government since.

They would be well advised to reflect on Labour’s
position as very much the junior coalition partner, even before considering the
external economic situation the country faces. They should also reflect on the
illogicality of voting in a way which, if successful, would have quickly led to
some really savage welfare cuts. The country raises income sufficient for eight
months and must borrow for the other four. Does anyone seriously think the gap
can be bridged just by soaking the rich; what rich? Arguing that a no vote was a
vote “against austerity” was simply delusional.

If the government
reaction was one of relief at the outcome, Sinn Fein’s glee was evident. Some
polls suggest it is now the second most popular party in the state. Its campaign
for rejection was a mixture of bombastic chauvinism, with talks of wielding
vetoes against Europe, and populist left wing proposals for higher taxes on the
better off and salary cuts for higher paid public servants. Somewhat
inconsistently it also asserted that our “gallant allies in Europe” would
continue to fund us should we vote no.

Given that we are still very
much engaged fiscally in a work in progress, with at least two harsh budgets and
more pain to come, there is every prospect for Sinn Fein to consolidate its
position further at the expense of Labour and perhaps Fianna Fail.  It now has
the working class Labour vote clearly in its sights. It will be interesting to
see how Labour behaves over the required cuts in the next
budget.

Developments on the larger European stage just might throw Labour
a lifeline, though it has to be re-emphasised that even if all Ireland’s debt
(over 70% of which is due to our own spending excesses and has nothing to do
with the banks) were to disappear magically overnight, we would still have to
borrow to pay next week’s welfare payments. We can at least be upfront about our
record of compliance with the Troika programme to date and can now point to the
positive referendum outcome.

The flavour of the month in Eurospeak terms
is the notion of an economic stimulus package (writ small, a similar notion was
touted by Sinn Fein, but ran aground on the practicality of finding funding;
more borrowing?). Hollande, the new French (socialist) president has even
proposed tying French ratification of the Fiscal Treaty to getting some such
package tacked on to the treaty. I suggested last time that some Potemkin
village-style construct might be fabricated to satisfy him and others who
believe that economic growth and recovery can be generated easily. And, indeed,
the whole Fiscal Treaty can be regarded, somewhat similarly as a Potemkin
exercise to mollify the German electorate. Does anyone seriously see the small
print of the treaty being implemented?

But right now the priority is to
address the situation in the PIGS, whatever waffle there may be about growth. I
write before the second Greek election, which may prove a tipping point. All the
PIGS have now received bailouts, the latest being Spain whose banks are shaping
up to be the Irish situation writ larger. Spain has been described as too big to
fail. A bailout has been agreed as I write, but, based on past performance,
there is considerable doubt whether the action taken will be sufficient or
timely enough to provide a lasting solution. The pious hope here is that in some
way a lasting solution involving a greater role for the European Central Bank
would have positive implications for revisiting Ireland’s banking debt, still
leaving us, however, with the other 70%.

Looking at the broader picture,
the slow emergence of a European super state built around Germany, about which I
wrote two years ago, continues apace. Arguably grappling with the current fiscal
crisis is giving impetus to the process.  Already remedies and proposals for
solutions unthinkable two years ago are now firmly on the table, though sorting
them out and finding the correct balance may take some time. Ultimately some
variant on the Alexander Hamilton solution of a fiscal union seems the likely
eventual outcome, always allowing for the quirks of the democratic process. But
Germany must step up to this particular plate.

Though little remarked
upon, Britain breaking ranks late last year may come to be seen as a very
significant landmark. Once the straightjacket of unanimity was removed progress
has been swift – at least in European terms. The Fiscal Treaty was drafted
rapidly and outside the existing Treaty structures so that no country could
wield a veto or delay matters. On past form it is highly likely that several
future agreements and modifications will be necessary before the Euro crisis is
finally resolved. Expect them to be also drafted in a way that precludes any
national veto.

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