Objection to Stability Treaty information leaflet

The People’s Association Watchdog would like to formally object to the government’s ‘information’ website and leaflet in regard to the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. We would further protest the use of any public funds for this document.
We believe this contravenes the mcKenna judgement and clearly shows a bias towards a Yes vote.

The proper informal term for the treaty is the ‘Fiscal Compact’ Treaty, referring to it as the ‘Stability’ Treaty is misleading, yes the term is included in the full name, however so is co-ordination and governance. This infers the treaty will bring ‘stability’, that point is well disputed and many leading economists would disagree. If an informal name is to be given it should be the ‘Fiscal Compact’.

The front page of the leaflet only refers to the term ‘Stability’ treaty when it should have been given its full title.

The wording of the first page is biased towards a yes vote. Disputable claims are not facts and should not be included in an unbiased ‘information’ leaflet.

The introduction seems to presume that it was our deficit that caused the crisis and not the financial sector. This we know is untrue.

First Claim: It’s a Treaty aiming to support growth and employment, especially for euro area countries including Ireland

Counterclaim: Where are the provisions/articles within the treaty that specify terms to foster growth and employment? There are no terms within this treaty that specifically deal with these issues, merely mentioning them without any substance does not constitute ‘fact’.

Claim 2:The Stability Treaty is an international agreement among twenty-five European countries including all countries who, like Ireland, use the euro. The Treaty states that its purpose is to support “sustainable growth, employment, competitiveness and social cohesion”.

Counterclaim: The treaty may state this but there is no evidence to support that the treaty will, in fact, make good those aims. Leading economists would dispute the assertion that the treaty will support growth or employment.

The German Institute for Macroeconomic and Economic Research estimates that the effect of this will be to drive down Eurozone growth to a mere ½ percent average annual growth up to 2016, depending on the timing of the fiscal consolidation.  Depressing economic growth during a period of stagnation will undermine confidence in an economy’s ability to generate the future revenue needed to repay its debts. The Government’s recovery strategy is based on an expanding export base. However, if European countries are simultaneously driving down their demand, our markets for exports will be contracting.

“Social cohesion is the capacity of a society to ensure the well-being of all its members, minimising disparities and avoiding marginalisation.”
This is a treaty that by its very nature and original purpose will be enacted to save the ‘euro’ not and not look to the well being of any nation/member.

Claim 3The Treaty requires every country to have its own law to protect the public’s money in terms of how much is borrowed, raised in taxes and spent.

Counterclaim: Where in the Treaty does it specify this law ‘to protect the public’s money’?
If this were true rather than placing an automatic debt brake into our law, we would instead have a treaty on regulation and supervision in the financial sector. This would do more to ‘protect the public’s money’ from the moral hazards of the banks and bondholders.

What is undisputed is that it was the financial sector that caused this crisis, not our deficit.

Claim 4To do this, it requires countries to apply discipline to their national budgets through stronger rules to help get debts under control and through a rule which –balanced out in good times and bad taken together – ensures that your government doesn’t spend more than it can raise in taxes over time.

Counterclaim: Again, the deficit was not caused by overspending. If the Fiscal Compact had been in place it would not have prevented this crisis.

In 2007, Ireland’s debt to GDP ratio was 24.8%, far less than the 60% dictated in the Fiscal Treaty; our general budget was in surplus of 0.1% compared to a target of a deficit of 3%; and our structural balance was estimated by the EU Commission in spring 2008 to be in surplus of 0.2% compared to a target of a maximum deficit of 0.5%. Later on, the structural balance was revised downwards, with the Commission in 2011 saying that Ireland had a structural deficit of 1.4%. So having the strictures of the Fiscal Treaty in place would not have meant we could have avoided the economic crisis.  In fact, the government would have been congratulated on having met the targets so effectively and with such high growth rates!

‘Ensures that your government doesn’t spend more than it can raise in taxes’; this implies that it was overspending that caused the crisis. As we can see from the figures above this was not the case. However bailing out the banks and bondholders did adversely affect our deficit.

How Much is the Bailout Costing? Bond payments September 2008 to April 2012 were €103.7bn, Bond payments from April 2012 onwards: €40.6bn.

So far, according to Mr Noonan, the bank recapitalisation is €62.8bn (Anglo/INBS €34.7bn; AIB/EBS €20.7bn; BoI €4.7bn; IL&P €2.7bn). Given that according to Mr Noonan these banks still have over €40bn to pay, there is a good possibility we may have to recapitalise again. Also, this figure does NOT include interest lost on the money taken from the National Pension Reserve Fund, nor does it include the interest we’ll have to pay on the borrowings needed to fund all that recapitalisation.

Claim 5The Treaty is part of a toolkit to help avoid another economic crisis.

Counterclaim: If this is true, where’s the rest of the kit?

The crisis was caused by the financial sector, how does this treaty prevent such a reoccurrence?

According to Constantin Gurdgiev Economist: “There is nothing within the Pact that would facilitate either Portuguese or Irish economic stabilization and recovery. When it comes to dealing with the current crisis, the new Pact contains no tools for achieving structural reforms required to arrive at sustainable public finances. No country has been successful in restoring fiscal and external balances after a decade of twin deficits.”

According to Paul De Grauwe (Centre for European Policy Studies Brussels): “Will the establishment of the ESM shield the Eurozone from future crises? My answer is unambiguous. It will not. In fact it is worse than that. Some of the features that have been introduced in the functioning of the ESM will make it more difficult for a number of countries, in particular Ireland, to attract funds in private markets. These features will have the effect of increasing rather than reducing volatility in the financial markets.”

Claim 6It is part of a group of plans and rules aimed at helping economic recovery and to prevent a repeat of the economic and financial crisis we’ve had in Ireland and Europe in recent years.

Counterclaim: ‘Helping economic recovery’, ‘prevent a repeat’, again the leading economists say that this would not have prevented the crisis and will not prevent reoccurrence but will indeed lead to a worsening of the recession. To prevent a reoccurrence, the financial sector needs to be overhauled, regulated and supervised.

Another option would be for the ECB to lend directly to the banks and not to the governments.

‘Helping economic recovery’: According to the Economist: The pact’s rigidity would make recessions worse, and the new fiscal rule would not have kept Ireland or Spain out of trouble.

According to the Davy Report (Bloomberg: Conall Mac Coille, Chief economist); The fiscal compact would have had no bearing on the collapse in Ireland’s public finances had it been adopted at the inception of the euro.

The cause of the crisis that we should be working on so as to avoid a repeat of the economic and financial crisis.

According to the Banking Enquiry: Financial integration in the euro area allowed banks in Ireland unprecedented access to cross-border funding. As in many smaller EU economies the entry of foreign banks intensified competition in lending. The banks’ ability to borrow cheaply in international wholesale markets created a ‘capital flow bonanza’ which has been observed to markedly increase the likelihood of a banking crisis within the receiving country. This clearly happened in Ireland.

According to the Assistant Director General, Financial Institutions Supervision, Central Bank of Ireland: In the 2000s, it is clear that the low ECB policy rate facilitated the growth of property prices in Ireland. There was also no direct regulation of credit limits, for example through restrictions on LTV ratios.  This meant that Irish households were able to accumulate liabilities more easily than consumers in countries where there was stricter regulation. A contributing cause of the crisis was that bank governance and risk management were weak – in some cases disastrously so.

According to the Banking Enquiry: These supervisory problems must be seen in conjunction with the absence of forceful warnings from the central bank. However, the IMF’s major Financial System Stability Assessment of 2006 also did not sound the alarm.

According to the Assistant Director General, Financial Institutions Supervision, Central Bank of Ireland: A striking lesson of the global banking crisis is the danger of allowing banks to operate to free market principles within free market economies.

Clemens Fuest (German economist); “without a fundamental reform of the European banking sector, the euro is in jeopardy.”   is the financial industry, he argues, that repeatedly endangers the monetary union. Ireland’s budgetary problems are the result not the cause of the crisis.

Claim 7: This Treaty does not change how decisions on taxing and spending are made.

Claim 8: The rules in the Treaty, many of which are already in place under other European laws, do not affect the role of Governments and national parliaments in decision-making on tax and spending.

Counterclaim:  According to Article 5 of the Treaty,
1.  A Contracting Party that is subject to an excessive deficit procedure under the Treaties on which the European Union is founded shall put in place a budgetary and economic partnership programme including a detailed description of the structural reforms which must be put in place and implemented to ensure an effective and durable correction of its excessive deficit. The content and format of such programmes shall be defined in European Union law. Their submission to the Council of the European Union and to the European Commission for endorsement and their monitoring will take place within the context of the existing surveillance procedures under the Stability and Growth Pact.

Article 3: (e)  in the event of significant observed deviations from the medium-term objective or the adjustment path towards it, a correction mechanism shall be triggered automatically. The mechanism shall include the obligation of the Contracting Party concerned to implement measures to correct the deviations over a defined period of time.

Decisions on taxing and spending will be influenced if not implemented from the EU and shows a significant divergence from past procedure.

Page 2 of the leaflet

Claim: The Stability Treaty is a significant element of the joint efforts being made in Ireland and the EU to tackle the economic crisis and to restore international investor confidence. This is particularly important for a small open economy like Ireland, which depends very heavily on inward investment by multi-nationals and on exports to create jobs.

Counterclaim: This is a matter of opinion and not fact. Please refer to the many economists who say this will do nothing to solve this crisis and that it is unlikely to restore investor confidence. In fact they say that because Ireland depends so heavily on the EU for exports that the impact will be to depress growth and external demand.

The Treaty is particularly relevant to Ireland’s economy and to investor confidence in the following ways:

The Treaty refers to the importance of safeguarding and stabilising the euro area. Its rules are intended to contribute to stronger economic growth and investment in the European Union.

Counterclaim: Again, this is a matter of opinion and not fact. Please refer to the many economists who say this will do nothing to solve this crisis and that it is unlikely to restore investor confidence. In fact they say that because Ireland depends so heavily on the EU for exports that the impact will be to depress growth and external demand.

The Treaty will allow Ireland access to the EU’s new assistance fund, the European Stability Mechanism (ESM), should it ever be needed. It is important that Ireland be eligible to receive this funding in the event of any future economic problems, and to reassure those who wish to invest in Ireland. It is necessary to ratify the Treaty to continue to be able to access the ESM fund.

Counterclaim: This claim is also disputed. The European Stability Mechanism (ESM): The ESM Treaty refers to ‘new’ financing. This reference to ‘new’ means that the current programme can be extended and financed under the ESM itself – because it would not be regarded as ‘new’. It is merely a continuation of support – support that the EU leaders have already guaranteed.

“We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes.”

This was issued after the Fiscal Treaty – and the ESM clause – was approved at EU level. It has not been contradicted in any subsequent EU statements.

In short, the Irish Government is the only the government in the EU to claim that Ireland will be isolated.

Also, there are other alternatives and to insinuate otherwise would be misleading.

The European Financial Stability Facility (EFSF), is accepting applications for new money up to the middle of 2013 and will stay open to administer this money in subsequent years so that new, extended or ‘rolled-over’ financing can come from the EFSF up to July 2013. This further underscores the EU leaders’ guarantee to Ireland. The argument that the current programme runs out after the deadline for EFSF funding doesn’t stand up.

International Monetary Fund (IMF): Bill Murray director of external relations of the IMF has said there is ‘no reason’ why Ireland could not ask it for another loan when the current bailout programme ends in 2013. “Any IMF member country can make an application to us for a loan.”  Asked if there was anything to stop Ireland from doing so, he said “no . . . The only countries from which we would not accept an application are non-members or those not in good standing of the previous IMF loans.” Murray said it did not matter to the agency whether the country had access to the European Stability Mechanism.

For the moment, we still spend a lot more than we raise in taxes. This cannot last, because debt will grow further and your taxes will go more and more to paying for that debt rather than for public services and jobs incentives. We have to manage our debt and budgets. This is at the heart of this Treaty and these budgeting rules will apply to all countries which ratify the Treaty.

Counterclaim: ‘Good Housekeeping’ insinuates that we are overspending, when in fact we are under-spending on essential services. This wording insinuates our problems are down to ‘bad housekeeping’, this is untrue.

The deficit is caused by bailing out the banks and bondholders.

The Treaty fines countries already in trouble, only 4 countries are within deficit, the only country that is in crisis because of ‘housekeeping’ is Greece. To infer that the crisis is down to ‘bad housekeeping’ is incredibly misleading.

To infer that this Treaty in any way deals with any of the causes of the crisis is not factual.

Yours sincerely,

Sonya Oldham

People’s Association Watchdog

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