WHAT A NEW EU TREATY ON THE EUROZONE RULES MEANS FOR IRELAND-MORE BAD NEWS?

Those are French students protesting against Sarkozy. We may be seeing something very soon here in Ireland if Sarko’s big idea of a big new EU Treaty takes off.

For Ireland, the idea of another major Treaty is arguably very very bad news. I note the talk is now shifting to ‘urgent Treaty change’…but its not clear if the German’s and French have given up on the idea of a big sweeping new Treaty as well…..this is more or less what Sarkozy said:

“After this long road, we are coming back to essentials. That’s why France and Germany want a new European treaty, in order to rethink the organization of Europe,” See:  http://www.npr.org/2011/12/01/143017948/sarkozy-speaks-on-reshaping-eurozone

I’ve no problem with using Article 48(6) of Lisbon to take emergency actions and rewrite the ECB rule book in a minimal way. I do have a major worry about another major Treaty. Why?

First, it seems unlikely we could avoid holding a divisive and bitter referendum, as the changes suggested in a major Treaty reform would likely be significant enough to fall within the scope of the Crotty verdict which argued a referendum would be required whenever an EU Treaty had an impact which was likely to  “alter the essential character of the Communities”…or “create a threat to

fundamental constitutional rights.” It would fall under the first heading be massively rewriting the Maastricht rules and the latter because the Oireachtas has under our constitution primary responsibility for any Budgetary process.

Secondly, its seems far from certain the Irish electorate would vote yes to a complex treaty reform-that could easily be presented as unwise in economic terms, and in nationalistic terms, a further imposition on our economic sovereignty. As one commentator noted: “An Ipsos-MRBI poll recently for The Irish Times showed that any referendum on the EU here would start with 47 per cent of voters in the No camp versus just over a quarter in the Yes camp, a near insurmountable lead.” Daragh McDowell, The Irish Times, November 14th. http://www.irishtimes.com/newspaper/opinion/2011/1114/1224307524795.html

Thirdly, this makes me fear any referendum would become a ‘gun to the head’ type question. Either you agree to this Treaty change which gives the EU new fiscal powers of supervision over national budgets OR you don’t get access to Eurobonds   and/or you can’t be in the Eurozone. In effect it could become a second referendum on whether or not we should stay in the Eurozone (with added discipline).

The problem there is that emotionally a great many Irish people may well feel they would like to kiss the Euro goodbye, and copy the Danes, Swedes and British. However, it would be tricky to leave the Eurozone and their are sober arguments for and against.

The argument for a national currency is basically the flexibility that some type of national currency would give you-for example one could run a national currency at a lower level of value, a depreciation strategy, which can help boost competitiveness and exports. However, in the long term such strategies can easily cause their own problems, and in the short term they make imports more expensive-and Ireland imports quite a bit as much as she exports. One also has to ask whether Ireland has a good record of using any national autonomy and freedom of action wisely, like Switzerland or Norway? It is true that in early 1990s a significant devaluation of the Irish currency did help our economy, but the risk might be that domestic national management of any new national currency could be become a real political football that could easily be badly managed. After all look at how we domestically managed our Banking and Property sector?

All those debts denominated in Euros would still likely have to paid with some new currency whose value would be unknown? A currency value fluctuation risk in repayment would come into play. Many Hungarians are now trying to pay back mortgages that were sold to them in Euros or Swiss Francs-with a Florint that has massively devalued.

“Two-thirds of Hungarian mortgages are in Swiss francs – taken out to take advantage of low interest rates, mostly when the Swiss currency was weaker. The franc’s sharp gains against Hungary’s forint have left many borrowers struggling to make repayments.”

From: EU urged to probe Hungary mortgage move, By Neil Buckley, East Europe Editor, Financial Times, http://www.ft.com/intl/cms/s/0/22904922-e835-11e0-9fc7-00144feab49a.html#axzz1fC7Nr7oi

The Hungarian Parliament was forced to introduce a law which allows mortgage payers repay at a rate 25% below the exchange rate-a move that is controversial and is sure to be litigated. In effect the Hungarians are imposing some type of unilateral re-denomination of foreign loans, which is legally tricky and may have long term effects on domestic credit supply.

Savers with Euros in the bank would rush to get their money into other currencies or out of the country, fearing that a Punt Nua would lose value relative to the Euro, and therefore we would have further capital flight and might even have to bring back currency controls.

We would have to get back into the business of running a national currency again almost overnight-it took years of planning for the switch to the Euro! Such a sudden currency switch is far from straight forward for a very small trading nation like Ireland. Would it in fact mean a return to the Sterling zone, which means in some ways having your economic freedom  cramped by the City of London and the Bank of England as much as say the ECB and the Franco-German leadership of the Eurozone? Should we discuss being linked with the Dollar? That didn’t work well for Argentina. And the Dollar is losing value as well.

Finally how would our exporters view Ireland outside the Eurozone? It must be quite advantageous that we are in the Eurozone if they are using Ireland to export to the continent (although less so if they are focused on the UK market). There would be a return to a risk of exchange rate fluctuation which would be some type of tax on investment. I honestly don’t know how big it would be, but in the short term it would likely make the work of the IDA a lot harder trying to convince a big American or other firms to open up an operation in Ireland if they expected to trade heavily in the Eurozone. The fact that we wouldn’t be might put them off.

One quickly see this is shaping up to be a strategic nightmare for Ireland. We either vote to join a strict fiscal union which will impose further austerity upon us most likely, and ‘shotgun wed’ us into perhaps a much deeper type of federal integration, for example harmonizing corporate taxes, OR we refuse all that and are forced also by doing so, to leave the hard-Euro zone, and have to fall on back on some expediency of re-using the Punt, re-joining the Sterling zone, or something very uncertain?

Not much of a choice there it seems, but there is a lot to play for yet. Most of all Sarkozy may well simply lose the French Presidential election during April and May. If so..I for one say…. good riddance….to him and may be as well to the idea of another ‘grand Treaty’ which I think is the last thing we need now.

Face the current and massive crisis with the imperfect rules we have and work around them and within them and simply get on with it!

Oh, and its Friday.

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