On Treaties, Balanced Budgets and Turkeys who vote.

Also known at the Irish voter…maybe….? Openly sourced from http://en.wikipedia.org/wiki/File:Male_north_american_turkey_supersaturated.jpg for reasons of an educational nature.

I’ll come to Turkeys who vote later, but first that new fangled EU Treaty (that isn’t actually an EU Treaty because Britain and the Czechs will not sign it, so its a Treaty of (certain) EU member-states).

Confused? Read on!

Interestingly, I could not actually find a public copy of the final text agreed. There is a lovely press release by the European Council, who organized the ‘informal’ summit. You can find their ‘conclusions’, but seeing as the ‘devil is in the detail’ it would be nice to make easily available the actual final Treaty text? http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf

It seems the draft text they worked off was the one agreed on January 19th, which can be found via Euractiv: http://www.euractiv.com/euro-finance/25-eu-countries-sign-german-led-fiscal-treaty-news-510489

However, the actual Treaty text will be formally signed in March, and only then will we see the finished text. In fact, there has been some detective work going on by journalists to get access to the latest draft text, and there seem to have been at least five different versions doing the rounds. The apparent latest one, which was discussed and agreed in principle on Monday night (Jan 30th) was ‘discovered’ by Italian newspaper La Stampa and circulated to the mostly Eurosceptic website Open Europe: http://openeuropeblog.blogspot.com/2012/01/fifth-time-lucky.html

So what is it all about?

For now 2 points (another post will follow up)

First, forget the legalities for a moment. Politically this is NOT a done deal. Sarkozy has to be re-elected by June this year, and that is looking unlikely. Hollande, his socialist rival and front-runner has said he will re-negotiate the deal.Even if Sarko somehow managed to slither through their weird double round voting system and become the next President, he will still likely face heavy weather inside the French Parliament who are refusing to pass domestic French legislation to balance their budget, which is what this new Treaty say must happen (see: http://euobserver.com/19/114992 on this point).

Some of the German newspapers are complaining the deal is too weak and that Germany might want to come back at some stage and toughen it up!

That means this Treaty could be ‘re-opened’ in the Summer, especially following say a possible contingency in the Spring, like a Greek unilateral exit from the Eurozone. And all bets would be off (as well the entire EU perhaps) if Marine Le Pen wins…actually her odds are not that bad ..especially to get to the second round of voting…(see: http://sports.ladbrokes.com/en-gb/politics/french-politics/2012-french-presidential-election-e215023201), and the latest polls put her close enough to Sarkozy……so interesting days ahead.

Conclusion: it would be crazy for Ireland to rush to a referendum on a Treaty that its not entirely clear will come into effect. Whatever, the AG advises, we should hold off on a referendum for now.

Second, has the new fiscal Treaty been diluted in terms of its Austerity menu? 

No its still a hair-shirt treaty!

The only big idea in the fiscal Treaty is that all signatories will implement a national ‘debt brake’-which some right-wing economists think is what is needed to convince markets that EU states are worth lending to. However, with a debt brake in full swing, states won’t be able to legally borrow that much anyway-because they can only more or less spend what they raise in taxes or cut in public spending. This is kind of contradictory no?

So, we’re agreeing not to borrow and only spend what we can raise from taxes or savings so that we can convince people we’re actually worth lending to?

It turns out that the idea of a debt brake is actually (a) very unproven and (b) very controversial.

It is however the substance of this Treaty, and as a matter of substance it is in my view a really really stupid idea. If given the chance, I will most likely vote no to this because I think its a crap idea.

Some EU Treaties have had before semi-crap ideas balanced by reasonable to good ideas (The Treaty of Lisbon had a charter of rights and a new EU energy policy, which were good, balanced by more or less crap ideas like the idea of a Presidency of the European Council, so it was and remains a perfectly reasonable Treaty on balance, despite what some hysterical commentary at the time suggested).

I don’t see any balance in this Treaty, so it will take some persuading of my mind to vote otherwise. That is if we even have a referendum.

It is worrying that the strongest argument being made for the Treaty is Lucinda Creighton’s line that if we don’t sign it we risk being ‘outside the Eurozone’. (http://www.reuters.com/article/2012/01/30/us-ireland-euro-idUSTRE80T0GQ20120130).

This is not a good argument for any Treaty: sign this because if you don’t your out?

In fact, the Czechs are not signing it (for now) and they plan to join the Euro (maybe). Legally its not very clear what status an Irish ‘no’ to this Treaty would have viz our Eurozone membership. Remember, the Eurozone rules are actually enshrined in the Treaty of Lisbon which are binding on all member states (this Treaty is not an EU Treaty like that), and moreover, they include no mechanism by which any member of the Eurozone can be expelled or even choose to leave!

Perhaps, they other 24 states could refuse us a second bail-out from the ESM if we don’t say yes to the Treaty. However, we could then just go direct to the IMF and get the money maybe at a cheaper rate, no? Its not clear to me how that could be legally prevented. And any refusal to bail Ireland out a second time, if we really need it, risks forcing some kind of debt default ‘event’ from Ireland, which means that would not be in their interest to starve us of liquidity.

The substantive question should be is a debt-brake a good idea that we ought to have to help us get out or our mess and make the Eurozone better?

If you don’t know what a debt brake is have a look here at what the German Central Bank says it is: http://www.bundesbank.de/download/volkswirtschaft/mba/2011/201110mba_en_debt_brake.pdf

If you want to get a scholarly view for why any balanced budget rule might be a really dumb idea read this nice piece by Belgian economist Paul De Grauwe: http://aei.pitt.edu/32338/1/De_Grauwe_on_Balanced_budget_fundamentalism_September_2011.pdf

The debt brake is as close to a balanced budget rule as doesn’t matter, and the latter is very common in nearly all American states as part of their state-level laws in some shape or form. However, the devil is in the detail and some balanced budget rules are more flexible than others. The Swiss debt brake was passed in a referendum in 2001, and explicitly allows for a mechanism whereby national governments can borrow and spend more than than the raise in taxes or save in cutting costs, precisely during a recession. This in sensible. Its far from clear how much discretion we will have or exercise in the precise wording of any impending Irish debt brake legislation, but I think it should be as flexible as is possible, if possible.

One recent study of US Local and state finance notes how the balance budget rule works in practice in the USA: “States and localities must therefore increase taxes or cut spending to balance their books. Those actions can harm vulnerable populations and short- circuit a national economic recovery. States and localities are the nation’s largest employer — responsible for one out of seven jobs — and in most years they contribute a third percentage point in real annual GDP growth. Since the start of the recession, local governments have cut 241,000 jobs, and surveys suggest as many as 481,000 more cuts may be coming.”*

So what a balanced budget rule actually means in practice is that given taxes cannot be much increased in most states, and politicians fear taxes (usually), they will simply cut public jobs and public services to bridge the gap. There is nothing political neutral about a balanced budget or debt break provision.

You can now translate the above quote into loads of Irish, Greek and even French and Belgian public sector workers being basically fired over the next few years. True, such an outcome is not certain, and some of it will happen anyway, but with a debt-brake rule in place its more than likely.

Oh, I mentioned that balanced budget rules are quite new-Germany only passed theirs in 2009. One Canadian study of a state level balanced budget rule in place since the early 1990s, found that most pieces of balanced budget legislation have failed to achieve their original objectives…like any piece of legislation, a balanced budget law is only as effective as the political will and public support surrounding it.” **

It might well rip up in shreds the Croke Park agreement with the Irish public sector and will likely have to require a further massive retrenchment in the Irish public sector, if it is taken seriously and applied. Some Irish people, who hate the Irish public sector, might well vote for it precisely for that reason. Perhaps however, they should pause and reflect though what the likely higher costs and inequalities of an even more privatized education and health care sector would be like, after just a few years of that.

But for myself, I may well be a turkey bird of sorts, but I’ll really have to be convinced to vote for this particular version of Christmas.

*Gordan, Tracy (2011) ‘State and Local Finances: where we’re going’, at http://www.brookings.edu/~/media/Files/rc/articles/2011/0131_state_local_finances_gordon/0131_state_local_finances_gordon.pdf

**Wesley, J.J and W. Simpson (2011) ‘Promise Meets Reality: Balanced Budget Legislation in Western Canada 1991-2010’,  at  http://www.cpsa-acsp.ca/papers-2011/Wesley-Simpson.pdf

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