Vote YES on Thursday

Predictions about the effect the referendum on the Fiscal Compact this coming Thursday will have on austerity in Ireland are meaningless.

Those who are trying to convince voters that it will have any bearing at all on household charges, septic tank inspection fees, water rates or anything else of that nature are either dangerously delusional or shockingly dishonest.

What is objectively true is that Germany (Bunds [German government bonds] approaching negative yields), Finland, The Netherlands, Austria (unemployment: 4%) have taken control of their finances and are all in favour of the fiscal compact. They simply want other countries to agree to it so that when stimulus measures are put in place for the EU as a whole there will be no free riders. It's hard to blame them for that.

And they're the countries I want to be aligned with in the EU - not the ones that allow UK and US commentators to put us into awful acronyms like PIIGS.

http://www.solarwave.ie/

Another reason to vote Yes

Francois Hollande

Socialist Francois Hollande has become the latest president of the Fifth French Republic. Much has been made of his apparent attitude to the EU Fiscal Treaty, about which we in Ireland will have a referendum vote at the end of this month. 

At this stage it is impossible to know how much of M. Hollande’s words represented electioneering rhetoric and how much will result in solid changes to the treaty, but there is reason to believe that, while the austerity aspects of the treaty will not change, they might now be accompanied by measures aimed at stimulating the economy of Europe.

This represents just one more reason for Ireland to vote Yes in the referendum. It was always a good idea to confirm our position as members in good standing of both the EU and the Euro zone, and voting Yes is the means to achieve that under current circumstances. Now we have an added incentive – as members that are fully committed to fiscal responsibility, which is what the treaty is about, we can take full advantage of whatever economic stimulus is brought into being by the influence of France under its new leadership.

18 yo boy racers get control of Ferrari

A piece by John Waters in today’s Irish Times seems to claim that Ireland’s acceptance of the Maastricht treaty, which gave us Euro entry along with low interest rates and which tied our economy to those of Germany and France, is the root cause of the fiscal and monetary problems we suffer from at present.

This is a nonsensical, disingenuous argument. France still enjoys triple A ratings on its government debt and Germany has one of the strongest economies on the planet. For a while Ireland, too, had money to burn. Unfortunately, burn it we did.

John is right, though, when he talks of collective amnesia. If we didn’t suffer from it we would remember that, at the time of Euro entry, each country joining had to convince the EU that it had its finances in proper order, by having national debt and budget deficits within set boundaries. It is reasonable to presume that they were meant to stay that way. That the common currency meant we no longer had the ability to devalue our way out of high inflation is not new news. It was drilled into us, over and over again at the time, that this was going to be the case.

It seems central Europe took it for granted, or was convinced by our negotiators, that the Irish government, its Finance department and their economic advisors understood these fundamental economic principles. But it appears they did not.

What happened in practice was that the good old Republic of Ireland went ahead and took advantage of all the nice things that Euro entry had to offer, such as significant trade benefits, defense against speculative attack on our currency, very low mortgage rates (which we abused), elimination of currency exchange costs and risk for travelers to the rest of the Eurozone, pricing transparency for same, an additional incentive for US foreign direct investment into Ireland - and ignored the responsibilities it brought, the most important of which was to control our inflation.

To illustrate the point, imagine what it might be like if a group of eighteen year old boy racers were given control of a souped up sports car, for example a Masarati or a Ferrari, after having convinced the provider that they were actually mature, fully trained, experienced professional drivers.

The sports car in this analogy is the highly tuned European economy that German (and Dutch, and Nordic) prudence and efficiency had nourished over the years since the last war, and which was well known to be predicated on the control of inflation so that it is positive (deflation is also bad) but low.

The supplier is the European Union and you can work out for yourself who the boy racers are.

We broke every rule in the book. 120% mortgages, lending for everything from property development to foreign homes to whatever you’re having yourself. Spending went completely out of control. State capital projects routinely came in so far over budget that the numbers were shocking. We had a banking compliance system that became a global joke. We had a government that bought its way through successive elections without any regard for, and it seems now, no understanding of what an inflation differential between us and central Europe would eventually lead to.

All is not lost, however. We do seem to have woken up and, as everything is relative, we actually now start to look good by comparison to the most errant Euro member, Greece. With a bit of luck this present crisis will allow us to learn by bitter experience.

With a bit more luck we will be allowed to stay in the Euro, despite our demonstration of an embarrassing immaturity when it comes to the most basic economic principles.

And by the way - entering into a mutually beneficial multinational, legally binding agreement, that the other parties expect your country to adhere to, does not constitute loss of national sovereignty, no matter what the venerable Olivia O'Leary says, as quoted in John Waters’s article.

Democratic deficit - what democratic deficit?

In the beginning there were 17 separate currencies where there is now only one, the Euro. This currency unit was set up as a result of the Maastricht treaty, which was democratically tested in Ireland by means of a referendum. The agreement, voted on and passed by the Irish people, included that the common currency would be monitored by the European Central Bank, now known as the ECB.

Monitoring means, and was always understood to mean, ensuring as far as possible the continued viability of the currency and the setting of the interest rate that would be attached to it, which affects most particularly the rate of inflation in the Euro zone and the exchange rate of the Euro against other global currencies.

Sixteen other states of the European Union have a stake in all of this. They were, and are, entitled to assume that ratification of the Maastricht treaty would mean that all member states would abide by the rules by which the common currency was set up, and that all members would accept the oversight of the ECB, which was specifically charged with that task in the Maastricht treaty.

In the olden days if a country found it had allowed its inflation rate, and therefore its competitiveness, to exceed what was prudent, its currency could be devalued either explicitly, or stealthily by market forces. This solution was not available, and was never going to be available in terms of their economic relationships with the other Euro zone states, to those countries that had signed up for the Euro.

All this was known at the outset. It was understood, or should have been understood, by the economists whose job it is to advise the finance ministers and compliance agencies in the various countries. And the same economists would not exactly need to have been qualified to the level of Nobel Prize winners to be able to come to grips with this principle.

What has now happened is that a number of member states of the Euro zone have taken their eyes off the ball to the extent that they have allowed inflation to increase well beyond the rate that has been achieved in some other Euro countries, most notably Germany, so there is now a serious imbalance in competitiveness within the Euro zone. Not only that, but a number of these same countries have either borrowed more than they can afford to repay or have allowed their banks, as in the case of Ireland, to lend too much, cause a property bubble which has burst, and then have their unsustainable wholesale loans guaranteed by the state.

These developments have a direct and serious bearing on the viability of the Euro. Default on sovereign debt by a Euro member state would be devastating for it. However, those Euro zone countries that have been able to keep their inflation rates and borrowings at acceptable levels, such as Germany, France, The Netherlands and Finland, and are now clamouring for the ECB to do its job and bring pressure to bear on these errant members to rectify the situation by living within their means and in other ways acting responsibly, are being accused of contributing to what has come to be characterised as a “democratic deficit”.

I’m afraid I don’t see it, this democratic deficit. Even when Nicholas Sarkozy lashes out at politicians in Italy and Greece in his frustration at seeing some of their number playing local political games with the Euro crisis, it hardly qualifies as an all-out attack on the sovereignty of that state. It might be a call for all concerned, even at this late stage, to live up to their legal and moral obligations as representatives of a country that freely, and democratically, signed up to the Maastricht treaty, and were happy indeed to take advantage of the very significant trading, foreign direct investment inflow, low interest rates, elimination of currency exchange overhead, reduction of exchange rate risk and the pricing transparency benefits of the monetary union that have been there since its inception, and which the prudent and compliant members would like to see continue. Instead of castigating them, we might take a leaf from their book.

Mr. Fintan O’Toole, c/o The Irish Times newspaper, please take note.

The Euro zone rescue deal - "them and us"

The announcement of the Euro zone rescue package, which included a 50% loss on Greek bonds for those banks that held them, led to a number of reactions here in Ireland. One was from Mr. Peter Brown of the Irish Institute of Financial Trading, who said, on the RTE news on Thursday 27th. October:

“If they’re that keen on keeping the Euro intact, Ireland needs a deal”.

Who are “they”, in this context? The ECB? Angela Merkel and Nicholas Sarkozy? The European Commission? Ireland is a member of the ECB and the EU Commission. France and Germany are our comrade states in the entity that has given us massive social, equality and consumer legislation improvements at home and free access to a market of over half a Billion consumers, not to mention significant capital transfers through the EU Common Agricultural Policy and the Structural and Cohesion funds.

Our membership of the Euro zone provides us with protection from speculative raids on what would otherwise be our local currency, such as that which cost the Bank of England an estimated £3.4 billion in 1992. As a result of Irish government attempts to protect the Punt at the time, interest rates on Irish mortgages reached a staggering 16% at one stage.

We have vitally important price stability through the determined and consistent actions of the ECB, although we undo some of that by our own inflationary actions here at home. Our most recent crisis has shown that use of the Euro gives us access to technical and monetary assistance from those other member states, such as Germany, The Netherlands, Finland and France, that have the discipline and experience to be able to deal with low interest rates and increases in the money supply, and to impose adequate regulation on their financial institutions. Our recent property related bubble and its subsequent bursting has shown that we in Ireland are still only in the learning mode with regard to these matters.

An important consideration for travellers is that the Euro gives us the convenience of a common currency as well as valuable transparency in pricing throughout those states that use it.

And being in the Euro zone is yet another asset to go along with our educated workforce, our status as the only English speaking state in the zone and our competitive corporation tax rate to help us attract Foreign Direct Investment (FDI).

In a nutshell, when Mr. Brown talks about “them” he really means us - in order to make good on the implication of his remark, Ireland would have to be prepared to leave the Euro zone and, in so doing, jeopardise the whole EU project. In the light of the benefits we have and can continue to expect from remaining in, this would constitute the greatest example that can be imagined of cutting off one’s nose to spite one’s face.