Cormac Lucey: Just say No
What Ireland needs is not yet more access to the ESM cookie jar – which will only extend the crisis, but a massive debt write-off or radical restructuring. Only a No vote can get us this, argues Cormac Lucey.
In previous referendums on Europe I have voted Yes. In this referendum I expect that the Irish business establishment will vote Yes. But this time I will be voting No. These are my reasons.
The referendum is based on a falsehood
The referendum implies that it was out of control public spending which caused the crisis. But our public finances were well-run prior to the crisis. In March 2008, the EU reported reassuringly of Ireland that “Despite the weakening in the budgetary position in 2007, the medium-term objective, which is a balanced position in structural terms, was reached by a large margin.” In fact, our debt crisis is a euro crisis, unleashed by common euro zone interest rates that under-priced debt and thus encouraged debt explosions and cost inflation across the euro zone periphery.
The structural deficit does not belong in the Constitution
While I agree with the goals of the referendum – prudent public finances – I do not agree with tying the hands of future policy makers in this matter and then throwing away the keys. Nor do I agree with inserting the notion of a country’s “structural deficit” into our Constitution as it appears impossible to accurately measure a country’s structural deficit in real time.
The IMF (as well as the EU) reported that Ireland was running a structural surplus in 2007. But in 2009, the IMF revised its methodology and hey presto, it discovered that in 2007 Ireland had actually been running an enormous structural deficit of over €15bn.
As Colm McCarthy has said: “The measurement of structural deficits is more or less impossible and the inclusion of an un-measurable concept in an international treaty is a reckless piece of drafting.”
Government receipts (including social insurance) are expected to be around €50bn this year, down 17% from their level in 2007. Gross government spending is expected to be €70bn, up 12% from its 2007 level (with only half of that increase due to increased social spending following increased unemployment). Our national solvency is being held hostage by a public sector which has yet to adjust to Ireland’s permanently reduced circumstances. Allowing Ireland access to the ESM cookie jar from 2014 onwards would only give the public sector another excuse to delay its long-overdue adjustment to reality.
We don’t need the ESM to prolong ‘extend and pretend’.
The solution Ireland needs is either a massive debt write-off or a full-scale fiscal union which would take over much of our debts.
The problem is that the EU opposes both solutions: the first is financially disagreeable, while the second is politically unattainable. The troika is therefore left with a policy of ‘extend and pretend’: the debts of the distressed periphery countries are given reduced interest rates, extended repayment periods and everyone pretends that everything’s fine.
Extend and pretend might work as a strategy if time was on our side and the effects of renewed economic growth and mild inflation would, over time, reduce the effective burden of our debt.
This is how the US and the UK managed massive debt burdens after World War II. But time is not on Ireland’s side as we are not benefiting from growth or inflation and meanwhile our young are leaving.
We need debt restructuring (and probably EMU exit) The fact that you can buy devalued Irish Government debt for just 66% of the price of equivalent German government debt confirms Ireland’s insolvency.
In such circumstances, access to the ESM would only compound the eventual cost of an Irish debt restructuring.
The IMF published a post-mortem entitled ‘Lessons from the Crisis in Argentina’. That report concluded that “in a situation in which the debt dynamics are clearly unsustainable, the IMF should not provide its financing.
“To the extent that such financing helps stave off a needed debt restructuring, it only compounds the ultimate cost of such a restructuring.”
Iceland’s strategy of speedy debt default and currency devaluation shows us that there is another – viable - way. The OECD forecasts economic growth there of 2.4% this year, after 2.9% in 2011. Unemployment is forecast to fall from 7% last year to 6.1% this year.
Unfortunately, Ireland is not Iceland as our GNP growth forecast for this year has slipped all the way down from the 4.1% growth forecast by Brian Lenihan back in December 2009 to the minus 0.7% forecast by the Central Bank this February. This collapse in forecast growth happened while Ireland was the EU’s star pupil and complied dutifully with its policy prescriptions.
Conclusion – Vote No.
A vote for the fiscal compact is a vote for extend and pretend, continued economic stagnation and more emigration. It is a vote of confidence that the EU and ECB will be able to master this crisis despite having fluffed it for several years.
It is a vote of confidence in an Irish Government apparatus which didn’t see the bubble, which didn’t warn of the bust and which guaranteed our banks – genuinely believing they were solvent.
Rather than additional debt accessed through a drip-feed of political surrender to a profoundly wrong-headed view of how this crisis developed, Ireland needs a debt restructuring (and probably a euro zone exit).
Voting No is our best chance to get it.