Economist says treaty is bridge to fixing crisis

THE PROPOSED fiscal compact will not solve the euro crisis but it is an indispensable bridge to policies that can resolve the crisis, an adviser to former minister for finance Brian Lenihan told an Oireachtas committee yesterday.

Strengthening fiscal discipline at member state level would pave the way for more aggressive counter-cyclical policies at the euro area level, Alan Ahearne of NUI Galway told the Joint Committee on European Union Affairs.

“An appropriate macroeconomic stance at federal level is critical because, along with fiscal consolidation and competitiveness improvements at home, the crisis countries in the euro area need favourable external conditions to resolve their problems.”

He said a recent paper written by him and a colleague for the Bruegel think tank had suggested raising tax revenues at European level – such as by way of taxing the financial services industry – to help borrow money for European smart energy initiatives. “But such policies are unrealistic unless fiscal discipline at the national level is nailed down.”

Sinn Féin Deputy Pádraig MacLochlainn said that, “unfortunately”, fiscal federalism, which was necessary for monetary union to survive, was not achievable politically.

However, Dr Ahearne said full fiscal federalisation was not required. There could be partial federalisation, with structures being used for specific purposes such as the banking crisis.

Macroeconomist Karl Whelan of University College Dublin said he was a sceptic regarding legally binding macroeconomic rules. The idea of a balanced budget might appear self-evident to the famous Swabian housewife, but an economy was not a single household and the golden rule covering allowed structural deficits was a poor one.

It was in Ireland’s interest to sign the treaty as Ireland’s debt ratio was so high; the State was set for a long era of tight fiscal policy. Signing the treaty was needed to secure access to European Stability Mechanism funds, he said.

He criticised Minister for Finance Michael Noonan for saying a treaty referendum would be a vote on euro membership.

However, John McHale, chairman of the Irish Fiscal Advisory Council, said it would be important that people knew the possible consequences of a No vote that could lead to a sovereign default and, following that, a departure from the euro.

He said it was almost impossible to see how mutual insurance mechanisms for the euro countries could be introduced without a credible commitment to greater shared fiscal discipline.

Economist Tom McDonnell of the Tasc think tank said leaving the euro would be a catastrophe for Ireland.