Given our economic collapses from fiscal indiscipline, we need tight budgetary rules
AT YESTERDAY’S European Council the German chancellor, backed by the French president, put forward proposals to resolve the European crisis. Unhappily columnists’ tight deadlines preclude analysis of these proposals here.
The timing of this and associated meetings has prevented involvement by the leaders of the next Irish government in these crucial negotiations.
On the occasion of a similar, but much less important, European Council meeting in 1977, which took place in the immediate aftermath of that year’s general election but before the Dáil had met to elect Jack Lynch as taoiseach, the outgoing head of government, Liam Cosgrave, offered to try to facilitate the incoming taoiseach’s attendance at that meeting – an offer that Lynch declined.
But this crucial European Council is meeting before rather than after our election. The next such meeting is not due until the end of March. However, there has been talk of a special meeting early in March, which might take place before the new government takes office on March 9th. If such a special meeting were to be held, Cosgrave’s precedent could become relevant.
This coincidence of our election and the Merkel-Sarkozy proposals could not be more unfortunate from Ireland’s point of view, and that the two Opposition leaders have adopted different approaches to the “renegotiation” of our bailout has not been helpful.
There is a possibility of some of the terms of that deal being alleviated – not just for Ireland’s political benefit but as part of a general review of bailout procedures in the wider interest of the euro zone.
The euro zone members – and the wider EU of 27 – need to ensure that any states requiring bailouts remain solvent and able to pay the interest and eventually the capital borrowed from European institutions.
In our interdependent world of shared sovereignty, a collapse of our economy, or that of any other state, would suit no one in Europe. Changes are therefore under way in the manner in which the problems of member states in financial difficulties are to be addressed.
It has been suggested that one element of this – but only one – could involve reviewing the interest rate at which European institutions lend bailout money.
While the importance of this factor has been exaggerated, it could be of some assistance.
The interest rate charged on these loans should clearly be such as not to prejudice the solvency of bailout recipients of European loans while at the same time not charging so little as to encourage states to behave irresponsibly – as Ireland did.
As soon as it seemed that Germany might favour such a move – in return for acceptance by a bailout state of an effective European-wide fiscal discipline, which Germany itself recently introduced into its constitution – Fine Gael moved rapidly.
Enda Kenny and Richard Bruton went to Brussels to meet European Commission president José Manuel Barroso to make it clear that in government they would happily accept an effective fiscal discipline.
This was a very positive move in the national interest which provoked none of the usual rubbish about “loss of sovereignty”. It may also have been good electoral tactics – but constructive election politics rather than the usual populist kind.
Given our experience of two successive economic collapses within a quarter of a century, both sparked off by gross fiscal indiscipline by an irresponsible government, Ireland needs a tight budgetary discipline, possibly in constitutional form, that will protect us from suffering the same consequences again.
Until this election campaign, Labour had given and had firmly adhered to the national commitment to a €15 billion fiscal adjustment over the four years to 2014, €6 billion of which has already been secured, painfully, by last December’s budget.
However, following the Fine Gael Brussels move, Labour announced that in government it would “renegotiate” with Europe the provisions of our bailout, reducing the remaining adjustment to €7 billion and extending the term of the adjustment by a further year.
On this page last Tuesday economics editor Dan O’Brien said this announcement was “misguided” because the European Central Bank would not “countenance any reduction in the size of the package”. He also thought it would resist an extension of the timeframe. I am less certain about the timeframe.
At such a stage in the election campaign there must be a danger in what was presented as a unilateral announcement of an unrealistic cut in the scale of the fiscal adjustment to which we are committed.
This would prolong our painful path towards fiscal balance and further raise our high debt/GDP ratio.
It could also weaken Labour’s electoral support. A half of that party’s votes now come from middle-class members of the electorate, many of whom have appreciated Labour’s sense of public responsibility and who also share that party’s concerns about the growth of inequality in our society. How will they react to this initiative?
Ruairí Quinn’s efforts to tone down Labour’s challenge to the European institutions suggest nervousness about this issue.
In this connection it has been interesting to see data provided by the most recent Milward Brown poll showing switches in party voting intentions since the last general election in 2007.
From these data it can be calculated that Labour has gained a massive 215,000 potential new voters from Fianna Fáil and, to a much lesser extent, from Fine Gael, which may explain Quinn’s intervention.
By contrast, Labour seems to have lost only a few thousand voters to Sinn Féin or to the ranks of Independent candidates.