The Fiscal Compact Treaty; a sheep in wolf’s clothing?


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The debate on the Fiscal Compact Treaty in Ireland has been dominated by duel scaremongering arguments; the threat of institutionalised austerity on one side and the threat of discontinued ECB funding on the other. The result has been a complete lack of debate on the actual content of the Treaty.

The Yes side claim that it will bring stability. The No side claim that it would enshrine austerity into the Irish constitution and allow the EU to dictate our national budget. But what does the treaty actually say?

Article 3(1b) of the Treaty is very clear that the maximum limit of structural deficit will be 0.5% of GDP but it gets much more vague when describing how this measure would be enforced.

Article 3(1c) states that in “exceptional circumstances” a contracting party may deviate temporarily from the fiscal objective without repercussions. Article 3(3b) defines such “exceptional circumstances” as “an unusual event outside the control of the Contracting Party concerned which has a major impact on the financial position of the general government or to periods of severe economic downturn“. This could include a wide variety of circumstances and thus is very open to legal interpretation. It would allow Ireland to break the rules provided she could justify that any outside event had had a major impact on her economy. Similarly, if economic downturn makes it impossible for Ireland to keep to the fiscal rule, she would be given a temporary break from working towards this objective.

If Ireland should significantly break the fiscal rule, and cannot use the above mentioned clause as justification, the necessary follow up action according to the Article 3(1e) is to automatically trigger a “correction mechanism“. But what is this mechanism? According to Article 3(2) the mechanism will be “on the basis of common principles to be proposed by the European Commission“. Therefore it is not yet decided what this budgetary mechanism will be but, as stated later in the same paragraph, the creation of this mechanism “shall fully respect the prerogatives of national Parliaments”.

Therefore the Treaty will not condemn Ireland to perpetual austerity regardless of circumstances because periods of severe economic downturn and vaguely defined “exceptional circumstances” permit temporary deviation from the fiscal objective. The Treaty will not hand all national budget making decisions over to outside powers. Rather, if a contracting party significantly breaks the fiscal rule without managing to interpret “exceptional circumstances” as being applicable, they will merely have to implement a “corrective mechanism” that will respect the prerogatives of national parliaments when it is decided upon.

A Yes vote will sign Ireland up to treaty that is not as demonic as some would have us believe. It leaves a lot of room for legal interpretation and national sovereignty but it’s lack of clarity creates a murky view of what is to come. The vague nature of the definitions and procedures laid out in the Treaty are clearly intended to prevent a complete loss of budgetary sovereignty while also allowing for a justifiable opt-out clause should a contracting party need to deviate from the fiscal rule for economic reasons. The effect, however, is that it is very difficult to tell how the measures referred to in the Treaty will pan out in reality and this is a point that seriously requires some clarification within the Irish referendum debate.

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2 Responses

  1. CMK

    May 23, 2012 1:05 pm

    Jenny, that’s an interesting series of points you make. However, I disagree profoundly with your analysis and I think you’re missing the point about the ‘exceptional circumstances’ parts of the Treaty, which allow deviation from the deficit and debt/GDP ratio.

    What I think your analysis fails to take account of is the ideological presuppositions that will determine whether X or Y constitutes an ‘exceptional circumstance’. So, as I’ve made this point elsewhere, if the austerity treaty were in force in Ireland in early 2008 and the bank recapitalisation, establishment of NAMA still occurred, then very soon we would have reached the limits set out in the fiscal pact – probably around early to mid 2009.

    The state would then have been faced with a choice: breach the terms of the fiscal pact or let the banks go under and drag large portions of the European banking system down with them. Anyone with any knowledge of who governs Europe, how and why they govern it will realise that European treaties will be discarded immediately there is any threat to the European financial system. The fiscal treaty’s terms will be ignored completely if there is any future existential crisis for European capital; a development that is absolutely certain to occur in the next few years.

    Where the fiscal treaty will be applied consistently, remorselessly and relentlessly is in curbing expenditure on public and social services. That’s the real purpose of the fiscal treaty. The deficit and debt rules are moral principles to ensure a steady running down of ‘social Europe’ and it’s replacement with a version of the US model of commericalised and commodified provision of public services. Institutionalising and constitutionalising the intellectual foundations of austerity – the deficit and debt rules – are absolutely pivotal to that process.

    The fiscal treaty is the political embodiment of a double standard that holds that EU member states can load up on debt and run huge deficits if that’s what its take to maintain the financial system (precisely what we’ve done here) but they cannot run up debt or deficits (huge or otherwise) to fund stimulus or to meet shortfalls in funding for public services.

    That’s the political context within which the austerity treaty is being developed and will be implemented and the European Commission and European Court of ‘Justice’ will see any appeals to them for relief from the terms of the treaty in strictly commerical and neo-liberal terms and will discount any appeals to solidarity based on preservation or enhancement of existing levels of public services in core European Union states.

    EU elites’ objective, in short, is to universalise the Greek experiment for working people, and apply the Irish experiment for banks and bondholders. This treaty, with that in mind, is an important part of their achieving that objective. Stopping it here will be a major setback for them.

  2. Jenny O'Connor

    May 23, 2012 2:04 pm

    CMK, there is very little that I disagree with you on. I understand that this article may create the impression that I am advocating a Yes vote, which I am not, in fact I think that we should vote a tactical No. The point of the article was to look at what the Treaty actually says. I feel that the Irish people should demand to know how the more vague and ill-defined sections of the Treaty will actually pan out in reality before they vote on it.

    I think the recent elections in Greece have been a wake-up call to some who would advocate the Greek model for all of Europe. Neoliberalism has survived with such vitality in Europe only because of the social democratic bargain whereby people accepted an unequal system in exchange for a welfare state that would aid those most affected and provide services to the people. This deal is what has prevented any kind of rebellion against the system in Europe, electoral or otherwise, for many years. If this welfare state is hollowed out people will vote for radical parties advocating debt default and this would be the ultimate threat to the European financial sector. I just don’t see this Treaty leading to a complete hollowing of the welfare state because, if the stability of Europe’s banks and financial sector is the priority, this would be the most destabilising factor imaginable.

    It may take some time for the effects of the Treaty to be realised but, if its effect is as you outline above, I believe that EU countries will change its provisions to avoid country after country rebelling at the polling station.