There are many reasons to vote No in the forthcoming Treaty on the austerity pact. One of them is that it is simply unworkable. The current Treaty is the latest attempt to deal with the structural problems created by the single currency by administrative rather than economic means.
In effect, it applies a series of rules and sanctions for countries with excessive deficits and debt levels. But it never addresses how those government deficits and debts arise. In the Treaty government finances are treated as if they operate autonomously from the real economy. The fundamental error of the Treaty is that this assumption is incorrect.
A government deficit is negative savings (borrowing). Within any economy there are only three main agents which can provide savings. These are government, households and businesses (both financial and non-financial). Of course, it is possible to borrow from overseas, or lend to it, but for the purposes of this argument the focus will be on the domestic sectors.
It follows from the fact that there are only three agents that can provide savings that their aggregate savings must be in balance, or sum to zero. Therefore, if any two sectors are saving, the other must be borrowing. This happened, for example, in the run-up to the current crisis, when both the government and corporate sectors were saving (and registered surpluses). This obliged the household sector to be a net borrower.
Now, the position has altered dramatically. The household sector is a net saver and so too is the corporate sector. Therefore the government is obliged to become a net borrower. The mechanisms for this are the refusal of the corporate sector to invest which leads to both rising unemployment and falling tax revenues. The household sector, in fear of its continued incomes through falling real incomes and job losses increase its own savings.
The CSO table below identifies these trends numerically.
Households have increased their savings by €7.6bn since 2007. Corporations have increased their savings by €25.4bn. Therefore the government has increased its borrowings by €52.4bn (the remainder being accounted for by other sectors, including overseas).
This is shown in the chart below. The government deficit occurred while there was a dramatic increase in the savings of the corporate sector.
Now, unless the Treaty were to include provisions to allow Euro Area governments to regulate the savings of both households and the corporate sector, then it is impossible to administratively determine their own level of savings.
It is worth noting that in both the boom and the depression, the Irish economy has not performed as a normally functioning market economy. Under that circumstance, the household sector is a net saver and the corporate sector a net borrower for investment, while the government is a saver or borrower depending on the combination of its taxation and spending policies. The household sector has been obliged to return to its usual role of saver by the crisis. But in no case has the corporate sector performed its assigned role in a properly functioning market economy. It has been a saver throughout the boom and bust. This is the key cyclical and structural problem of the Irish economy.
Returning to the Treaty – it is clear that it is based on a thorough misconception regarding the sources of government revenues and the claims on its expenditure. As a result it cannot succeed even in its own terms of reducing deficits and debt, although it will have the effect of reducing government spending. But, as the EU Commission’s forecasts highlight, Irish government spending has been cut for 4 years and yet the structural deficit is rising.
Proponents of voting Yes to the current Treaty threaten all manner of dire consequences for this economy in the event of No vote. Never quite explaining why further Irish borrowing will be required if everything is going so well currently, the argument actually underlines the complete failure of policy which has been imposed across the Euro Area in the name of deficit-reduction. In reality the most stringent of these ‘deficit-reduction’ measures have been applied in Greece.
If voters want to avoid a Greek fate for Ireland, and for the whole of Europe, they should vote No.
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