Monday, 7 May 2012

European Stability Treaty

The net question in the referendum is whether Irish permanent law should be amended to  constrain  Governments running up debts in future.
In a way, this should not be a controversial issue.
If Governments run up debts, these debts have to be serviced or repaid by citizens.  Prudent citizens should, I believe, be in favour of using the law to prevent Governments piling up unnecessary or wasteful liabilities for future generations. It is very difficult for an individual voter to follow what a  Government is doing with the finances on a day to day basis. So having limits and independent controls should be seen as helping people ensure that their   money is managed prudently by their Government.
Opposition parties, in particular, should favour placing limits on borrowing by current Governments because, if they ever find themselves in office, they will be the ones  who will have to put money aside to pay interest on the previous Government’s   debts, before they can spend any money at all on day to day services or investment  for the future.
If the Stability Treaty is ratified by people on 31 May, the Dail and the people will be much better informed than in the past on what the Government is doing with the people’s money.
An independent Fiscal Advisory Council will keep  the Dail ,and the  people, informed about trends in Government finances. If mistakes are being made in estimating future revenue or spending, the  Dail and the people will have a new means of keeping the Governments finances honest, so to speak.
This searching analysis of Government finances by the Fiscal Advisory Council, and also that by the European Commission, will greatly enhance Dail Eireann’s ability to carry out its  duties under Article 17 of the Irish Constitution. This Article requires the Dail to approve Government spending and taxation. If the Stability Treaty is approved, the Dail will have much better quality information for making these important decisions. Governments will not be able to produce phoney estimates, something of which I had direct experience myself as incoming Minister for Finance in 1981
And, under article 13 of the Stability Treaty, government and opposition parties the Dail will have a new means of observing, and influencing, the economic policies of other EU countries. There will be a new conference of parliamentarians drawn from economic affairs committees from all member states of the euro. As an export economy, we need to have an input into the policies of our neighbours, and this provision the Stability Treaty will help give us that.
Some people are describing the Treaty as an “austerity treaty”, because it places limits on Government borrowing.

But borrowing is not a cure for austerity.

Borrowing is often just a means of postponing austerity.
It is a means of getting the next generation to pay this generation’s bills, without consulting them. And if the interest rate is high, the austerity in the future, will be much greater than anything that would happen if problems were faced up to now.
The idea of placing limits on Government borrowing and debt is not new.
Back in 1992, the Irish people in a referendum approved our joining a Euro currency, and agreed to rules to defend the value of that currency by limiting Government Debts to 60% of GDP, and Government Deficits to 3% of GDP.
Put another way, we agreed that our overall Governments debt would not be more than just below two thirds of everything everyone earned in Ireland in a year, and that that the Government would not borrow additionally, in any one year, more than 3 cents for every euro earned by the country as a whole in a year.
These rules were put in the form of an EU Treaty, known as the Maastricht Treaty, approved by the Irish electorate on 18 June 1992.
Some might ask why we needed a rule like that, about Government borrowing, in a Treaty primarily about setting up a new common currency?
The answer is that, if you want to prevent a shared currency becoming worthless through inflation, you have got to control the amount of money in circulation. One of the ways that money is put into circulation is by Governments borrowing money, and spending it.
Unfortunately we have not been able to keep our word to ourselves.  All over Europe, Governments have got themselves into trouble because they have breached the 60% and 3% limits.

Of course, this was not the only problem, nor the only cause of the economic crisis.

Private businesses and individuals also borrowed and spent excessively. There was too much credit given out, and things were bought, with that credit, for more than they were worth.  The European Central Bank, and the Central Banks of most European states, did not put a stop to this. The same thing happened outside the euro area, in Britain and the United States, so it was not a problem of the euro as such.
 To use an analogy, it was a problem of people, and businesses, acting like sheep, following one another, rather than thinking where they were going.  Meanwhile the fences had been allowed to get into disrepair, parts of the field had no fences at all, and the shepherd had gone to sleep.  
Now we have to put these things right.

The Stability Treaty is only a small part of the solution.

Ireland, and the rest of Europe, needs to reform its banking system.  A functioning economy needs banks. But Banks never again must be allowed grow to be too big to fail. 
Genuine economic growth needs to be promoted, based on developing new products and services that the rest of the world will want to buy. 
The consequences of the ageing of our societies must be addressed honestly.
Confidence must be restored, so that people will feel free to spend what they have. But confidence is only sustainable, if it is based on truth, the truth about what owe, and truth about what we are spending. The Stability Treaty will help us tell ourselves the truth about our own economy, more fully than we did in the past, and in that way it will help restore confidence.

A Yes vote in Ireland to the Stability Treaty will not bring complete certainty. Uncertainties will remain in the European and global economies.   

The EU is a political organisation. It is democratic. All EU Governments have public opinions to consider, not just the Irish Government. The road to a stable, sustainable, and productive economy in Europe will be a long one, probably with some  detours. But the EU has made a start,
    on banking,
    on regulation,
    on monitoring systemic risks and
    on  monitoring economic as well as fiscal imbalances.

There is more to do
    on promoting investment, 
    opening up markets to competition, and
    freeing people to work in other EU countries by  recognising their  qualifications.

But, having served as an Ambassador in the United States, and observed the United States legislative process at close quarters, I can say that the European Union is much further along the road towards dealing with its (admittedly more severe) long term structural and budgetary problems, than the United States is.
The EU system is not deadlocked. It is working, slowly, sometimes incompletely, but it is working. Passing the Stability Treaty is a part of that work. 

Speech by John Bruton, former Taoiseach and current vice President of Fine Gael, at a meeting to launch the Meath Fine Gael  campaign on the European Stability Treaty in the Ardboyne Hotel, Navan, at 8pm on Friday May 4th.

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