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Why this really is an Austerity Treaty

Why this really is an Austerity Treaty

The opening salvos of the debate about the Fiscal Treaty from the right-wing political parties and the establishment media have attempted to ridicule the argument that this is an Austerity Treaty. Leo Varadkar called on the Socialist Party not to “lie about the treaty and what it’s about” (quite a serious charge, especially considering it’s over a week since I wrote to him seeking a public debate and have received no reply!).

The Irish Times featured an editorial criticising my description of the referendum as ‘people’s opportunity to reject austerity at the ballot box.’ and did not print my letter in response.

Instead of this being an Austerity Treaty, according to the government forces, it is apparently the opposite. Varadkar declared that if we don’t accept it ‘there’s a risk that austerity may have to be faster, and quicker and deeper”! The Tanaiste, Eamon Gilmore, helpfully informed us that this was an opportunity to vote for “economic stability and economic recovery” and “an opportunity to go beyond casino capitalism.”

Balanced budget rule

So who is telling the truth? This article will outline clearly how this is a Treaty to institutionalise austerity right across Europe, with reference to the key articles in the Treaty. It is a Treaty written for the benefit of finance capitalism, the bankers and bondholders who played such a large role in the crisis. The government forces have consistently avoided in engaging in any debate about the text of the treaty, all the while demanding that those of us on the No side don’t drag in ‘extraneous issues’!

The central reason why this is an Austerity Treaty is the enforcement of the ‘balanced budget’ rule contained in Article 3. The passing of the referendum will result in a rule in domestic legislation imposing a maximum structural deficit of 0.5% (unless a country has a debt to GDP ratio of less than 60%, in which case they could have a maximum structural deficit of 1%). This is not simply to be an aspiration, as the call for a maximum 3% deficit in the Stability & Growth Pact was initially in reality.

This is a target which will be enforceable. The balanced budget rule means the imposition of an automatic ‘correction mechanism’ – which means cutbacks and extra taxes triggered automatically in the case of exceeding this target. Failure to implement this rule correctly can result in a fine of around €150 million for Ireland at the European Court of Justice.

What is a structural deficit? Essentially, it is a measurement of the deficit in an economy when cyclical movements in the economy and one-off expenditures are taken out of the equation. However, how to determine it is a matter of a lot of debate between economists with the result that different institutions can come up with very different figures. For example the IMF estimates that Ireland ran a structural deficit of 5.4% of GDP in 2006, while the EU Commission estimated a surplus of 2.2%! (Davy Stockbrokers – Ireland and the Fiscal Compact). It also is really something that can only be measured with the benefit of hindsight, with the result that structural deficit estimates differ radically over time. For example, Davy’s Stockbrokers points out that in April 2007, the IMF estimated that Ireland had run a structural surplus of 2% of GDP in 2006. Yet, in September 2011, it indicated that Ireland ran a structural deficit of 5.4% in GDP in 2006!

Who will decide on what all the countries’ structural deficit is in this case? It is the European Commission which will decide on the target date by which this strucutral deficit target must be met by and it will also decide on what countries’ structural deficits are. This represents a further transfer of powers to this unelected body over vital economic decisions.

Countries that are in ‘bailout’ programmes are shielded from these targets until they exit. Ireland is currently due to exit in 2014. The Commission could say that Ireland therefore has to meet this target in 2015. The Department of Finance estimates that in 2015, Ireland will have a strucutral deficit of 3.7%. Bringing that down to 0.5% would mean €5.7 billion worth of extra cuts and attacks, as Michael Taft has illustrated.

It is more likely that the Commission would give Ireland a few years to meet the target. A target of 2017, for example, would simply mean extending that austerity over three years, with around €2 billion of extra austerity per year, if no significant economic growth was forthcoming.

A question that Vincent Browne has posed is, why does a strucutral deficit target mean that austerity has to be imposed? Could the structural deficit target not be met through progressive taxation for example? In theory, that is true, but recall that it is the European Commission that will be driving the attempts to meet these targets. Recall the neo-liberal austerity programme that the Commission has pushed with the ‘bailout’ programmes for Ireland, Greece and Spain. Recall the six pack on economic governance and the Europlus Pact – which are about reducing deficits through slashing social expenditure. Recall the fact that the European Commission endorsed Ireland’s latest austerity budget, without of course pausing to demand a wealth tax on the increasing wealth of the super-rich in our country, for example the €219.3 billion held in net wealth by the richest 5%. The European Commission is a right-wing neo-liberal institution and will use the structural deficit target to push austerity policies.

This therefore is a Treaty to institutionalise austerity. If it is passed and implemented across Europe, this Treaty will not bring stability and growth, it threatens an absolute disaster. Austerity is already destroying lives and economies across Europe – with the Greek economy in freefall as a direct result, the Portuguese economy continuing to shrink and the Irish economy (according to the ESRI) set to become the first in the EU to have six consecutive years of declining domestic demand. This level of austerity means that the eurozone as a whole is likely to face ression in 2012.

The result of synchronised institutionalised crisis will be absolutely disastrous and opens up the prospect of an even deeper crisis.

Debt Reduction provision

Article 4 is a debt reduction provision, requiring countries with a debt to GDP ratio of over 60% to reduce it by one twentieth of the excess per year. This is a provision for further austerity policies in order to pay down the debt. In theory, there are two ways in which this ratio could be reduced. GDP could be increased or the debt itself could be reduced through paying back the principal. In practice, because of the austerity policies already being pursued and the implications of Article 3, the option of significant GDP growth is effectively ruled out.

Therefore, this Article in effect calls for a massive pay back of debt to the casino capitalists whose system Eamon Gilmore was apparently so eager to move beyond! In the Eurozone as a whole, the debt to GDP ratio is at 85%. Reducing that to 60% without GDP growth would require a reduction of €2.3 trillion of debt. (As explained by Brian Lucey here) This is a recipe for yet more austerity policies that will provoke a further contraction across Europe.

Ireland’s debt to GDP ratio is likely to be around 120% in 2015 when we exit the bailout. Reducing the debt ratio by one twentieth per year will therefore mean reducing it by 3% of GDP per year. Without significant economic growth, that means paying back €4.5 billion per year in principal to the bondholders on top of the €9 billion a year we will be paying in interest rates. This debt will only be paid back on the basis of yet more savage austerity imposed on working people, which will in turn mean a worsening of the crisis.

Removal of right to engage in deficit spending

Articles 3 and 4 together demonstrate how this is an austerity Treaty in the interests of the bondholders and speculators. This is not simply one off austerity, but an attempt to enshrine it “through provisions of binding force and permanent character”. (Article 3.2) They mean that engaging in expansionary fiscal policy will be effectively made illegal. This is not only fundamentally undemocratic, by tying the hands of future governments to continue the same economic policies and removing the right of people to elect a government with socialist or even Keynesian economic policies, but it is also bad economics from the point of view of ordinary people across Europe.

While it is the case that often achieving a structural balance would be a worthwhile aim, it also often makes sense for a state to engage in borrowing and deficit spending in order to create employment and develop the economy. The oft-cited example of the Schwabian housewife not living beyond her means does not hold any water when we are dealing with a state that is not an isolated household but has a huge impact on everything that happens in the economy.

The need for massive public investment is particularly evident right now in Ireland. 450,000 people are on the live register and private sector investment has collapsed. Despite an increase in profits for the private sector (the profits of non-financial corporations increasing by €2.6 billion in 2010) investment continues to decline (by €30bn since 2007). On the basis of relying on the private sector, it is simply wishful thinking to suggest that the financial resources will be put together with the available skills and talents of labour to create jobs and wealth in our economy.

That is why massive public sector programmes are needed to get people back to work, as well as improving our infrastructure and developing our economy. If big business is not willing to invest, the key sections of the economy should be taken out of private ownership and into democratic public ownership and a democratic plan developed based on massive public sector investement to redevelop the economy. With the balanced budget rule and the demand to reduce the debt to GDP ratio at a quick rate, the capacity of a state to engage in the necessary public investment will be effectively eliminated.

Prospects for the referendum

The major political parties, the key sections of the mainstream media and the big business community will all mobilise heavily to ensure that people do not make the ‘mistake’ they made in Nice I and Lisbon I. Every avenue will be pursued to avoid debating the actual content of the Treaty and instead to rely on a combination of aspirational phrases and fear. This is because it is a vital issue for the political and economic establishment in Ireland and in Europe.

While we are facing very serious well-funded organisations on the opposite side, we have strong advantages on the No side. The fact that at 24 pages, the Treaty is readable and that the actual content of the Treaty is fairly clear in institutionalising austerity means it will be more difficult for the Yes side to avoid defending the actual provisions of the Treaty. People’s actual experience of the austerity over years now means the majority will be instinctively opposed to any attempt to institutionalise it. Developing struggles against austerity in particular in the form of the massive campaigns against the household and septic tank taxes mean that anger can get the upper hand over fear. Our job is to clearly explain to people how the choice we face here is one of institutionalising austerity, and that this is people’s opportunity to reject the austerity that has failed so disastrously already.

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