Would the economic provisions in the Fiscal Treaty have prevented Ireland’s current financial crisis?

The answer to this is no. The main economic provisions in the treaty state:

“The budgetary position of the general government shall be balanced or in surplus.”

The Irish government actually upheld this budgetary position in the run up to the economic crisis. According to the IMF, between 2000 and 2007 (other than a -0.312% deficit in 2002) the government held a surplus in six out of seven years. In fact, the Centre for Economic and Policy Research specifically says that Ireland was a model of fiscal responsibility in the years leading up to its current disaster.

Not only does the treaty state that budgets must be balanced or in surplus, it states that the structural deficit cannot be higher than 0.5 %. Again, Ireland achieved this target in 2000, 2001, 2004, 2005, 2006, 2007.

 

The treaty then requires the debt to GDP ratio to be set below 60%. Again, this was achieved in Ireland in the run up to the economic crisis. In fact, Ireland has had a debt to GDP ratio below 60% since 1996 with year on year reductions, unlike countries such as Germany and France.

From the above two charts, you'll notice that Ireland had a near perfect record in the run up to the financial crisis.

The rules outlined in this Fiscal Treaty do nothing to address the causes of the Irish crisis. If we look at what did cause the crisis, then we will see why.

Ireland (and much of Europe) finds itself in this difficult position because private debt has been placed on taxpayers shoulders - you'll notice this from around the year 2008 in the above charts.

A large portion of this debt was derived from the property bubble, which was compounded by the German and French economies. Both were struggling during the early to mid 2000’s, and consequently demanded that the European Central Bank (ECB) keep interest rates low. This made credit available at a very cheap rate.

People throughout Europe could now borrow more and buy more - and that’s exactly what happened in Ireland. The increased demand for property in the Irish market saw developers inflate prices way beyond what they were actually worth.

On top of this, the implementation of pro-cyclical fiscal policies by previous governments made matters even worse. Prudent governments should increase taxes during a ‘boom’ and save for a rainy day so they can invest and create growth again. But the Irish Government lowered taxes and increased spending during the ‘boom’. They became over-reliant on income from the property industry and when it inevitably crashed, we were left with a massive hole in the public finances -  The state just couldn’t take in enough revenue through taxes to pay our everyday costs.

This new reality was then used by the Troika (particularly the ECB) to threaten the Irish taxpayer into paying back unguaranteed, unsecured bondholders in European banks (who had taken a risk on Irish banks like Anglo) or face the risk of default and the collapse of the entire economy. Essentially – we’ll only bail you out on condition you bail out the bondholders.

This treaty does nothing to prevent another crisis from happening, because it in no way addresses the causes of the current one. In fact, the economic clauses in this treaty are a pat on the back to the reckless economic policies of previous Irish governments and the lack of regulation in the banking sector across Europe. If the EU and the established political parties genuinely wanted to prevent a further crisis, they should have prepared a treaty that would prevent pro-cyclical policies and encourage counter-cyclical (you must raise taxes during a boom). Instead, this treaty encourages the exact opposite and calls for more of the same.

To date, the main arguments in favour of the treaty have been, “this is about responsible budgeting and good housekeeping” or this treaty is there to “prevent another crisis” and create “stability.” The above statistics prove conclusively that this is untrue. The use of the word stability by the government and the YES side is simply about using language to influence voters.

So if the provisions in this treaty don't address the problem, just what does it do?