A 'No' in Ireland doesn't mean 'No' to Ireland
As Irish voters cast their ballots this week for or against a referendum to approve the European ‘fiscal compact’, investors’ minds still seem firmly transfixed on events in Greece. In some ways, this seems odd. Greek voters don’t go to the polls until next month: nothing will change in the intervening period. Meanwhile, a ‘no’ vote in Ireland’s referendum would — on paper — mean that the country would be deprived of ongoing financial assistance, running the risk of that country going into default. Given how much Irish debt is still held by institutions elsewhere in Europe, that would be an even greater catastrophe than a possible Greek default.
But as John O’Brennan, an academic at the National University of Ireland Maynooth, suggests, no one seriously believes that Ireland would be left to fend for itself if a ‘no’ vote prevails in the referendum. The Irish government has dutifully followed the measures prescribed under the terms of its bailout. Punishing the democratic will of voters in a country that has been a poster child of good conduct would raise hackles across Europe — and would be counterproductive to boot, given the economic consequences for the region.
This must be seen as something of a gamble though, and one that voters seem unlikely to take — after all, a ‘no’ vote wouldn’t mean an end to austerity. A harsh fiscal environment would necessarily persist given that Ireland would struggle to source funding to run budget deficits. But O’Brennan reckons a ‘no’ vote would be profound across Europe. The region’s appetite for austerity is clearly waning: not just because of protests in Greece, but also due to the shift to ‘growth’ being attempted by new French president François Hollande.
Ireland doesn’t have a veto over the fiscal compact. But an Irish rejection could nevertheless prove a death-knell for the treaty as it stands.
Even though Ireland has dutifully followed the … textbook approach, the economy has failed to respond, and Irish bond yields are still high. As Chauchat points out, “something is not working”.
Karen Maley, Business Spectator (quoting financial analyst Francois Chauchat)
Greek voters go back to the polls in mid June to try again at electing a government. But a more immediate poll looms, which could have serious implications for Europe’s efforts to tackle its present economic crisis. Ireland is holding a referendum to approve the new European ‘fiscal compact’ — a German-driven commitment to enshrine fiscal discipline within the Eurozone. (Ireland is the only country to hold such a vote due to domestic constitutional requirements.)
As with Greece, Ireland has had to be bailed out by its European neighbours — though for different reasons. Whereas Greece was brought unstuck by government profligacy (exacerbated by attempts by politicians to hide the true, parlous state of its finances), Ireland required aid after its financial sector imploded and its banks’ debts were absorbed by the state. But the effect on voters has been much the same: austerity and underlying economic conditions have slammed the breaks on economic growth and driven up unemployment.
But unlike Greece, Ireland is something of a ‘darling’ within the Eurozone. It enjoys labour market flexibility and a competitive business environment. But that isn’t enough to nurse Ireland back to health — not while banks are still trying to rebuild their balance sheets. And without a stable financial sector, businesses have little scope to grow, hampering efforts at broader economic recovery.
Irish voters have reason to be frustrated at the pain they continue to experience. Nevertheless, they are expected to approve the fiscal compact. Were the referendum to fail, Ireland would be deprived of any additional external assistance. Francois Chauchat, an analyst for GaveKal (an investor research firm), suggests it would also surely turn Greek voters’ minds again towards anti-austerity parties — just at a time that polls there have swung in favour of the pro-austerity centre-right New Democracy party. By the same token, if Ireland does — as expected — endorse the compact (or, to interpret voters’ intentions more precisely, reject the idea of trying to renegotiate the terms of its bailout), Greek voters will probably be more likely to plump for the likes of New Democracy. Even events in Ireland are viewed through the Athenian prism.
Do Greeks have two heads as well?
Imagine an underperforming economy relative to its neighbours, with unemployment above the regional average. Its government is struggling to raise sufficient revenue to pay its bills — even as it slashes public spending, it still needs to tap credit markets for funds to keep going. Voter frustration — anger, even — is rising. This isn’t a story of any European country, but of Tasmania.
It is wildly unfair to compare Tasmania to the likes of Greece, of course. But Alan Kohler tries his hand at it nonetheless as a parable for what Europe is going through. Australia has a ‘two speed’ economy with mining states such as Western Australia booming, while the likes Tasmania are going backwards. Similarly, Greece can’t raise enough tax revenue while businesses there are burdened with high wage rates. On the other side of the coin, German industry benefits from a relative low cost base and high skills base, in turn providing almost the only engine for whatever economic growth Europe can muster today.
Plainly, the prospect of Tasmania ditching the Australian dollar is vanishingly small, unlike Greece with respect of the euro. Australia also enjoys a considerably more integrated financial market — in Europe, banks are ‘national’ rather than pan-regional institutions. Kohler argues that shoring up the financial sector is essential for Europe to stabilise, and will require joint solutions across the Eurozone. But the region also needs growth so that governments have some chance of meeting their deficit reduction targets (which, in any event, should be pushed out to the medium term). Further austerity, in Kohler’s eyes, is not the solution — rather, it will only exacerbate Europe’s problems.
There are good reasons to believe this is not the 1930s, redux.
Pawel Sweiboda, Demos Europa Center for European Strategy
The anger on Europe’s streets is palpable. Voters have punished governments that have tried to rein in their out-of-control budgets by cutting spending, raising taxes and slashing entitlements. Many commentators have likened this anti-austerity backlash to the conditions in Germany that gave rise to the Nazi movement: a populist leader, Adolf Hitler, was able to rally his nation with a plan to restore an economy that had been crippled by make reparations for the first world war. Populists in Europe today aren’t railing against a bloody conflict, but they are fighting a war of a different kind — against foreigners imposing their economies values and policies.
Certainly, there is much evidence to support this comparison. Politicians on the radical fringes of the political spectrum — both left and right — have gained ground. At the forefront of this economic crisis is Greece, where the neo-Nazi Golden Dawn won seats in parliamentary elections earlier this month. And the radical left Syriza movement emerged from virtually nowhere to become the second-largest party in the chamber in those same elections.
But Pawel Sweiboda sees a different story unfolding. He argues that the election results in Europe simply reflect an evolution in the operation of democracy. Where major parties might once have been able to saturate the media with their message, the inherently decentralising effect of the internet means that parties of all stripes now have new avenues to reach prospective voters. The smallest parties have the most to gain from social media in particular.
That isn’t to say that there isn’t reason to fear the fracturing of the democratic establishment in Europe. As Sweiboda maintains, the rise of neo-fascist movements is a legitimate cause for concern — and one that mainstream politicians should remain vigilant of. But the advantage of the current media environment is how quickly the tide can turn. The latest opinion polls suggest that Greek voters now recognise the dangers that await them if they give too much power to extremists preaching simplistic ‘solutions’ when they go to the polls again next month: the mainstream parties (who endorse the current terms of Greece’s bailout) appear to be in the ascendancy again.
A crisis long in the making
Optimists might once have argued that the formation of the euro represented the demise of national identities in Europe — that instead, a pan-regional ‘European’ identity had emerged. Mired in an economic crisis, it’s plain to see how invalid that notion was. This isn’t just about differences in policy judgements across the continent. The political environment is, in parts, toxic: just look at the Greek newspapers that plaster swastikas over images of German chancellor Angela Merkel.
As Clive Crook writes, Europe’s problems are intrinsic to its structure, which owe to the conflicted objectives of those who pursued the “European project” with such zeal. If only economic benefits were being sought, the European Union would simply have become a souped-up free-trade zone. The Germans, hence, have long been keen on drawing more members into the fold to widen economic ties. But the French, long resistant to the idea of ‘free trade’, have always sought deeper political integration — in large part to circumscribe German power. France saw the single currency as one means of driving this. Germany only came on board for political reasons. In the wake of German reunification in the early 1990s, German leaders felt that they needed to demonstrate a commitment to growing Europe rather than merely growing itself.
It’s something of an irony that the very measure designed to ensure that Germany would not dominate Europe has now enshrined that dominance. In fairness, it’s not that the measure itself — that is, the single currency — is necessarily at fault. Rather, its design sowed the seeds of the present crisis. It’s easy to forget now, but until the debt crisis blew up, Greece could borrow money at much the same rate as Germany. But it’s plain for all to see now that Greece is not Germany — Greek sovereign debt was accumulated at an astonishing rate. Without strong institutions (like a tax office that actually collected taxes from people), Greece was always a much riskier investment environment.
It is easy to dismiss history as largely irrelevant to what Europe must do now. Whatever mistakes were made in the past cannot be undone. But Crook reminds us that today’s decisions will depend on what Europe itself wants, and its history will inform those judgements. The commonly stated solutions — establishing jointly backed Eurobonds, and expanding the remit of the European Central Bank to be lender of last resort to the region’s governments — represent the sort of wholesale fiscal, and to a large extent political, integration that many European states have long resisted. A United States of Europe seems a long way off. But if that is the inevitable and ultimate end-point, then it’s hard to see how doing ‘whatever it takes’ to save the Eurozone is really on the agenda.
