I have been asked to speak on the realities of what the treaty means for Ireland and on the question of understanding the facts. I thought it would be useful to make four or five points about the treaty. They are in no particular order. I hope they will shed some light on what it means for Ireland. The first point I wish to make is that in terms of its intrinsic impact, this is probably the most limited European treaty that Ireland has ever had a referendum on. There are two senses in which that is the case. First, its scope is far narrower than previous treaties on which we voted. The Single European Act introduced the Single Market, in effect. The Maastricht treaty introduced the single currency. The Lisbon treaty introduced a range of reforms. Each of them operated on a far broader plane than this treaty, which is a much narrower legal instrument. It is a single piece of the jigsaw puzzle of responses to the crises that have engulfed the eurozone for some time.
This treaty is narrow in another sense as well. In terms of the substantive economic rules it imposes, it represents a very narrow departure from the status quo and an even narrower departure from existing rules, rules that are in the course of being made and rules that are being planned - what Yeats might have called laws that are “past, or passing, or to come”.
Perhaps I can elaborate on that. There are two key rules in the fiscal treaty. The first is the debt rule in Article 4 which provides that when the ratio of a contracting party's debt to GDP exceeds 60%, that contracting party shall reduce it at a rate of one twentieth of the excess per year. However, that rule is already in place under Article 2 of a 1997 regulation which was amended last December. The other key rule is the deficit rule, the so-called balanced budget rule - inaccurately called a balanced budget rule - in Article 3 of the fiscal treaty which requires that a state's annual structural balance be at its country's specific medium-term objective or at least that contracting parties ensure rapid convergence towards their respective medium-term objective. That rule is a tightening, although a fairly marginal one, of a rule already found in Article 2(a) of another 1997 regulation, amended last December, which stipulates a defined range between -1% of GDP and balance in cyclically adjusted terms. What we have in the fiscal treaty is precisely the same debt reduction rule that applies to Ireland now and a deficit target altered from -1% to 0.5%, which is a shift, but not a big one.
I wish to make three further observations on the deficit rules. The deficit rules significance is also reduced by the fact that it will not apply to us while we are in the EU-IMF programme under Recital 20 of the preamble to the treaty. The relevance of the new deficit rule is further reduced by the need to comply with the debt rule. In the absence of strong economic growth, compliance with the debt reduction rule will require us to run budgetary surpluses. Running surpluses, by definition, means one will not be affected by a rule that limits the size of the deficits. One will not be allowed to run deficits under the debt reduction rule. The deficit rules significance is also reduced by the fact that, if one reads the fiscal treaty properly, we are not bound by a structural deficit limit of 0.5%, instead we are bound by a country's specific medium-term objective in that regard and, at least initially, all we have to do is ensure rapid convergence towards that. In other words, we do not have to hit 0.5%. The 0.5% structural deficit rule only applies when the debt to GDP ratio is 60% or more. Once it is significantly below that level, the current structural deficit limit of 1% applies. Overall, there is no change in the debt reduction rules and a deficit limitation rule will have only a limited effect, if any, in the Irish context. That is the first basic point. It is not only the basic economic rules that build on European law. That is already in place. There are other provisions under the so-called six-pack, the two-pack and laws that will be adopted which reflect what is in the fiscal treaty. Therefore, the divergence from existing law and law in the course of being made is not as great as many have made it out to be.
That raises questions as to why we have ended up with a treaty. There are two reasons, one of which is to provide reassurance to the German public, in particular, that whatever financial solidarity they express with other eurozone states will not be dissipated. On the one hand, such guarantees are arguably legally unnecessary. Just because something is not legally necessary does not mean it is not politically necessary. We all know that from the Irish guarantees legally completely unnecessary in respect of the Lisbon treaty but politically very important in Ireland. The second reason for a treaty, as Mr. Philip Lane, who I understand appeared before the committee today, said, is subsidiarity in action. In other words, it is the idea of making the monitoring of fiscal policy primarily a domestic responsibility rather than something applied in Brussels alone, that is, the internalisation of discipline.
All of that leads to my second point which is the consequences of voting "Yes" or "No" to the referendum on this treaty. It follows from what I have said that voting "Yes" will not make a tremendous amount of difference to our economic obligations. As noted, to the extent that we run structural surpluses, it will not make any difference and we will be covered by precisely the same debt reduction obligation. As regards voting "No", I make three observations. We will still be bound by the debt reduction and deficit target obligations under the six-pack, more specifically under the revised Stability and Growth Pact. To that extent, a "No" vote will not make much difference. Neither will it stop the treaty from entering into force. We are all aware of that, given that it requires only 12 of the 17 member states to sign up to it. Where it will make a difference is under Recital 25 of the fiscal treaty and Recital 5 of the European Stability Mechanism treaty. The stated intention of the contracting parties is that non-ratification should bar us from access to new programmes under the ESM from 1 March 2013. That is immensely significant.
The current bailout lasts until the end of 2013 and has to be followed either by re-entry to the markets or access to new bailout forms. If this is not the case, Ireland will default. To deprive ourselves of access to bailout funds is hugely significant. Many economists have expressed the view that we may well need another bailout, including Colm McCarthy, Willem Buiter, Peter Brown, Donal Donovan, John McHale and Dan O'Brien. Therefore, we are not beyond the possibility of needing another bailout. A "No" vote might help push Ireland into default because who would want to buy Irish sovereign debt if there is no possibility of a bailout in the event of getting into difficulties. Of course, the other member states may choose to bail us out. They are not barred from doing that but there would be no guarantees in that regard.
The third point is that the vote on the fiscal treaty does not appear to make us choose between Keynesianism and Hayek's economic doctrines or even to choose a rule-based approach to debts or not. As regards Keynesianism, the treaty does not outlaw high spending. Mr. Philip Lane referred to this issue. Under the treaty, one can be a high tax, high spend, or low tax, low spend state but not a low tax and high spend state. That is the catch. In one way, the treaty may actually facilitate more financial solidarity because, by setting German fears at rest, it may contribute to more transfers from the centre, not less, and in fact it has already done so, given that preliminary political agreement that we would have a fiscal compact led to the European Central Bank pumping a trillion euro into the banks through the recent long-term refinancing operation.
In regard to Keynesianism in Ireland, as Professor John McHale as pointed out, we are so crippled by debt that nobody will lend to us to finance counter-cyclical policies. We are already with the lender of last resort. It is not that significant as regards Keynesianism and non-Keynesianism. Also, it does not mark a big change in terms of introducing a rule-based approach. There is no great innovation here. We have always had a rule-based approach to debt and deficits in the EU since the entry into force of the Maastricht treaty in 1993. Under Article 126 of the Treaty on the Functioning of the European Union, TFEU, member states were required to avoid excessive government deficits. There was also the protocol on the excessive deficit procedure. Those rules were supplemented by the Stability and Growth Pact in 1997. Therefore, we have always had a rule-based approach. The problem was that the rules were not enforced. Sanctions were provided for under the Stability and Growth Pact but they required a qualified majority vote in favour and the former French President Chirac and the former German Chancellor Schröder vetoed it. In other words, they used their blocking minority. Under Article 7 of the fiscal treaty, they will no longer be able to do that. Therefore, the rules should apply to big and small states alike.
Four errors have crept into the debate. The first is the idea that Ireland will gain something by vetoing the European Stability Mechanism treaty. The European Stability Mechanism, which is at €700 billion, will be our main insurance policy against default when it comes into force. It is vital we have access to it for its own sake because we may need it and to reassure sovereign debt markets. An astoundingly good reason is needed to veto the ESM treaty and I have not seen one. A veto would hurt us and fellow member states. It is interesting to note that Recital 5 of the ESM treaty, which is the one to which people object, the conditional access clause to the ESM, is effectively the same as Recital 25 of the fiscal treaty which we cannot veto because we do not have a veto over it. I am not sure what we would gain by vetoing the ESM treaty.
Second, the idea that we are enshrining the fiscal treaty in the Constitution is not correct. All we are seeking to put in the Constitution is an authorisation and immunity clause. In other words, we are seeking to insert an authorisation to ratify the fiscal treaty and to immunise laws, Acts or measures necessitated by the State under that treaty. It is similar to the authorisation and immunity clause in respect of EU treaties under Article 29.4. I assume the implementation of the fiscal treaty will be carried out through a fiscal responsibility Act or an ordinary Act of the Oireachtas. Therefore, the idea that we are committing some kind of irreversible act by putting an immunity and authorisation clause into the Constitution is incorrect. In fact, because decisions relating to the six-pack are decided by qualified majority vote, it will be harder to get out of the six-pack obligations than the fiscal treaty obligations. If we wanted to get out of those, we could denounce the treaty in the same way as we could denounce any other treaty. However, I do not expect we will want to do that.
A third mistake relates to the idea that the fiscal treaty consists only of the fiscal compact. This may be a technical correction on my part, but there is more to it than that. It includes provisions on economic policy co-ordination and governance and also governance of the euro area. This includes Article 13 of the fiscal treaty, which envisages a role for national parliaments. Building budgetary policies and other issues in the fiscal treaty are to be discussed by a conference of parliamentary representatives, and I assume this role will be taken on by COSAC.
A fourth correction I would like to make concerns the idea that this treaty is irrelevant to Ireland because we would not normally have violated its terms. Other states, as committee members may have heard earlier this afternoon, did so and because we are so economically interdependent, violation by these other states affects us and has a negative impact on us. I could make some further points, but I will leave it for now as I want to leave time for other speakers.