Alternatives For Ireland After NO Vote In Referendum

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Prof. Terrence McDonough ( School of Business and Economics,  NUI Galway) made a presentation to the Joint Committee on European Affairs on the Intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union regarding Ireland’s many options if there was a NO vote on Fiscal Treaty Referendum.

There is a strong chance Ireland will need a 2nd bailout. As many suspect (and hasn’t been denied by Irish government), the Treaty was changed at Irish Government’s request so that Ireland would not be able to access the ESM for funding if it voted NO. This measure was brought in so the Irish Government could force the electorate to pass the referendum (they knew full well one was required). Below are options that Ireland has to deal with the eventuality of needed funds. In fact Constantin Gurdgiev said a NO vote is Ireland’s trump card.

In fact, Ireland will have a number of options in this event.  First, Ireland is small but scary. A disorderly Irish default would threaten the stability of the European banking system.  A European Central Bank intervention to restabilize the system would be considerably more expensive than a second bailout of a comparatively small country. It is highly unlikely that Europe would ignore its self-interest in order to spite the Irish electorate.  Funds would be  found outside of the ESM.

Secondly, Ireland also has the option of borrowing from the IMF rather than the European institutions.

A third possibility is to set about closing the budget deficit.  Irish tax take as a  percentage of GDP is well below the EU average.  Taxes on wealth and high incomes are  considerably underexploited.

A fourth possibility is the restructuring of debt.  The Anglo-Irish promissory note  payments alone constitute 3 billion in any given year.

A fifth under-discussed possibility is the issuance of innovative debt instruments.  It would be possible to make Irish bonds acceptable in payment of taxes in the event of any  default.  This should eliminate the risk premium which makes it difficult for Ireland to re- enter the markets at this time.

Any one of these options alone has the potential to substantially address the budget gap in the event of a second bailout and a failure to access ESM funding.  A judicious  combination of these strategies would easily finance the resulting gap with little disruption.

The sky will not fall in the event of no vote.

If a no vote will not lead to disaster, are there positive reasons to vote yes?

Many pro-treaty arguments are primarily intended to be calming and reassuring in  nature, telling the electorate that a yes vote is the safe and conservative course.  In fact such a  pact is historically unprecedented and a dangerous experiment.


Paul Sommerville who was on the Vincent Browne show said that there is no chance Ireland would be left without funding.

“There is absolutely no chance that the ESM will not fund us no matter what way we vote, zero chance…”.

Goto 29mins 15 secs into interview at


Referendum For Ireland

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Great news for Ireland. The Irish Constitution wins again and ensures the Irish have one last crack at an EU treaty. Predictably TPTB in Ireland will use the same tactics as the last time. The message as usual will be

If it’s not passed, the sky will fall in, the world will end, everyone in europe will hate you.

If you do pass it, everybody will get a job and the Celtic Tiger will come back.

or some thing like that.

Constantin Gurdgiev had this to say on the Fiscal Compact

As a whole, to comply with the Pact parameters, the Euro area economy will have to shrink by some €535-540 billion every year between now and 2020 – an equivalent of reducing euro area growth by a massive 3.9% annually.


Ireland will be one of the worst impacted economies in the group courtesy of our excessively high structural deficits, debt to GDP ratio and cyclical deficits. In 2012, Ireland is forecast to post a structural deficit in excess of 5.5% of potential GDP – the highest structural deficit in the entire Euro area. To cut our structural deficit to 0.5% will require reducing annual aggregate demand in the economy by some  €7-8 billion in today’s terms. Debt reductions over the period envisioned within the pact will take an additional €12 billion annually. For an economy with huge private sector debt overhang, paying some 12% of its GDP annually to adhere to the Fiscal Pact is a hefty bill on top of the already massive interest bill on public debt.

So, looking at the past will give an indication of likely countries will be able to stick to the constraints

My own research based on the Euro area data shows that during 1990-2008, only two euro countries – Finland and Malta – have complied with the Fiscal pact criteria more than 50% of the time. The rest of the member states, including Germany and France, have run sustained deficits more than 60% of the time. Once a euro state found itself stuck in twin current and fiscal deficits in one decade (the 1990s), transitioning to a twin current account and fiscal surplus in the next decade (the 2000s) was virtually impossible. For example of all states in EA17 who were in current account deficit throughout the 1990s, only 2 have managed to achieve current account surpluses during the following decade. Only one country that experienced fiscal deficits in the 1990s has managed to generate fiscal surpluses over the following decade. No country has been successful in restoring fiscal and external balances after a decade of twin deficits.

Gurdgiev sums it up as

In short, the Pact our Government so eagerly subscribed to is at the very best a continuation of the status quo. At its worst, Ireland and other member states of the Euro are now participants to a fiscal suicide pact, having previously signed up to a monetary straightjacket as well.

Senator Shane Ross had the following comment

Mr Ross said it was a fiscal pact on austerity and was dictated by the French and Germans without any input from Ireland.

He also said it was a road we should not go down and the debt reduction has to be tied into the ratification process.

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