The net question in the referendum is whether Irish permanent law should be amended toconstrain Governments running up debts in future.
In a way, this should not be a controversial issue.
If Governments run up debts, these debts have to be serviced or repaid by citizens.Prudent citizens should, I believe, be in favour of using the law to prevent Governments piling up unnecessary or wasteful liabilities for future generations. It is very difficult for an individual voter to follow what aGovernment is doing with the finances on a day to day basis. So having limits and independent controls should be seen as helping people ensure that theirmoney is managed prudently by their Government.
Opposition parties, in particular, should favour placing limits on borrowing by current Governments because, if they ever find themselves in office, they will be the oneswho will have to put money aside to pay interest on the previous Government’s debts, before they can spend any money at all on day to day services or investmentfor the future.
If the Stability Treaty is ratified by people on 31 May, the Dail and the people will be much better informed than in the past on what the Government is doing with the people’s money.
An independent Fiscal Advisory Council will keep the Dail ,and the people, informed about trends in Government finances. If mistakes are being made in estimating future revenue or spending, theDail and the people will have a new means of keeping the Governments finances honest, so to speak.
This searching analysis of Government finances by the Fiscal Advisory Council, and also that by the European Commission, will greatly enhance Dail Eireann’s ability to carry out itsduties under Article 17 of the Irish Constitution. This Article requires the Dail to approve Government spending and taxation. If the Stability Treaty is approved, the Dail will have much better quality information for making these important decisions. Governments will not be able to produce phoney estimates, something of which I had direct experience myself as incoming Minister for Finance in 1981
And, under article 13 of the Stability Treaty, government and opposition parties the Dail will have a new means of observing, and influencing, the economic policies of other EU countries. There will be a new conference of parliamentarians drawn from economic affairs committees from all member states of the euro. As an export economy, we need to have an input into the policies of our neighbours, and this provision the Stability Treaty will help give us that.
Some people are describing the Treaty as an “austerity treaty”, because it places limits on Government borrowing.
But borrowing is not a cure for austerity.
Borrowing is often just a means of postponing austerity.
It is a means of getting the next generation to pay this generation’s bills, without consulting them. And if the interest rate is high, the austerity in the future, will be much greater than anything that would happen if problems were faced up to now.
The idea of placing limits on Government borrowing and debt is not new.
Back in 1992, the Irish people in a referendum approved our joining a Euro currency, and agreed to rules to defend the value of that currency by limiting Government Debts to 60% of GDP, and Government Deficits to 3% of GDP.
Put another way, we agreed that our overall Governments debt would not be more than just below two thirds of everything everyone earned in Ireland in a year, and that that the Government would not borrow additionally, in any one year, more than 3 cents for every euro earned by the country as a whole in a year.
These rules were put in the form of an EU Treaty, known as the Maastricht Treaty, approved by the Irish electorate on 18 June 1992.
Some might ask why we needed a rule like that, about Government borrowing, in a Treaty primarily about setting up a new common currency?
The answer is that, if you want to prevent a shared currency becoming worthless through inflation, you have got to control the amount of money in circulation. One of the ways that money is put into circulation is by Governments borrowing money, and spending it.
Unfortunately we have not been able to keep our word to ourselves.All over Europe, Governments have got themselves into trouble because they have breached the 60% and 3% limits.
Of course, this was not the only problem, nor the only cause of the economic crisis.
Private businesses and individuals also borrowed and spent excessively. There was too much credit given out, and things were bought, with that credit, for more than they were worth.The European Central Bank, and the Central Banks of most European states, did not put a stop to this. The same thing happened outside the euro area, in Britain and the United States, so it was not a problem of the euro as such.
To use an analogy, it was a problem of people, and businesses, acting like sheep, following one another, rather than thinking where they were going.Meanwhile the fences had been allowed to get into disrepair, parts of the field had no fences at all, and the shepherd had gone to sleep.
Now we have to put these things right.
The Stability Treaty is only a small part of the solution.
Ireland, and the rest of Europe, needs to reform its banking system. A functioning economy needs banks. But Banks never again must be allowed grow to be too big to fail.
Genuine economic growth needs to be promoted, based on developing new products and services that the rest of the world will want to buy.
The consequences of the ageing of our societies must be addressed honestly.
Confidence must be restored, so that people will feel free to spend what they have. But confidence is only sustainable, if it is based on truth, the truth about what owe, and truth about what we are spending. The Stability Treaty will help us tell ourselves the truth about our own economy, more fully than we did in the past, and in that way it will help restore confidence.
A Yes vote in Ireland to the Stability Treaty will not bring complete certainty. Uncertainties will remain in the European and global economies.
The EU is a political organisation. It is democratic. All EU Governments have public opinions to consider, not just the Irish Government. The road to a stable, sustainable, and productive economy in Europe will be a long one, probably with somedetours. But the EU has made a start,
on monitoring systemic risks and
on monitoring economic as well as fiscal imbalances.
There is more to do
on promoting investment,
opening up markets to competition, and
freeing people to work in other EU countries byrecognising theirqualifications.
But, having served as an Ambassador in the United States, and observed the United States legislative process at close quarters, I can say that the European Union is much further along the road towards dealing with its (admittedly more severe) long term structural and budgetary problems, than the United States is.
The EU system is not deadlocked. It is working, slowly, sometimes incompletely, but it is working. Passing the Stability Treaty is a part of that work.
Speech by John Bruton, former Taoiseach and current vice President of Fine Gael, at a meeting to launch the Meath Fine Gaelcampaign on the European Stability Treaty in the Ardboyne Hotel, Navan, at 8pm on Friday May 4th.
People in Ireland are awaiting with acute interest the results of stress tests on their banks to be made public on Thursday. Stress tests are estimates, estimates of what assets might be worth at some time in the future .
Estimates can be made on either very pessimistic, or very optimistic, assumptions about economic developments in the future.
The hope in some quarters is that the EU exercise of stress testing banks will generate confidence in banks based on certainty, but we should be careful here. Certainty about the future is a logical and philosophical impossibility. All banking, everywhere and always, is a matter of confidence, not of certainty. If one makes exceptionally pessimistic assumptions these can become avoidably self fulfilling. One must avoid accentuating the economic cycle in the downturn phase, just as much as one should lean against the wind in the up phase!
In Ireland’s case, the credit of the state itself has unfortunately become entangled with that of the banks. It would be no solution to anything to enhance the credit of the banks, by diminishing the credit of the state. This is the issue with which the newly elected Irish Government is working with its EU partners.
I am sure EU decision makers are by now fully aware that the Irish banking problem has been influenced by the requirement of free movement of capital within Europe since 1990, and the deep interdependence that that has created, with all its good and bad aspects.
In a sense, the Irish banking problem is a manifestation of a wider European banking problem that grew in the context of monetary union. We have had, as President Barroso has said, a monetary union without an adequate economic union.
But I would add that we have also had monetary union without adequate monitoring of risks to European financial stability through lax banking practice across borders within the EU . Systemic interdependence between banks was allowed to develop, indeed encouraged, but without systemic supervision of the cross border risks that that created .
I will show that, back in 1992, the framers of the Maastricht Treaty foresaw these risks, and created the necessary powers to monitor them, but that EU institutions failed to follow up on key provisions. of that Treaty. If these provisions had been fully followed up, it would have helped us avoid what happened to European banking in 2008.
As a result of the failure to follow up on some of the Maastricht provisions, there was not adequate Europe wide monitoring of the risks arising from flows of money across borders from countries, with surplus saving, to other countries where banking bubbles developed. Ireland is a country in the latter category, unfortunately.
To make that point is not to argue that Irish institutions should avoid their financial responsibilities, to bondholders or others. A bond is a promise, and promises should not be broken, especially if ones economy is based, as Ireland’s is, on the provision of international services, in which trust is vital. Let me reiterate, of course, that the main responsibility for Ireland’s plight rests with Irish institutions.
In Ireland, private sector institutions were first and foremost responsible for the bubble, especially the property development industry for it’s reckless borrowing, and estate agency community .
The boards and managements of banks for the reckless lending share responsibility, as do the media, with their reliance on property advertising ,for encouraging people to climb the so called property ladder, as if one place on this ladder was a measure of one’s place in society.
The Irish economics profession has a responsibility for, generally speaking, not calling attention to the obvious unsustainability of the borrowing , and of the level of construction activity, which could not possibly have been maintained. The methods of the accounting and auditing professions have also to be called into question.
It is obvious that the Irish Central Bank, the Financial regulator, and Government made major errors.
But , if we are to overcome the crisis and avoid a new one, everybody must be self critical, including the ECB and other European institutions. A single currency for 16 or more separate nations was always a challenging project, intellectually, politically and economically. If there were design flaws in the project, these must be remedied but , even more so, if powers to act existed, and these were not used, that must be acknowledged.
Risks inherently flowed from the decision to allow free movement of capital within the EU. Exchange controls at national level were no longer available as a means of preventing bubbles developing. That gap had to be filled at a higher, EU wide, level.
The ECB has, under its statute, which was appended to the Maastricht Treaty in 1992, a responsibility to oversee supervision of banks. Some in the ECB may feel that that responsibility rests solely with national central banks but a close reading of the statue of the European System of Central Banks shows that that is not so.
A single currency for 16 or more separate nations was always a challenging project, intellectually, politically and economically. If there were design flaws in the project, these must be remedied. If powers to act existed, but were not used, that too must be acknowledged.
To assess what the ECB could ,or should , have done, about the credit bubble in Ireland one should look at the statues under which it was established, which were appended to the Maastricht Treaty in 1992.
Article 3.3 of the statute of the ESCB says that the ECB
“shall contribute to the smooth conduct of policies pursued by the competent authorities relating to prudential supervision of credit institutions , and the stability of the financial system”.
Note two phrases here… “the prudential supervision of credit institutions” and the “stability of the financial system” .
The ECB would claim that this does not give them a frontline or direct responsibility for prudentially supervising individual banks. But it does give them a contributory responsibility, a role that I would construe as including drawing attention to banking practices that threaten the overall stability of the financial system in the euro zone. Forinstance if in one country, credit was growing at 30% a year and lending had reached 300% of GDP, that was something that the ECB would have been aware of, and which would certainly have come within its mandate under Article 3.3.
Furthermore, Article 25.2 of the ESCB statute says that the ECB
“may perform specific tasks relating to prudential supervision of credit institutions”
and Article 34.1 goes on to say that the ECB may make regulations to implement Article 25.2 that is concerning prudential supervision.
Under Article 14, the ECB had power to issue instructions to national central banks.
A normal reading of this would suggest that it was the intention of the framers of the Maastricht Treaty that prudential supervision would be a responsibility of the ECB, in conjunction of course with the central banks of the member states.
Unfortunately these provisions were never activated. This is because the Council of Ministers never adopted the necessary enabling regulations. One really ought to know why.
The Treaty provided that the Council of Ministers, acting by means of regulations in accordance with a special legislative procedure, may unanimously , and after consulting the European Parliament and the ECB, confer specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions. A proposal from the Commission would have been required. This was never done. We now have a European Systemic Risk Board, but that is 18 years late
It would appear that the ECB found itself with a clear responsibility ,under one article of its statute, to contribute to supervising credit institutions like those in Ireland which have come to pose a systemic risk, but was never given the powers under another article to exercise those powers, as the framers of the Maastricht Treaty expected it would.
An explanation ought to be forthcoming from the European Commission, from each of the member states, and from the ECB itself, as to why these provisions were never activated.
A failure to activate specific Treaty powers, that could have been used to prevent EU wide systemic risks in the banking system, is no minor omission. The omission suggests that responsibility for failing to prevent a banking crisis in a number of EU member states is shared in part by EU institutions.
Clearly, as we now know all too well, the expansion of credit in some countries like Ireland and Spain has affected the “stability of the financial system”, in the words of Article 3.3 of the ESCB statute.
I repeat that this does not mean that the ECB was ever to have, or ever had, the primary responsibility for failures of supervision of individual institutions ,like Anglo Irish Bank. But it does mean that the ECB, the Commission and Council could, could have seen the risk that overall imbalances in banking would upset the stability of the overall financial system, and could have activated the ECB’s Treaty powers to enable it to deal with that. They could have activated the ECBs powers to issue binding instructions to national central banks.
Even if the ECB could not use these powers I have mentioned above, it also had power under Article 4(b) of the statute to submit opinions to national central banks where it saw bubbles developing. It appears that the ECB took a rather narrow interpretation of this power and did not use it ,unless it was specifically consulted by a member state. This is a pity.
The ECB may have been inhibited here by the principle of subsidiarity, but I think it was mistaken in this judgement. We now know these banking risks were in fact not confined within one country, but spread across borders. With the benefit of hindsight, one can thus see that the principle of subsidiarity did not apply.
If the ECB felt it was not getting enough information from national central banks to form a judgement, it also could have used Article 5.3 to obtain better information. But unfortunately the Council regulations to give effect to this power excluded ,until 2009, information about prudential supervision of credit institutions. The Council and the Commission share responsibility for that critical omission.
EU institutions, including the ECB, are now helping to resolve the situation in Ireland and Greece, but this help is in the form of loans which will have to be repaid..
Of course, it would not have been politically easy for the ECB to have used its powers to warn the Irish authorities in 2003 or 2004 to rein in credit. There would have been an outcry from many in Ireland decrying “interference from Frankfurt”, and all that sort of atavistic nonsense. But the ECB can ignore that sort of thing, because it is politically independent under its statute, more politically independent even than the European Commission.
I repeat that I do not make these points to out of any wish to shift blame away from where it belongs. The main blame must be borne in Ireland. But if the EU is to learn from the crisis, it has to look at the whole picture. Part of that picture is the role of the ECB and other EU institutions.
Having said all that, it is important that Ireland approach its European partners in a realistic frame of mind.
Other European countries have problems too.
For example, almost all of them have budget deficits of their own. Many of them have more severe immediate problems with the fiscal cost of the ageing of their societies and workforces than Ireland has. They are also aware that the original justification for the cohesion and regional funds of the EU, to which many were net contributors and we were net recipients, was precisely to prepare countries like Ireland to be able to face the rigours of a single currency. If Ireland now discovers it was ill prepared, the first responsibility is its own.
Other EU countries have domestic political constraints too.
For example, Germans have a justified horror of inflation after their unique experience in the 1920s when inflation peaked at level higher than were seen in Zimbabwe recently, and destroyed the saving of all thrifty families.
Reactionary and nihilistic anti EU sentiment, of the kind we seen in Ireland during the first Nice and Lisbon referenda, is rising in many other countries, and transferring money to countries that can be presented as not having managed their affairs well, feeds those sentiments. This is especially so if the country lending the money has a lower income per head than the recipient.
Irish people must understand these political realities, just as others must be realistic about what Ireland can do on its own about what is part of a systemic European banking problem.
It would make no sense for other EU countries, in their own interests, to make counterproductive demands of Ireland. Demanding that it change our corporation tax system is counterproductive. Corporation tax is one of the ways whereby Ireland will be able to repay the loans it has received. The 12 and a half percent corporation tax raises an amount equivalent to almost 3% of Irelands GDP, more than France collects in corporation tax, and a lot more than Germany collects, which comes to just over 1% of German GDP.
More importantly, low corporation tax rates to attract foreign investment, mainly from outside the EU, has been the core of Ireland economic model since 1956, before the EU had even come into being, and before many of the leaders sitting at the European Council were born! This foreign investment contributes hugely to Irish tax revenues, not only through corporation tax ,but even more so through all the other taxes paid by those working for and supplying these foreign firms. It also has made Ireland, a peripheral island by any standard, one of the most internationalised economies in the world, and that gives it a unique capacity to trade its way out of its current difficulties.
Lending Ireland money, but simultaneously asking it to dismantle the economic model that enables it to repay the money, would not be good banking practice, to put it mildly!
There is a lot of discussion in Ireland at the moment about what is loosely described as political reform. The assumption seems to be that the financial and banking problems the country faces are due in part to a failure of the” system “. The implication of this is that if the “system” were different, different, or more timely, decisions might have been taken.
Reform should never be an end in itself. Bad reforms can make a bad situation worse. Changes have costs as well as benefits. So it is important to define what one hopes to achieve by particular reform. One should define very clearly in advance the output one is looking for, not just the input.
Is the output hoped from the reform simply to be saving money?
Or is it more informed and careful decision making? Or, on the other hand, quicker decisions?
Is it having a different type of person in politics? If so, what kind of person?
Or is it tilting the power balance more in favour of elected (and therefore accountable) public servants , as against public servants who have not had to stand for election? Or is it to continue the trend of the last 50 years which has moved power away from elected Ministers to “expert” or “independent “ entities”?
Is it to give more power to the opposition and backbenchers relative to Government, or the reverse?
All changes have costs, as well as benefits. A reform should only be made if the benefits are greater than the costs.
More accountable or more informed decisions may also be slower decisions. Safeguards do not always come for free.
Time spent giving an account of past failures, or answering parliamentary questions or freedom of information request ,is time that is not available for some other kind of work. If every TD can ask lots of parliamentary questions, the quality of answers may suffer. It is often the boring questions that are the most important, but the media will not report them, and TDs need coverage in the media to convince their voters that they are working
All public servants, elected or not, are human. Requiring decision makers to account on a daily basis for what they are doing may make them more susceptible to short term pressures, and less careful about long term, or wider, interests.
Giving more power to experts will mean less input from the general public.
Having fewer politicians will save money, but it will mean less public access to politicians. Paying politicians less may mean having more part time politicians, as we had up to the 1960’s.
The big policy failure in Ireland took place between 2001 and 2007, when Irish banks were allowed to borrow huge sums from abroad, which they lent on to people buying , selling or developing buildings of all kinds here and abroad. Would those mistakes have been avoided if we had a different political system?
I am not certain of this. There were warnings, as early as 2003, from the IMF about house prices in Ireland, but these were not pressed. Even the OECD said, as late as 2007, believed the banks problems were manageable. Some who knew enough to be really worried may have kept quiet because they did not want to be personally accused of causing a collapse by spreading panic. Some warned of problems in 2006, but by then it was really too late anyway.
We need are people who are willing to be unpopular, who are willing to say things that the general public and the media really do not want to hear, and which may damage the interests of powerful people.
We need an ability not just to question decisions, but to question and examine all the assumptions on which decisions are made.
It was the unexamined assumption that excessively high house prices in Ireland would unwind gradually, and that there would be a soft landing, that was the central cause of Irelands financial downfall. Why was that comfortable assumption not challenged in 2002, 2003, and 2004?
Why was the Central Bank not challenged for being insufficiently conservative in those years? Given that such a challenge would have been very unpopular at the time with house purchasers , builders, and media advertisers, what mechanism do we now need to introduce into our political system to ensure that, in future, such a challenge will not only be made, and, more importantly, will be heard?
A meaningful political reform must one in which the underlying (often over optimistic ) assumptions of policy decisions are made explicit , and then are rigorously questioned
It must provide time in the Dail and Senate, and space in the media, for such questioning, especially where such questioning runs counter to the prevailing consensus.