John Bruton

Opinions & Ideas

Category: fiscal compact

Interview by Dermot Murnaghan for Sky News

ANY QUOTES USED MUST BE ATTRIBUTED TO MURNAGHAN, SKY NEWS
DERMOT MURNAGHAN: Now then, on Thursday the people of Ireland will be offered a choice to accept or reject stricter European plans for stricter budget disciplines. According to the latest polls the yes campaign is in the lead but opponents say the plans have no social or economic merit. Well joining me now from just outside Dublin is the former Prime Minister of Ireland, John Bruton, a very good morning to you Mr Bruton. Does Ireland feel the weight of European responsibility lying on its shoulders? If it should vote no, the implications for the euro could be dire.
JOHN BRUTON: Not really. In this case it will be enough for 12 of the 17 countries of the eurozone to vote yes to the Fiscal Compact for it to come in to effect so unless previous EU treaties, Ireland is not essential. On the other hand I think it is in Ireland’s interests to vote yes because that would give us the possibility of applying for funds from the European Civility Mechanism if we need them. It would also incorporate into our own domestic rules, better balanced budget controls on the government, to prevent governments – particularly in boom times – spending money that they ought not to spend and borrowing money that they ought not to borrow. The controls contained in this document are mainly to do with internal controls in Ireland rather than EU controls which exist anyway and they will I think be particularly applicable in boom times rather than in times of difficulty when you have to cut back anyway because you can’t borrow the money.
DM: The poll I referred to also tells us something interesting about Irish political life in that it seems on this issue to be dividing more than it has done in the past along class lines in that those more tending to vote no are those suffering most from austerity and recession, those at the bottom of the economic pile.
JB: I think that’s true, the polls seem to suggest that that is the case although in the last week, I think among people of the less well-off socio-economic group there has been an increase in the yes support in that camp because I think they realise that if we have to go for a second bail out, that would be a lot of it to support social welfare and healthcare schemes that benefit the less well-off people more than they benefit other people and obviously if we were cut off from funds, the people who would be first to suffer would be the least well-off. I think that message is beginning to percolate right across the community at this point.
DM: Does that tell us that those people minded, and I see on third of the electorate is still undecided, those people minded to vote no are stick of this tag that has been hung round Ireland’s neck of the poster boy for austerity, they may be beginning to feel that the Greeks are right and say let’s not take it any more, it doesn’t have to be this way?
JB: Well I think the truth of the matter is Ireland is doing well not because of austerity but in spite of austerity. We are doing well because we have a very big foreign direct investment base in this country, we are the leading attractor of foreign investment in the world, certainly in Europe, and that’s keeping our economy healthy. I think that that is something that depends very much on us being part of the European project, people invest here from America, from China, from other countries like that, because we are a fully subscribed member of the European Union. If we were to cast in doubt our commitment to the disciplines of the European Union and the euro, that would have an adverse effect on foreign direct investment which would have an immediate adverse effect on interest rates and on job creation here in this country
DM: Well leaving aside the referendum there, if Greece should exit the euro or be forced out of the euro, it’s said that this could spark a domino effect. Do you think that Ireland could be ejected from the euro or is it irrevocable, its membership?
JB: Well, legally it is not possible to eject a country from the euro. A country might decide that it had to leave but I don’t think it’s likely that Greece will leave in the end because the effects on Greece would be so enormous, there would be an immediate four percentage point drop in the Greek gross domestic product, on top of all the drops that have occurred already, in the immediate effect of their leaving. If that were to lead to a break-up of the eurozone, you could have up to a twelve percent drop in income right across the eurozone, with the biggest sufferers actually not even being Greece but being Germany and France and, of course, Ireland. So I think keeping the eurozone together is a very, very high priority but clearly you have got to do that on a basis that you’re not simply giving money that is being poured down a black hole which never will come up again, you’ve got to have some controls or guarantees both in European law and in domestic law and what the fiscal compact treaty does is insist that we put it into our domestic law as well as relying on European controls which are there already under existing treaties.
DM: Just briefly, do you have any sympathy with people, maybe just to cause mischief, who have been saying in Ireland maybe you would have been better staying linked to sterling as you were forty years or so ago?
JB: Well at that time we had a situation where interest rate policy was determined in London without any Irish input and we went up and down with the fortunes of whatever suited the British economy as decided by people in Britain over which we had no say. In the eurozone we are one of 17 countries therefore we don’t determine the policy but we do have a say, we have representation in the European Central Bank, representation in the European Commission, in the European Parliament so we have more control, not complete control but more control of our economic future as a member of the eurozone than we would have if we were simply to unilaterally link ourselves to sterling and accept whatever was decided in London.
DM: Okay, Mr Bruton, thank you very much indeed for your time. John Bruton there with his thoughts on the referendum.

THE LATEST VERSION OF THE EURO AREA FISCAL COMPACT-WILL IT BE ENOUGH TO SATISFY THE ECB TO DEPLOY THE NECESSARY FIREPOWER?

On the basis of the  agreement at the EU Summit on 9 December, the EU is working out the details of the proposed fiscal compact which will be incorporated in a Treaty between EU members, except the UK. The latest version has been published on the Open Europe website and is herewith.

My own view is that something solemn and strong, along these lines, is needed if sovereign borrowing by European states is to regain the confidence of the markets. This a vital national interest for all euro area member states, notably for Ireland. So the Treaty must  pass. But we must also make sure it is as well designed as possible.

A few questions need to be answered.

1.)    Will this Treaty need to be put to a Referendum in Ireland?

When Ireland joined the United Nations and the IMF, no referendum was needed, even though in the former case Ireland theoretically could have been, or be,   committed militarily,  in  defined circumstances, which have not  in fact yet arisen.
One of the provisions in the Treaty , would commit Ireland to introduce a balanced budget rule into its legal system in a  binding and permanent way, preferably in the national constitution.
 A constitutional amendment would definitely require a referendum. But an amendment to the Central Fund Act or some other piece of “permanent” financial legislation, to impose a balanced budget policy, would not require a  referendum.
I wonder if  that would be sufficient?

2.)    How easy will it be to interpret is the proposed compact?

If the wording of the proposed Treaty is to subject to adjudication by the European Court of Justice and, in Ireland’s case, by the Irish Supreme Court it needs to be very clear .

The Treaty would allow a country to have a structural deficit of up to 0.5% of GDP , “in terms of the country specific medium  term objective” for that country. That objective would presumably be set by the Commission.

 Interpreting administrative objectives set by the Commission would be difficult for Courts.

Furthermore, the concept of the structural deficit itself is quite elastic. It depends on the point a country is on in its economic cycle. But there is often controversy even among top economists about when an economic cycle began or ended, and even about whether there is such a thing at all. This will bring judges into very difficult areas in which they have little expertise.
There is also a question about how binding these rules will be. A rule in Ireland’s constitution is much more  severe, than rules in constitutions in other countries, where the constitution is  seen as guidance, rather than absolutely binding regardless of circumstances


3.)    Does the compact do everything that needs to be done?

My own sense is that there is not enough in the draft Treaty about how Europe is to regain competitiveness and market share.
 This means bringing downs costs, in the way Germany did in the 1990s and Latvia did more recently. Fiscal austerity is necessary, but not sufficient, to achieve this.
Austerity is not an end in itself. It is only a means to an end, and that end needs to be more credibly and clearly defined by the Heads of Government of the Euro area.

THE EURO AREA FISCAL COMPACT

A new fiscal compact was announced on 9 December  by the  Euro area  Heads of Government,  as a means of protecting the stability and integrity of the  Economic and Monetary Union,  and of the  European Union as a whole.
This is a vitally important goal, especially for Ireland which has gained more than almost anybody else in terms of market access, funds, and influence since it joined the European Union in  1973.
It is most important for Ireland that this fiscal compact be credible with the markets, and also  understandable  by the electorates of all 27  EU member states.
AUSTERITY WAS COMING ANYWAY, BECAUSE OF THE AGEING OF EUROPEAN SOCIETIES.
A fiscal crisis in Europe was always on the cards around now, even if there was no single currency, because of the ageing of the European population.
 Repeatedly, the European Commission has produced reports that said that, with unchanged policies, the debt to GDP ratios of many European states were going to reach  500% by  2050,  simply by virtue of the increased size of the likely  retired elderly population relative to the  working age population.
 During the boom, these reports were ignored by bankers, bank regulators, bond market participants, Finance Ministers, and political parties.
 But if you want to understand the rationale for   German attitudes today, you have only to look at the prospective ageing of its population.
 Germans are worried that the savings they have put aside for their retirement will be devalued by inflation generated by excessive monetary easing by the European Central Bank, or by fiscal irresponsibility by other European states that are unwilling to balance their current budgets.
Critics of Germany do have a point when they say that, in the short term,  Germany is asking a lot of some other  euro area countries(like Italy and Greece) when it demands that they must  suddenly become more competitive, increase their exports, and thereby earn the money to pay off their debts when, at the same time, their major market (Germany) is retrenching and reducing its demand for imports. 
But the motivation for the German caution is the ageing of their own population, as much as it is fear of a repeat of the hyper inflation of the 1920’s. And Greece and Italy also face the ageing of their population too, so they would have had to retrench anyway, whether Germany insisted on it or not.
It is also important to keep a sense of proportion about “austerity”.
 Admittedly expectations and prices have risen in the meantime,  but austerity in 2012,  is not quite the same as austerity was in the  1930’s , or even the 1980s, because  almost all European  countries are starting from a much higher income level that applied in the  1930’s or  in the 1980’s.
IT IS IMPORTANT TO RESPECT BASIC ARITHMETIC
 It is also important to respect basic arithmetic.
 For example, Ireland could not expect to have a welfare state as generous as that of Sweden, at tax levels similar to those of the United States.
 As the late Garret FitzGerald pointed out on many occasions, and it did not add much to his popularity, Ireland is not, overall, a heavily taxed country.   Pay, benefit , and pension levels paid from public funds are also  higher than  those in many  other EU countries for  comparable situations.
 A choice about the distribution of benefits and burdens has to be made, and these are the most difficult questions of all. They are the ones politicians, who are usually trying to build the widest possible coalitions, prefer to avoid if they can.
During the boom these questions were  easily avoided by borrowing, and by funding permanent expenses with temporary revenues.  That is now over.
 Even if the EU had no fiscal rule, the markets have now woken from their long slumber, and are demanding that those, to whom they lend , show how they will balance their books,  and repay what they owe when it is due.
 In that sense, the new EU fiscal compact is almost superfluous, in that  markets will be imposing discipline anyway, euro or nor euro, pact or no pact, Britain in or Britain out.
The choice is between slow, negotiated, and slightly less destructive austerity, imposed by the EU compact, or fast,  and much more destructive,  austerity imposed by the markets.
Therefore, I argue that it is best for Ireland that there be strong and credible EU rules. It is important, however, that these rules be as operational as possible, as credible as possible and as understandable as possible.
In that spirit, I raise one or two questions about the detail of the  proposed compact.
HOW, AND BY WHOM, WILL THE NEW STRUCTURAL DEFICIT RULE BE INTERPRETED?
In paragraph 4 of the EU leaders statement, they say that the annual structural deficit shall not exceed 0.5% of GDP and that that this rule shall be introduced into member states legal systems at “constitutional or equivalent level”. 
This is separate from the Excessive Deficit Procedure, under Article 126 of the existing EU Treaties, which provides for fines if deficits exceed 3%, and which is being strengthened under proposals that come into force this week. It is also separate from other changes, which require no Treaty or constitutional change,  which will  penalise countries for excessive debts as well as  excessive deficits, and which will require  countries to reduce debts progressively by a fixed amount each year
 This 0.5% provision    is something new and different,  not published before, which is   to be introduced into the domestic constitutional arrangements  of all member states.
 The concept of a structural deficit (of 0.5% of GDP) is different from the 3% limit in the Stability and Growth Pact.
If  this part of the pact is to be understandable, workable, and enforceable, one must ask the key  question.
 How easy will  it be to define  the structural deficit at any given time?
If something is to go into a constitution, its meaning must be both clear, and constant.
To see the sort of difficulties that might arise, one should look at  a recent  OECD study on Ireland(OECD working paper number 909, by David Haugh published 2 December 2011).  It said
“Rules specified in terms of cyclically-adjusted balances or equivalently balances measured “over the
cycle” are difficult to operationalise and monitor because they depend on forecasting the size of spare
capacity in the economy, which cannot be observed and is particularly difficult to estimate for a small open economy such as Ireland’s.
The Swedish Fiscal Policy Council found it difficult to assess compliance with the government’s target of a 1% surplus over the cycle (Calmfors, 2010).
 Disputes over when the cycle started and finished were among the most contentious aspects of  rule that operated in the United Kingdom until the end of 2008 (OECD, 2009).
Reliance on such measures may also induce policy mistakes. With the benefit of hindsight, initial cyclically-adjusted fiscal balance measures appear to have given an overly optimistic view of the Irish fiscal position prior to the crisis, which may have contributed to a sharp rise in expenditure in 2007 before the crisis hit”
If economists in the OECD have difficulty with this concept of a structural deficit , as indicated in this  quotation, one must wonder what the judges of  the Irish  Supreme Court will make of it.
 My understanding is that economists often radically revise their opinion, afterwards, about what the structural deficit really was in a previous year. That would  make life very difficult for the Supreme Court!
While the European Court will verify the transposition of the new 0.5% rule at national level, it will be the Irish and other national Supreme Courts that will have the job of interpreting it. If something like this is written into the Constitution, the ultimate decision on whether a  budget for any  given year is compliant with the constitution will have to made by   the judges  of the Supreme Court.  This certainly will bring judges into areas of judgement which are not, to put it mildly, their primary expertise.
There is also the question of what sanctions the Supreme Court could impose, if a structural budget  deficit exceeds 0.5% of GDP .
As far as I know, some countries, like France,  have relatively soft sanctions for breaching the constitution,  while other  countries, like Ireland, immediately strike down as null and  void, something that is unconstitutional.  It may seem fanciful at this stage, but one also has to ask what would happen if Britain, which has no written constitution at all were to join the Euro at some future  time?
When is this new arrangement to come into force?
If the provision is intended to influence the markets, the date cannot be pushed too far into the future. The Commission is to propose a calendar for this. Will it be the same calendar for all members, or will countries with the biggest structural deficits get more time?
According to NCB, even if we follow all of the plan, Ireland’s structural  deficit will still be at  3.7% in 2015, which is well above the 0.5% to be written into our constitution.
 According to Deutsche Bank, the structural deficit of the Euro area as a whole stood at 3.2% in 2011, so the rest of Europe has a long way to go too.
I believe this particular proposal needs to be teased out , rigorously and in great detail, and I have no doubt the Irish Government will  be doing  that in the next few months.
A LIFESTYLE CHANGE MAY NOT BE ENOUGH, THE PATIENT MAY ALSO NEED EMERGENCY TREATMENT!
As I said earlier, the ageing of our populations requires us to follow the path laid out in the fiscal compact.
 Keynes General Theory was formulated for a society with a very different demography than the one  Europe has today.  That is why we have no choice, euro or no euro, but face up to the fiscal challenge posed by the statement of the EU  Heads of Government of the   9 December.
But, as I have  said,  we need to get the details right.
 In the meantime, the ECB must act as a normal Central Bank and provide liquidity for the markets.  The risk now is of destructive deflation, not of inflation. Germans may want to protect their savings, but they also need incomes, and their incomes will disappear if the European economy collapses. 
I hope Chancellor Merkel understands that, and does not stand in the way of emergency treatment of the economy by the ECB.
Lifestyle changes are important and necessary, but the patient needs to be alive, if he or she  is to change  lifestyle! 
It is also important that, now that the concept of the economic cycle is to be introduced into our constitutions, we do not pursue unnecessarily procyclical policies. Some have argued, convincingly, that the Basel Thee rules, as applied to banks, are unnecessarily procyclical.  They are dealing with   yesterdays problem, excessive exuberance, which the markets are punishing sufficiently anyway.
The Summit did not address the banking problem at all, and this is a pity. The difficulties of banks are at the heart of the problem. Society needs banks, and some banks are well worth saving, because banks are the repositories of our savings, and the engines of our economy
 But Martin Wolf was right when he wrote in the “Financial Times” last March “The German Government should tell their people that they are rescuing their own savings under the guise of rescuing peripheral countries”.
 I do not have the sense that that has happened yet, and that is why the 9 December Summit is not the final word on the crisis.
Remarks by John Bruton, former Taoiseach, at an event of the Dublin Chamber of Commerce, in DIT Cathal Brugha Street , embargoed for 8am  14 December  2011.

 

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