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Home > Blogs > Mindful Money > Why Ireland should vote no to the Fiscal Compact Treaty tomorrow

Why Ireland should vote no to the Fiscal Compact Treaty tomorrow

Why Ireland should vote no to the Fiscal Compact Treaty tomorrow Mindful Money

Tomorrow Irish voters go to the polls to decide whether they should vote yes or no to the European Union’s Fiscal Compact Treaty. There is of course an element of fantasy to this as the vast majority of the 25 countries that signed this treaty currently have a snowballs chance in hell of actually achieving “a balanced budget”! From the Treaty itself

the budgetary position of the general government of a Contracting Party shall be balanced or in surplus;

According to Eurostat, Ireland actually had a fiscal deficit of 13.1% of its economic output as measured by Gross Domestic Product in 2011. Indeed in the previous three years she had gone -7.3% ,-14% and -31% for this measure.

For national debt as a proportion of GDP, The Fiscal Compact Treaty repeats the past target of the Stability and Growth Pact which everybody including France and Germany ignored! This is particularly apposite as this treaty was pushed by the Merkozy amalgam of those two countries leaders. It required a national debt of 60% of GDP.

Ireland had a national debt of 108.2% of her GDP at the end of 2011 and in the previous three years it had gone 44.2%,65.1% and 92.5%.


You may already suspect that there is an element of farce about Ireland having a vote on a treaty it cannot possibly comply with in the foreseeable future. Indeed, I am reminded of my post on the March Hatters Tea Party! And there is another issue to consider. You see Ireland did follow the Stability and Growth Pact and, if we look back, did comply with the new terms of the Fiscal Compact Treaty. So her decline poses a serious question for the point of the treaty itself. Ireland had been maintaining the size of her national debt throughout the Euro era up to 2006 meaning that it had fallen substantially when compared to her GDP and was at 24.7% in 2006.

So we are left with the problem that Ireland still had a housing and banking boom and bust inspite of following the new rules! It is an incredible irony that she votes on a policy which did not prevent her economic collapse.

How is the Irish Economy doing?

As it is her housing market whose boom and bust led to Ireland being brought to her knees let us examine its position. From her Central Statistics Office.

In the year to April, residential property prices at a national level, fell by 16.4%. This compares with an annual rate of decline of 16.3% in March and a decline of 12.2% recorded in the twelve months to April 2011.
Residential property prices fell by 1.1% in the month of April.

So we can see that house prices are still falling at a substantial rate and this comes on top of previous falls. The Residential Property Index stands at 65.4 compared to 100 in 2005 and compares with 130.5 in September 2007. So it has halved since the peak.

The mortgage situation is getting worse too. From the Central Bank of Ireland.

At end-March 2012, there were 764,138 private residential mortgage accounts for principal dwellings held in the Republic of Ireland, to a value of €112.7 billion. Of this total stock of accounts, 77,630, or 10.2 per cent, were in arrears of more than 90 days. This compares with 70,945 accounts (9.2 per cent of total) that were in arrears of more than 90 days at end-December 2011.

As you can see arrears were already high but are still rising and from the same report we see that arrears of more than 6 months rose from 6.9% of the total to 7.8%. And we can add the number of restructured mortgages to the list of problems.

Therefore, 116,288 accounts were either in arrears of over 90 days or had been restructured and were performing as at the end of March.

Ireland’s Banking Sector

The continued decline in the property market in Ireland has started to pose the question was the bailout of Ireland’s banks enough? There is certainly no relief in sight for her banking sector.

Economic Growth

We see here that whilst Ireland’s economy grew by 0.7% in GDP terms in 2011 it fell in the last two quarters. So we see a recovery ending and reversing. If we look deeper into Gross National Product which excludes the impact of foreign businesses -which would be likely to leave if circumstances changed- we see a fall of 7.1% in 2011.

Accordingly the gap between measured output of 161 billion Euros (GDP) and Ireland’s medium-term ability to tax itself or GNP of 129 billion Euros rose in 2011. As you can see the consequence of being a Celtic Tiger via attracting foreign companies had benefits but also costs.

Retail Sales are falling

The volume of retail sales (i.e. excluding price effects) decreased by 1.5% in April 2012 when compared with March 2012 and there was an annual decrease of 2.7%.

So better than the calamitous figures released by Spain yesterday but a fall nonetheless. If we look at the underlying volume index it is at 88.9 where 2005=100 and where 2007 was at 114.

Industrial Production

This is falling too.

Production for Manufacturing Industries for March 2012 was 2.5% lower than in February 2012 (see above and Table 1). On an annual basis production for March 2012 decreased by 5.6% when compared with March 2011.

If we look at the underlying volume index it is at 102.7 which is at least better than the base of 100 in 2005. But if we look at the previous two March’s we see a declining trend as it has gone 110.5,108.9 and now 102.7.

Construction has turned downwards too

Ulster Bank produces a monthly report on this subject and here is the April view.

Falling workloads led to reductions in both employment and buying activity, and the rates of decline accelerated in each case…Meanwhile, confidence among constructors with regards to the year ahead fell markedly

The Trade Position

Where Ireland stands out from the other Euro nations in trouble is that its balance of payments record is very good. For example her seasonally adjusted trade surplus of 3.6 billion Euros in February was typical and if we look back to 1990 we see that if we use it as a benchmark then at the end of 2011 her export volume was 484 and her import volume was 234.

You might be wondering at this point why the International Monetary Fund is involved in Ireland’s rescue at this point and in my view you would be right to do so. You would think politicians had got in charge of it and perverted its purposes or something…

But returning to Ireland the challenge is to maintain her export levels and hopefully grow them and in the darkening economic prospects in Europe this will be quite a challenge in the months ahead.

Unemployment seems to have stabilized

For the last year or so Ireland has maintained an unemployment rate of just over 14% with the latest figure for May being 14.3 and the more reliable quarterly series being 14.6% for the last quarter of 2011.


As you can see Ireland has strengths as well as weaknesses and she is in better shape than either Greece or Portugal. However she is showing signs of economic weakness in 2012 so far and this will only be exacerbated by a Euro area that on the latest survey data is expected to shrink by 0.5% in the current quarter. Not much chance for Ireland to increase exports there.

Meanwhile she has domestic problems with her housing market still and the declines in retail sales and industrial production will not help. If her economy continues to shrink then she will be unable to restrict her ballooning national debt to GDP ratio that on official estimates will hit 120% next year. The danger is that such numbers relied on economic growth which may now be replaced by contraction. And the familiar Euro dose of austerity will reinforce any contraction with more planned for 2013,14 and 15.

So the danger for Ireland is her debt burden which of course came from bailing out her banks. I often discuss on here the failings of the “Too Big To Fail” strategy and Ireland encapsulates it right now with her growing debt burden that is on the edge of becoming as Muse put it a

Supermassive Black Hole

And if you look at both Ireland’s past and future you see that a balanced budget did not prevent her going into financial crisis and is incredibly unlikely any time soon. On that basis how can she logically vote for it? And in something of a first for this blog I am in complete agreement with Paul Krugman.

Should Ireland vote no she may get a boost to her economy as Eurocrats metamorphose into Status Quo fans.

Again again again again, again again again again
Why don’t you do it, why don’t you do it again
Again again again again, again again again again
Why don’t you do it, why don’t you do it again

A Further Thought

With her balanced budget and her export-led growth Ireland had two sacred cows of economic theory and textbooks. The problem is that they did not stop what happened next…

This article was written by Shaun Richards and originally published on Mindful Money under the title: Why Ireland should vote no to the Fiscal Compact Treaty tomorrow

Tags: banking reform , banks , EU , euro treaty , Europe , european crisis , European Union , eurozone , Fiscal Compact Treaty , fiscal regulations , house prices , IMF , Ireland , ireland economy , recession
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