If there’s a country that knows how it feels to be caught between a rock and a hard place, it’s definitely Ireland!
On Thursday, the Irish people headed to voting polls. They were tasked to decide on whether or not the country should agree to the Treaty for Stability, Coordination and Governance which was drawn up in March to help address Europe’s debt crisis.
Under the treaty, the 780 billion EUR permanent bailout fund, referred to as the European Stability Mechanism (ESM), will only be accessible to countries that agree to its rules. States that ratify the treaty have to keep their annual structural deficits at or below 0.5% starting January 1, 2013. If they fail to do so, they will be penalized by European Court of Justice, fining them by as much as 0.1% of their GDP for every year that they exceed the limit.
Because the Irish constitution requires public approval for major reforms, Ireland was the only one of the 17 euro zone states to submit the treaty into a referendum.
The official tally showed that majority of the Irish said “Aye” to more cost-cutting measures. Results indicated that 60.3% of the electorate voted for the treaty.
But what would it have meant if more people voted against it? Simply put, Ireland wouldn’t be bailed out if it needed help with its finances. There would be no safety net for the debt-ridden country. Unlike what happened in 2010 when the Troika granted it an 85 billion EUR bailout package, the country would default on its debt obligations if it were to run out of cash.
Pro-austerity Irish policymakers did a good job of getting the majority of the people to understand that Ireland would risk getting booted out of the euro zone had majority voted “No.” Irish Prime Minister Enda Kenny repeatedly said that the government doesn’t have a certain source for funds should the country teeter at the brink of another default.
It would have also been another thorn on the euro’s side. According to analysts’ estimates, Ireland will probably need external funding within the next two years. The thought of it not having access to the ESM would’ve probably fueled concerns about a potential contagion in the euro zone even more!
Policymakers insist that agreeing to the treaty will foster a sense of certainty in the markets as it would show the world that Ireland isn’t heading in the same direction as Greece. Consequently, it may also increase the flow of foreign direct investment in the country which is said to translate to 145,000 jobs in Ireland and 70% of total Irish exports.
But of course, not everyone was impressed with the plan.
You see, in 2011, the Irish economy grew by a modest 0.7% on an annual basis following a 1.0% contraction in 2010. Analysts are worried that the implementation of more and tougher austerity measures to meet the treaty’s conditions would only choke off the country’s dismal economic growth and send it to negative territory once again.
Those who are against the treaty point out that Ireland has been the only country amongst the bailed out PIGS to meet its loan conditions. Since the 2008 financial crisis, it was able to set aside 24 billion EUR through spending cuts and tax hikes. So why should the Irish be punished for good behavior? They argue that instead of implementing more budget cuts, the government should stimulate the economy to address its problems, among which is a very high unemployment rate of over 14%.
But I guess it makes no matter now. A majority of the Irish have voted to ratify the treaty which is one less thing for euro bulls to worry about… for now. Hopefully, the Irish economy doesn’t run out of luck because more spending cuts would mean that growth won’t come easily.