Germany's dose of Irish luck

Ireland's vote to approve Europe's austerity compact is a major political victory for Germany, but economic conditions in the country will remain tough and could worsen.

The Irish government has declared victory in its referendum on the new EU fiscal compact, a treaty promoting fiscal discipline among eurozone members. The treaty's approval, expected to pass with roughly 57 per cent of the vote, based on early results, adds political credibility to austerity measures at a time when talk of growth initiatives is dominating the European discussion.

Although a 'no' vote would not have had instant implications for Irish membership in the eurozone or European Union, those in favour of a 'yes' vote – including the government, Irish business leaders, trade union leaders and the Irish Exporters Association – had warned that potentially dire economic consequences could follow a rejection of the treaty. These include uncertainty that would hamper Ireland's access to international bond markets, loss of confidence by foreign investors in Ireland's economic prospects, and diminished economic growth.

Dublin also said Irish membership in the euro and even the European Union itself could be at stake. Given how dependent Ireland's economy is on trade, loss of access to the common market or the euro would indeed have harsher economic consequences than austerity conditions attached to financial assistance from Europe.

That majority of Ireland's political parties backed the treaty, including ruling coalition partners Fine Gael and the Labor Party, as well as the main opposition party, Fianna Fail. The nationalist and euroskeptic Sinn Fein party led opposition to the fiscal compact. For Sinn Fein and other left-wing parties, the campaign represented an opportunity to form a united front against the government's austerity measures, to attack European 'elites' and to protest the coalition government.

The Irish government, on the other hand, had several reasons for promoting a "yes" vote. First, Ireland's current bailout package from the European Union will end in 2014, and future bailout funds under the European Stability Mechanism can be given only to countries that have approved the fiscal treaty. Irish Prime Minister Enda Kenny said March 31 that approving the compact would provide Ireland access to the "insurance policy of the European bailout fund," which he described as critically reassuring for investors.

Second, Dublin is hoping to receive concessions from its current lenders, the European Central Bank, the European Commission and the International Monetary Fund (together commonly referred to as 'the troika'), in exchange for securing ratification of the treaty. According to Kenny, Ireland is negotiating with the troika for a cheaper way to finance its bank recapitalisations. Ireland appears poised to receive the concessions: On March 31, Ireland reached an agreement with the ECB to delay by one year the first cash payment due on a 3.1 billion euro ($3.8 billion) promissory note. (The note payment due to the Irish central bank is being replaced by a government bond.)

Third, the favourable outcome gives the Irish government a political mandate with which to counter criticism over potentially unpopular actions still to come. However, economic conditions in Ireland will remain tough and could worsen. Few European governments have managed to navigate the financial crisis and win re-election. While the 'yes' vote could be seen as the Irish public's acceptance of the costs of remaining in the eurozone, it is not necessarily a measure of popular support for the ruling coalition, and it may still lead to negative consequences for Irish politicians.

Effects on Europe

The treaty's approval comes at a critical time for Europe. Concerns over the treaty's ratification have been growing, particularly since the May 6 election of French President Francois Hollande. During his campaign, Hollande promised to modify the treaty, signed under former French President Nicolas Sarkozy, to include measures to boost growth in Europe. Germany is unlikely to agree to a full renegotiation of the treaty since the current draft is already in the process of being ratified by European governments. Regardless, Hollande has toned down his campaign rhetoric and now is calling for a "growth addendum" to the treaty – that is, without altering the original text of the treaty. If France's proposals are incorporated, other countries might choose to freeze the parliamentary ratification process in order to analyse the new version.

Ireland is the ninth country to ratify the fiscal compact, joining Portugal, Greece, Romania, Poland, Slovenia, Latvia, Sweden and Denmark. Negotiations over the treaty between ruling and opposition parties in the rest of the European Union have also begun. Depending on if (and how) the treaty is modified, ratification processes already in progress could be forced to start over.

Consequently, the Irish referendum is a political victory for Germany since it gives Berlin additional arguments against treaty modification. The approval also returns the necessity of fiscal discipline to the forefront of the European discussion, which has been dominated by recent growth proposals such as project bonds, eurobonds and increased European Investment Bank funding.

Greece will hold a fresh set of general elections on June 17 after failing to form a government following its May 6 elections.
Austerity associated with the country's bailout packages has been the main issue, and politicians vowing to renegotiate Greece's prior commitments to austerity have found a ready audience. Several European leaders have described the upcoming elections as a Greek referendum on whether to remain in the eurozone. If Irish voters had rejected the centrepiece of Europe's reform efforts, Greek voters might have been emboldened to take a similar stance. But if Greece had hoped to find an ally in the Irish public, it will now have to look elsewhere. Reprinted with permission of STRATFOR.

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