Would hard-hit Ireland vote 'Yes' to a new Euro treaty?

In the short time-span of fifteen years, Ireland experienced a boom, a bubble and a bust. The boom which began in the first half of the 1990s was characterised by high levels of economic growth, full employment and a reversal of Ireland’s traditional pattern of emigration as Irish migrants returned home and non-Irish job seekers sought jobs in the so-called tiger economy.

In the first half of the two thousands, the boom turned to a bubble as pro-cyclical budgetary policies and low-cost capital as a consequence of euro membership fuelled a property bubble. Light touch regulation led to an explosion of credit in the private economy. The Irish government, on the other hand, ran surplus budgets and met the conditions of the EU’s Growth and Stability Pact every year.

However, the property bubble distorted state revenues as the public purse became ever more reliant on receipts from property transactions. The bubble burst in September 2008 when the consequences of the collapse of Lehman Brothers reverberated globally. On the evening of 28th/29th of September 2008, the chairmen of the two major Irish banks, Bank of Ireland and Allied Irish Bank (AIB) informed the government that there was a major problem in one Irish bank, Anglo-Irish, and that unless something was done there would be a run on Irish banks the next day.

A decision was taken by a very small group of people to guarantee the liabilities of the Irish banks, although the government did not know at the time what those liabilities were. They acted on the belief that they were addressing a problem of liquidity not solvency.  The guarantee was to cost Irish taxpayers dearly with an estimated €63bn price tag on the bailout.

The banking crisis mutated into a real economic crisis as the property bubble burst. Unemployment began to rise from a historical low of just over four per cent to over 14 per cent. Male unemployment rose to 17.3 per cent with young male unemployment in the 20-24 age cohort at 32.3 per cent.  The historical reversal of emigration ended as the Irish reverted to looking for jobs across the world. A decade of high growth (an average of over six per cent) was replaced by a severe contraction amounting to 21 per cent of nominal GDP between the fourth quarter of 2007 and the third quarter of 2010.

The end of the property bubble exposed severe problems in Ireland’s fiscal position. Having run surpluses for many years, the public finances deteriorated rapidly. Structural deficits and the cost of the bank bailout led to a debt-to-GDP ratio of 32 per cent in 2010. The government, then led by Fianna Fáil, began to address the public finance challenge by reducing public expenditure through a combination of pay cuts, a freeze on recruitment and a series of stringent budgets. However, the combination of a banking, fiscal and real economy crisis finally overwhelmed Ireland in autumn 2010 when the creditworthiness of the state was called into question in the financial markets.

Ireland found it more and more difficult to borrow at affordable rates, and capital fled the Irish banking system. The government of the time finally accepted that Ireland would have to accept an EU/IMF bailout in November 2010.  Ireland found itself no longer interdependent as a member state of the EU, but simply dependent on it. This was a major shock to the Irish state elite as Ireland had always managed to fund itself even when it was a very poor state.  The aim of this review is to assess the political impact of the bailout, its impact on Ireland’s relations with the EU and the prospects for that relationship.

Political Fallout

Given the depth of the economic crisis, the absence of major civil unrest, riots or even anti-government marches is a major contrast to the experience of Greece and the other Mediterranean states. An Irish anti-austerity march in December 2011 could not muster more than 2,000 marchers.  

This should not be interpreted as an absence of deep anger in Irish society. The electorate opted to exercise its anger in a general election that took place at the end of February 2011. This was an earthquake election. The once-dominant party, Fianna Fail, lost half of its votes and returned with only 20 seats . For the first time since it entered the Irish parliament in 1927, it was reduced to the status of the third party. Their coalition partners, the Green party, lost all of its seats.

The new government was formed by Fine Gael, a centre right party which became the largest party in the state, and the centre-left Labour party, the second largest party in parliament. Both parties agreed on a programme for government and set about governing in the context of limited sovereignty, the high level of conditionality attached to the bailout terms and a continuation of the politics of austerity until 2014 at least.

The new government set about repairing Ireland’s damaged international reputation and re-negotiating some of the provisions of the EU/IMF Agreement — but only at the margins. The core aim of the government is to regain sovereignty by re-entering the financial markets by 2016 at the latest, the centenary of the 1916 rebellion that lay the foundations for the establishment of an independent Irish state. Whether or not this is achievable largely depends on events beyond Ireland’s control, most notably the fortunes of the wider euro area over the next five years.

Ireland’s relations with the EU and Treaty Change

Membership of the EU is Ireland’s anchor framework in a globalising world. The EU/IMF agreement altered that relationship in a tangible manner. Ireland became a country ‘on watch’ and ‘at risk’ in the system. The Irish government has pledged to fulfil the requirements of the agreement although it signalled at an early stage that it would require changes to some of the terms.

It achieved some amelioration of the bailout terms in July 2011 with reduced interest rates and improved maturities which brought down the cost of debt servicing. However, the government failed to convince the ECB that it should not honour the unsecured senior bondholders in the now defunct Anglo-Irish Bank.  

On the 2nd of November 2011, Ireland repaid a billion euros on Anglo-bonds. Paying unsecured bond holders with Irish taxpayers money while at the same time introducing the fifth austerity budget in a row makes for toxic politics and has the capacity to further undermine the legitimacy of politics unless a resolution is found.

Nor should the apparent resignation of the Irish electorate be taken for granted.   In its bid to manage domestic politics and bailout politics at the same time, the Irish government is seeking an alternative way of managing the banking-related debt. The cost of the Irish bank bailout is too high for Ireland to bear on its own. Unless the debt is more sustainable, it has the potential to irreparably damage Ireland’s relations with the EU. Hence the negotiations on treaty change assume an added importance beyond the substantive issues of economic governance within the euro area.

The Irish government is committed to more robust economic governance within the euro area but would not have opted for treaty change at this juncture of the euro crisis. On an official visit to Berlin in November 2011, Prime Minister Enda Kenny made it clear that major treaty change was not Ireland’s preferred option; but Ireland did not oppose change at the December European Council. From an Irish perspective, addressing the euro crisis with the existing tool-kit is preferable to the complexities of treaty change. Having conceded treaty change, Kenny used the European Council to begin the process of alleviating the cost of the bank bailout to Ireland. In his statement to the parliament after the council, the prime minister outlined his approach in the following manner:

‘Both in my letter and in my presentation to colleagues at the meeting I explained the cost to Ireland of capitalising banks in a manner that protected European as well as Irish citizens. I said that this cost has been uniquely onerous — €63bn, or 50 per cent of GNP.

‘I said that I would be seeking access for Ireland to new European financial instruments that were not available to us at the time and that I would be doing so in the interests both of equity and of making our burden of debt more sustainable.’

Although the prime minister did not make an explicit link between treaty change and improved bailout terms, it is central to the Irish strategy. For the government, the domestic context is particularly challenging.  A lively debate has already begun on whether or not a referendum on the treaty will be required.

The government will be advised by the Irish Attorney General (chief legal advisor to the government) on whether or not a referendum will be required once agreement is reached on the text of the new treaty. To date, all major EU treaty changes have led to a referendum. In 1987, the then-government proceeded on the basis that the Single European Act (SEA) did not require a referendum; but one was held after the Irish Supreme Court issued a judgement known as the Crotty judgement following a successful challenge by private citizen.

Any change to the Irish constitution rests on the consent of the people by means of referendum. If it is found that the provisions of the new treaty imply constitutional change, then a referendum must be held. The government’s preference is to negotiate a treaty that will not lead to a referendum, but the final decision will rest with the Supreme Court if an individual citizen or group of citizens, as is likely, seeks judicial review.  

If a referendum is held in Ireland, it would be very difficult to get the consent of the people in the present economic environment. A poll in October 2011 suggests that 47 per cent of respondents would vote ‘no’, 28 per cent ‘yes’ and 25 per cent would be undecided about any new European treaty.  Moreover, the terms of the bailout remain highly contested. An Irish Examiner poll published on 28 November showed that 48 per cent supported compliance with the EU/IMF bailout deal, 33 per cent were against and 22 per cent held no opinion. On the two occasions when EU referendums were defeated in Ireland, there was a majority ‘yes’ going into the campaign.

The aim of the government in the negotiations on the new treaty will be to minimise the need for a referendum.  If one has to be held, they will aim to place Ireland’s relationship with the EU centre-stage. Unlike the UK, there is an available ‘yes’ to treaty change in Ireland provided there is a high-quality campaign with clear political messages. That said, no Irish government has had to go to the people as semi-sovereign, with massive transfers from the public purse to banks.

Brigid Laffan is Professor of European Politics UCD, Dublin.