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YOUR Fiscal Compact questions: Answers from Referendum Commission

We asked’s users to put forward their questions about what the Fiscal Compact actually MEANS and we would get straightforward answers. Here they are.

LAST WEEK, THEJOURNAL.IE issued a callout to you, our readers and fellow citizens and voters, on the question of the Fiscal Compact referendum.

We wanted to know what YOU wanted to know about the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (official title).

First, we picked the most commonly-asked questions you submitted on points that you didn’t understand or wanted clarified in the wording of the treaty.

Then we posed those questions to two independent bodies here (the Referendum Commission) and in the EU (the European Policy Centre), as well as to a representative each of the ‘No’ and the ‘Yes’ side.

Click here for answers from all sides.

HERE: The Referendum Commission’s Chairman, Mr Justice Kevin Feeney, answers your questions:

(Extra: The Referendum Commission added this question – What is the Referendum Commission?

It is an independent body set up by law to give a neutral explanation of the referendum proposal and to encourage people to vote. We don’t give the Yes or No arguments but we do try to explain the facts you are being asked to vote upon as clearly as possible.

It must be chaired by a Judge of the High Court or a retired judge of the High Court or Supreme Court. On this occasion that’s me. The other members are the Clerk of the Dail Kieran Coughlan, the Clerk of the Seanad Deirdre Lane, the Ombudsman Emily O’Reilly and the Director of Audit in the Office of the Comptroller and Auditor General Gerard Smyth.)

YOUR questions:

What is NEW in this treaty for Ireland?

In brief, the Treaty proposes to strengthen the rules designed to make governments keep a balance between their income and their spending. It is important to note that many of the rules covered in the Treaty in relation to Government deficits and debt are already in place under EU treaties and legislation, already apply to Ireland and will remain in place no matter what the outcome of the referendum on this particular Treaty. What this Treaty proposes to do is to make some of these rules stronger and to require countries to put them into national law.

So what’s new?

There are existing EU rules on government deficits and debt.

If we vote No the existing rules remain in place but we don’t get the new rules, and we don’t have them put into national law.

If the Treaty is ratified it would add to the rules on government deficits and put some of them into national law.

  • For example at the moment countries are required to keep their annual general Government Deficit below 3% of GDP. Which in plain English means that the amount a government spends in any one year should not be any more than 3% more than what the country earns in that year through the production of goods and services. That’s the current position.
  • Now the Treaty uses the concept of the structural deficit, which is calculated by adjusting the general government deficit to take out the effects of faster or slower economic growth, or the effect of one off items of spending or income. This gives you the underlying deficit or the structural deficit. And under the rules proposed by the treaty this should be no more than 0.5% of GDP. If we ratify it the Treaty would require Ireland to put this maximum 0.5% structural deficit limit into national law.
  • National law would also have to contain an automatic correction mechanism. So if we are not meeting our target, or not moving towards it quickly enough, this correction mechanism will kick in and oblige us to correct the deficit. Inflation or economic growth can work to correct the deficit over time, but if this isn’t happening the government would be required either to cut spending or raise taxes to reduce the deficit.
  • Another important point is that the recitals or the introduction to the Treaty states that only countries that ratify the Treaty can avail of bailout funding from the ESM in the future. If we do require funding can the ESM set additional austerity measures as part of the agreement. The treaty establishing the ESM provides that any funding will be subject to strict conditions.

Can Ireland still access the EFSF fund regardless of what way the vote goes?

If the ESM is established, it is intended to phase out the two temporary bailout funds (of which the EFSF is one) and it is intended that any new bailout after March 2013 would come from the ESM which is to be the permanent bailout mechanism.

A figure of €11 billion has been suggested as Ireland’s maximum input into the ESM. Does the ESM have the power to increase this figure if required?

The ESM is not the subject matter of the referendum.  For information, I can say that the ESM treaty provides that the countries which ratify the ESM Treaty will be obliged to contribute to the fund. Ireland is to contribute just under 1.6% of the fund. Ireland, if it ratifies the ESM Treaty, is expected to contribute €1.27 billion in instalments between 2012 and 2014.  This is on the basis of an initial capital of €80 billion. The €11 billion figure is based on a proposed total fund of €700bn. The size of the fund and any other changes to the ESM can be made only by agreement between all the participating countries.

The treaty says: “In the event of significant observed deviations from the medium-term objective or the adjustment path towards it, a correction mechanism shall be triggered automatically. The mechanism shall include the obligation of the Contracting Party concerned to implement measures to correct the deviations over a defined period of time.”

If we do require funding can the ESM set additional austerity measures as part of the agreement to provide funding to Ireland?

Apart from the requirement to have ratified the Fiscal Stability Treaty, the exact nature of these conditions is not set out in the ESM Treaty. What those conditions might be is really a matter of economic forecasting rather than law and it is outside the scope of the Referendum Commission to comment on that.

Your readers will have heard people on the Yes side and the No side making various arguments over whether one or other outcome would lead to greater austerity or greater prosperity and all I can say is that voters should listen to that debate and form their own view.

If we vote Yes in this referendum, is the treaty being added to our constitution?

On May 31st you will be asked to vote yes or no to adding a new subsection to Article 29.4 of the Constitution of Ireland. The Treaty would not be added to the Constitution, but a clause enabling the State to ratify it would be.

The wording of the proposed new subsection is:

The State may ratify the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union done at Brussels on the 2nd day of March 2012. No provision of this Constitution invalidates laws enacted, acts done or measures adopted by the State that are necessitated by the obligations of the State under that Treaty or prevents laws enacted, acts done or measures adopted by bodies competent under that Treaty from having the force of law in the State.

If a majority of the people vote yes, then this new subsection will be added to the Constitution and Ireland will ratify the Treaty. The Treaty will come into effect if it is ratified by at least 12 of the 17 countries which use the euro so unanimity is not required.

If it comes into effect and Ireland has ratified it, the national legislation which the Treaty requires would have to be introduced within a year.

If a majority of the people vote no, this new subsection will not be added to the Constitution and the Government will not ratify the Treaty.

The Treaty will come into effect if at least 12 euro area countries ratify it. Those countries which have ratified it will then be bound by its provisions.

If we ratify the treaty and then the wording of the treaty is changed afterwards, will the same amendments apply to us?

If we vote yes, we give our Government the power to ratify this specific Treaty. It will come into effect if at least 12 euro area countries ratify it and, if we are one of those countries, it will apply to us. If enough countries do not ratify it, it will not come into effect at all.

Any changes to the Treaty will have to be agreed by all the countries involved, including us. If changes were to be agreed before the Treaty comes into effect (and this is unlikely given the European Council’s decision on 23 May), that changed Treaty would not be the one that was the subject of the referendum and another referendum would probably be needed to allow our Government to ratify the changed treaty.

If it comes into effect, the countries concerned can agree to change it in the future – again, the agreement of all would be required. Whether or not a referendum would be required in Ireland to agree such changes depends on the nature of the changes.

The Taoiseach Enda Kenny said after the informal summit in Brussels this week that there can still be a growth deal among EU countries, completely separate to the fiscal compact. Is this possible?

The Referendum Commission is confined to explaining the actual referendum proposal. Political developments such as the one referred to in the question may indeed be possible but the Commission cannot comment on such matters.

What interest rate will the ESM charge? Is it ‘at cost’ as some in the ‘Yes’ campaign have claimed?

The Referendum Commission is confined to explaining the actual referendum proposal. The ESM treaty is not part of the referendum proposal. I can tell you that issues such as the interest rate to be charged will be a matter for agreement between the governors of the ESM – the Ministers for Finance of the countries that ratify the ESM Treaty – to decide.

The treaty refers to “Structural Deficit”, but it doesn’t define the term.  Some economists are worried that the term is undefined.  Could you please define “structural deficit” and provide a definitive explanation as to how exactly it is measured.

Well, it does define it. It does not go into detailed calculations but it does give a definition. The basic idea is quite straightforward. The structural deficit is arrived out by stripping out of the calculation of government finances any one off items of spending or income, or the effects of faster or slower economic growth. How it is calculated is a more complex matter and is a subject on which economists have written many learned papers and formulae. Ultimately Ireland’s objective in terms of our structural deficit will be agreed between the Irish Government and the EU and I imagine a significant number of economists will deployed by both sides when the calculation is being made.

The treaty says: “In the event of significant observed deviations from the medium-term objective or the adjustment path towards it, a correction mechanism shall be triggered automatically. The mechanism shall include the obligation of the Contracting Party concerned to implement measures to correct the deviations over a defined period of time.”

Who defines what a ‘significant deviation’ is; what are the “corrective measures”; who is to define the period of time?

The automatic mechanism will be based on a set of common principles which the European Commission will propose – these will deal with the nature, size and time frame of the action to be taken and with the independent body at national level which will monitor it. Significant deviations and time periods will all be part of this process. The term “significant deviation” is already used in EU law in relation to government debt.

Is there provision for any circumstance that any individual or group of countries to opt out of this treaty in the future?

There is no specific provision on this but this Treaty, as an inter-governmental Treaty, is governed by the Vienna Convention on the Law of Treaties which, among other things, sets out the rules under which a country may withdraw from an international treaty.

Answers from the European Policy Centre’s chief economist>

Answers from Sinn Féin’s Pearse Doherty for the ‘No’ side>

Answers from Fine Gael’s Simon Coveney for the ‘Yes’ side>

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