Ireland calls referendum on EU fiscal treaty

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Ireland will hold a referendum on the European Union's new fiscal treaty, Prime Minister Enda Kenny said yesterday (28 February), setting the stage for the first popular vote on the German-led plan for stricter budget discipline across the bloc.

Support for the EU has cooled in Ireland after its financial crisis, meaning there is no guarantee a vote will succeed. Irish voters rejected the last two European referendums, most recently in 2008, before passing them once concessions were offered.

After joining 24 other EU states last month in agreeing the pact for stricter budget discipline, Kenny sought advice from the state's lawyer on whether a vote was necessary and told parliament that on balance, a referendum would be required.

"The Irish people will be asked for their authorisation in a referendum to ratify the European Stability Treaty," Kenny told parliament, adding that arrangements on the vote would be made in the coming weeks.

"I strongly believe that it is very much in Ireland's national interest that this treaty be approved."

Unlike most other European countries, Irish citizens are entitled to vote on any major transfer of powers to Brussels. A rejection would damage long-term funding prospects for Ireland, which took an EU/IMF bailout in 2010, and cast doubt on its commitment to the single currency.

With the new pact set to come into effect once 12 euro area member states have ratified it, Ireland's European Affairs minister Lucinda Creighton said that the government would just have one shot at winning approval this time around.

Creighton added that Ireland will not seek concessions from Europe to ease its debt burden to make the referendum more palatable for voters.

"It will be pretty hard and certainly won't be a walkover. The last number of referendums have got tighter and the EU is probably less popular now than before," said Eoin O'Malley, a politics lecturer at Dublin City University.

"One of the things that the government will try and do is frame it as economically suicidal not to accept it … I suspect it will come down to who wins that framing debate."

Important implications

Ireland's return to mild economic growth last year and its success in meeting the targets set under its EU/IMF bailout has distanced it from fellow bailout recipients Greece and Portugal.

The head of one of the country's largest companies, CRH , said that the referendum could distract the country from its priorities of getting itself out of the economic quagmire.

Irish borrowing costs have more than halved on secondary markets since last July with yields on 10-year paper at 6.89% on Tuesday, the lowest level since the lead up to the bailout.

However a rejection of the treaty would probably reverse that progress rapidly.

A 'no' vote would prevent Dublin from using the European Stability Mechanism (ESM), the permanent successor to the eurozone's current rescue fund which Ireland is tapping as part of the bailout that runs until the end of 2013.

Ireland aims to resume issuing debt on bond markets later this year as a first step towards ending the bailout on schedule. However, with about €20 billion of borrowing costs to cover in 2014, most analysts believe it will need more official funding to meet some of its commitments.

"It [the vote] has important implications for Ireland potentially over the next few years," said Dermot O'Leary, Chief Economist at Goodbody Stockbrokers. "There is a reasonable prospect that Ireland will need further funding in the future, and it may indeed come from the ESM."

Deputy Prime Minister Eamon Gilmore said that while Ireland intended to emerge from its bailout without having to resort to the ESM, the facility was an important backstop that would further improve international confidence in the country.

Poll reveals public opinion split

A poll last month suggested the treaty would narrowly pass with 40% of those questioned saying they would vote 'yes'. Another 36% opposed the treaty, while a quarter of voters were undecided.

Ireland's main opposition party Fianna Fail has said it will join the governing Fine Gael and Labour parties in campaigning for a 'Yes' vote.

Sinn Fein leader Gerry Adams, whose party forms the second largest opposition bloc in the lower house and has seen its popularity surge over its anti-austerity stance, said his deputies would campaign against the treaty.

On the streets of Dublin, where nine out of the 10 people Reuters spoke to did not know what the referendum was about, it was clear the government has a hard job ahead of it.

"I agree we should have a referendum, but I don't understand what it's about," said Larry Kane, a 75-year-old former construction worker.

In Germany, a spokesman for Chancellor Angela Merkel said Berlin had “taken note” of the referendum decision but “would not comment on sovereign Irish decisions,” the Irish Times reported. The same line that was repeated by other political parties.

However, Michael Meister, a budget and finance spokesman for Merkel’s ruling Christian Democrats (CDU) said: “Whoever doesn’t accept the treaty has no protection from the ESM bailout fund. If the Irish people think they don’t need any ESM protection they can, of course, reject the fiscal treaty.”

The ESM treaty comes into force in July and Ireland faces exclusion from the fund if it fails to ratify, said Morgan Stanley, the investment bank. “The Irish referendum will be another crucial risk to follow,” the bank said in a note released on Tuesday.

Martin Callanan MEP, a British Tory MEP who is chairman of the European Parliament's Conservatives and Reformists group (ECR), approved the Irish decision to hold a referendum, saying: "A nation's economic destiny should be determined by the people through a ballot box, not political elites in a room in Brussels."

On the eventuality that Ireland fails to ratify, Mr Callana said: "This treaty was designed with this eventuality in mind. That is why only 12 of the 17 euro zone countries need to ratify it before it comes into force. Unfortunately, that seems to be how democracy works in the EU these days."

All EU countries – except Britain and the Czech Republic – have agreed on a new treaty for tighter fiscal discipline and deeper economic integration to save the euro currency.

But as attention now turns to the legal details and ratification process, questions are being raised as to what will happen to countries that fail to ratify, with some fearing exclusion from the club.

>> Read our LinksDossier: Europe's new treaty: Towards a multi-speed union

  • 1-2 March: 25 EU countries expected to sign new treaty at summit in Brussels (all except Britain and the Czech Republic).
  • May-June 2012: Likely timeframe for Ireland to hold referendum on the new treaty.
  • By end 2012: All signatories expected to finish national ratification process (12 euro area countries required for treaty to enter into force).

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