Ireland’s referendum on the EU reform treaty this week is only the first of three major threats to the Dublin government and its efforts to tackle a financial crisis that has crippled Europe’s once fastest-growing economy.
Brussels needs Irish ratification of the Lisbon Treaty to make the 27-nation bloc a stronger player on the world stage and to avoid policy paralysis. But Irish Prime Minister Brian Cowen needs a ‘yes’ vote on Friday even more.
Irish voters already delivered a shock ‘no’ to the Treaty last year. A second rejection could send the country’s reputation spiralling down and its borrowing costs spiralling up, marking a return to the dark days of February-March when investors feared a banking collapse would force the IMF to bail out the former ‘Celtic Tiger’ economy.
‘No’ vote would spell dramatic uncertainties for recovery
A ‘no’ might arouse false perceptions in financial markets that Ireland is hostile to Europe and even the common currency. “If we did vote ‘no’ there would be huge uncertainties and people would immediately speculate that we would go to a floating currency and all the analogies such as Iceland would suddenly come out very quickly,” said Noel O’Halloran, chief investment officer with KBC Asset Management in Dublin.
“I think the markets would go back to speculating on the IMF stepping in to bail out Ireland,” he said. “It would be a shoot first, ask questions later scenario.” Ireland is borrowing 400 million euros a week to fund its day-to-day spending during the recession and the cost of this debt might rise sharply.
Irish debt yield spreads have roughly halved from a 16-year high of 290 basis points hit in March, according to Alan McQuaid, economist with Bloxham Stockbrokers. But he predicts that a rejection of the Lisbon Treaty would send the premium of Irish 10-year bonds over German bunds, the euro zone’s benchmark, to 200 basis points or higher.
Recent opinion polls suggest a majority of Irish voters now support the Lisbon charter, which aims to speed up European Union decision-making. But the vote may be tight due to anti-government sentiment and a desire to punish Cowen for his handling of the economic crisis.
“I think it is more likely to be a ‘yes’ than to be a ‘no’,” said Richard Sinnott, a politics professor at University College Dublin. “[But] I would hesitate to be certain because there is much greater voter volatility in a referendum than in an election,” he added. “A late swing in one direction or the other cannot be ruled out.”
Irish Greens’ strong position
Cowen was just five weeks into his premiership when Ireland first rejected the Lisbon Treaty in 2008. A second thumbs-down could force him to resign, but would not necessarily spell the end of his centre-left coalition government.
A bigger risk for his administration will come on 10 October when members of the junior coalition party, the Greens, vote on a revised programme for government and a 54 billion euro “bad bank” plan to resuscitate the financial system.
The left-wing Greens would quit government if their members reject either issue. That would trigger a snap election, sink Dublin’s plans to purge its banks of 77 billion euros in risky property loans, and send their shares and bonds sharply lower.
The main opposition party Fine Gael, which would probably lead a new government, is against the “bad bank” plan, and wants the banks’ bondholders and shareholders to swallow the hit for cleaning up their balance sheets. Fine Gael favours nationalisation if that doesn’t work.
Cowen has offered some concessions to the Greens to secure their support next week, including the likelihood of a carbon tax in the December budget as well as tweaking legislation to create a National Asset Management Agency (NAMA) or “bad bank” to lessen the risk to taxpayers.
The concessions do not go as far as some Greens may wish but analysts believe they will be enough. “They [Green Party parliamentary members] don’t want an election, therefore they want NAMA to be as palatable as possible to their following and their activists,” said Sinnott.
“My judgement is that they have probably done enough to ensure that that is the case.” A rejection of Lisbon, however, may make it easier for some Green members to vote against both plans. And the party’s rules require a two thirds majority for endorsement.
This will make the 10 October vote, which is expected to involve around 700 Green activists, even more of a cliffhanger than the Lisbon referendum on 2 October. Surviving both would give Cowen and his Fianna Fail party a major fillip but the boost would not last long.
Another austerity budget in December has already raised the spectre of widespread industrial action and could yet put him on a collision course with the Greens and his own backbenchers. “In political risk terms the budget is the big one,” said Sinnott.
(EURACTIV with Reuters.)