Ireland added another dose of uncertainty to the future of the European Union by setting plans for a referendum on the fiscal treaty designed to keep the debt-swamped continent intact.
The decision came Tuesday, the day after the German parliament approved a fresh €130-billion ($174-billion) bailout package for Greece and the same day that the EU, the International Monetary Fund and the European Central Bank (the so-called troika) approved the next tranche of bailout loans for recession-stricken Portugal.
Although the referendum was expected – the Irish constitution requires democratic votes on sovereignty-transfer decisions – it puts some doubt over Ireland’s ongoing membership in the 17-country euro zone.
If the Irish people reject the fiscal treaty, Ireland’s exodus from the euro zone is not out of the question. That’s because bailout funds from the European Stability Mechanism (ESM), the new rescue fund that comes into effect in July, cannot be extended to countries that are not part of the fiscal union treaty. Ireland, bailed out once already, may require more funds.
That’s why economists are not dismissing the Irish vote as trivial. “The Irish referendum will be another crucial risk to follow,” Morgan Stanley said in a note Tuesday.
Irish Prime Minister Enda Kenny said arrangements for the referendum would be made in the coming weeks. No date has been set for the vote, but various reports said June is the likely date. His government had hoped to avoid a referendum while the economy is fragile (though no longer technically in recession) and many voters are angry.
Ireland’s budget deficit, estimated at 9 per cent of gross domestic product this year, remains stubbornly high and unemployment is rising. The national jobless rate is 14.6 per cent and youth unemployment is more than 29 per cent. The national debt, meanwhile, is climbing relentlessly and is projected to hit almost 120 per cent of GDP by 2014, only slightly less than that of Italy.
The referendum has the potential to polarize voters. The fear in Dublin, and the EU, which had hoped the Irish government could get away with using legislation rather than a referendum, is that voters who are weary of the austerity measures will retaliate with a “No” vote.
Ireland has rejected two EU treaties in the past, though they were approved in follow-up referendums. The Irish rejected the 2008 Lisbon treaty governing the EU and its powers, only to endorse it in a vote a year and a half later.
Mr. Kenny was quick to launch his “Yes” vote campaign on Tuesday with the message that endorsing the fiscal union treaty would translate into a stronger economy. “I am confident that the Irish people will do what is necessary,” he told parliament. “In the end, what this will come down to is a vote for economic stability and economic recovery.”
In December, Irish Finance Minister Michael Noon said a referendum on the fiscal treaty would, in effect, be a referendum on continued membership in the euro zone. The fiscal treaty was endorsed last month by 25 of the EU’s 27 countries (Britain and the Czech Republic opted out).
The treaty would enforce stricter budget discipline and impose fines on countries that exceed their debt and budget deficit limits. It would also allow the EU to review budgets. The treaty was championed by German Chancellor Angela Merkel, who has argued that only German-style fiscal discipline and austerity can prevent a second debt crisis.
A “Yes” vote in the Irish referendum is not assured. A recent opinion poll determined that 40 per cent of the Irish would support the fiscal treaty, with 36 per cent against and the rest undecided.
If the Irish vote “No,” the EU’s fiscal treaty would not necessarily be derailed. It could be launched with as few as 12 countries ratifying it.
News of the Irish referendum initially rattled the markets, but they bounced back quickly. In London, the FTSE-100 index rose and the euro gained 0.4 per cent against the dollar, reaching $1.345.
In spite of the continued deterioration of the Greek, Portuguese and Spanish economies, investors are encouraged by the second Greek bailout, combined with the debt “haircut” that will reduce Greece’s debt by more than €100-billion, and by stabilizing or rising consumer and business sentiment in Germany and some other EU countries.