Does Ireland Need a Referendum to Ratify EU Budget Rules?

There has been some debate following the release of the summit statement by the EU Heads of State on the 9th of December about the need for a referendum in Ireland to adopt the new rules. Minister Lucinda Creighton has been quoted as putting the odds of a referendum at "50-50" (no explanation as to how she got to those precise numbers). Tanaiste Eamon Gilmore stated in parliament last week that a referendum would be held "if needed." Today's Irish Times reports that the government is seeking legal advice on the issue and that it would take several months to arrive at a determination about the need for a referendum. The article also quotes one source stating a "hunch" that a referendum would be required.

I am not persuaded about the legal need for a referendum at this stage. The executive branch possesses exclusive competence to enter into international agreements in many consitutional democracies. Ireland is no different. The primary check on the abuse of this power is through the usual political process. But the Irish Supreme Court in Crotty v. An Taoiseach (1987) ruled that the "powers [to enter into international treaties etc] must be exercised in subordination to the applicable provisions of the Constitution. It is not within the competence of the Government, or indeed of the Oireachtas, to free themselves from the restraints of the Constitution or to transfer their powers to other bodies unless expressly empowered so to do by the Constitution. They are both creatures of the Constitution and are not empowered to act free from the restraints of the Constitution. To the judicial organ of government alone is given the power conclusively to decide if there has been a breach of constitutional restraints." Justice Walsh - one of the three judges in the majority - wrote further that  "[i]f it is ... desired to qualify, curtail or inhibit the existing sovereign power to formulate and to pursue such foreign policies as from time to time to the Government may seem proper, it is not within the power of the Government itself to do so. The foreign policy organ of the State cannot, within the terms of the Constitution, agree to impose upon itself, the State or upon the people the contemplated restrictions upon freedom of action."

One can argue, with some justification, that the judges in the majority are reaching too far into an area that is within the exclusive competence of the executive branch. Courts are not well placed to second guess executive decisions in the foreign relations area and it is preferable for judges to abstain from judicial review unless constitutional rights are clearly violated.

Still, even with this decision, it is not necessarily the case that a referendum is legally required in order to adopt the new EU rules. The judges in the majority seem to have limited the need for a referendum where there is a clear qualification, curtailment or inhibition of Irish sovereignty. It is perfectly sensible to argue that existing EU rules already occupy the field sought to be covered by the new rules and that there is no new curtailment of sovereignty. Rather, the new rules merely seek to operationalize the existing grant of sovereign power in favor of EU institutions by setting in place verifiable mechanisms with consequent sanctions for breach of treaty commitments. Under this view, a referendum is not necessary as there is no new transfer of sovereignty. In addition, one can argue that sovereignty in this area has also been transferred to the EU/IMF as part of the bailout agreement and nothing new is being done pursuant to the summit.

In conclusion, it is not clear that there is a legal necessity at this stage for a referendum in Ireland. The question will turn on the precise wording of the new treaty and it may be possible to draft it in a way that avoids the need for a referendum.

Greeks Taking Money from Banks to Store in Garages: No End to EU Crisis

As I've argued before, EU leaders have shown very little evidence that they are capable of taking the bold steps necessary to contain the crisis. Italy and Spain's continuing troubles show that markets have no faith in these band-aid measures and that they next crisis is not too far off. A recent article in the Guardian about a silent bank run in Greece is scary:

In May alone, almost €5bn (£4.4bn) was pulled out of Greek deposits, as part of what analysts describe as a "silent bank run". This version is also disorderly and jittery, just not as obvious. Customers do not form long queues outside branches, they simply squirrel out as much as they can.

One senior investment banker [said]: "People are scared that the government doesn't know what the fuck it's doing." He tells a story about an acquaintance who took out €30,000, wrapped it in a bag and stashed it in his garage. "The bag had previously had some food inside," he says. "So it attracted rats, who ate the notes."

These sorts of stories remind one of the Great Depression and it is incredible to read about it happening so close to home in this day and age.

Italian Burqa Ban: Prejudice Masquerading as Paternalism?

News reports indicate that Italy may adopt a ban on burqas, following the lead of other European states like Belgium. Those who violate the ban face fines of up to Eur. 300, whereas those who coerce women to wear burqas could be fined as much as eur. 30,000 and be jailed for 12 months. As in those instances, the ban's proponents cloak their case in the garments of concern for the poor women who are forced to wear the burqa, blissfully unaware of the hypocrisy of their position. For example, the New York Times quotes Barbara Saltamartini of the Freedom Party - no irony there - as saying that the ban "will put an end to the suffering of many women who are often forced to wear the burqa or niqab, which annihilates their dignity and gets in the way of integration."

I am sure that some of these people mean well but how on earth do they claim moral superiority when all they are doing is substituting one coercive act (the burqa ban) for another coercive act (forcing women to wear the burqa)? For my critique of the bans, see here. Previous blog posts are here, here, and here.

Ronaldo and Footballers as European Central Bank Collateral

Financial News reports that Bankia, the Spanish Bank, is offering Ronaldo and Kaka as collateral to the ECB for some financing. Ronaldo was supposedly acquired from Manchester United for GBP 80 million whereas Kaka was purchased for eur. 65 million.

The ECB has been accepting all sorts of junk as collateral lately but they might draw the line at Sepp Blatter and Irish footballers. Perhaps rugby players? Although seizing those muscular rugby chaps and taking physical custody in the event of default might be beyond the abilities of ECB personnel!

Ireland Gets Lower Rates on Bailout in EU Deal on Greece, But Default Still Possible?

The Irish newsmedia is reporting that Ireland will benefit from the new bailout agreement being hammered out at the EU summit. These reports seem to have more finality than is discernible from the leaked draft of the announcement. I looked at the draft and here are some key provisions with my comments in blue:

We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole. We also reaffirm our determination to reinforce convergence, competitiveness and governance of the Euro area.

Nothing new here as a matter of policy, they've repeatedly stated a commitment to the euro. The real consequences will depend on follow up action in new legal instruments.

We have decided to lengthen the maturity of the EFSF loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years. In this context, we will ensure adequate post programme monitoring. We will provide EFSF loans at lending rates equivalent to those of the Balance of Payment facility (currently approx. 3.5%) without going below the EFSF funding cost. This will be accompanied by a mechanism which ensures appropriate incentives to implement the programme, including through collateral arrangements where appropriate.

...

Structural funds should be re-allocated for competitiveness and growth under a European "Marshall Plan".

Greece is in a uniquely grave situation in the Euro area. This is the reason why it requires an exceptional solution. The financial sector has indicated its willingness to support Greece on a voluntary basis through a menu of options ...

EU leaders know that absent a bold plan, the contagion risk is very real. That might explain the Marshall Plan language. It is plainly a ploy to set up an exceptional situation to justify the extraordinary measures and to separate Greece from other countries like Ireland and Portugal. In the end it might be all talk and the markets may not be persuaded that Greece is all that different.

All other Euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The Euro area Heads of Statesor Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the Euro area as a whole.

This is once again a ploy to allay contagion fears and to reassure markets that Ireland and Portugal will not default. Does a statement of this sort really mean that Ireland will not default? Or that the markets will discount the likelihood of that happening? Given recent experience, it will take a lot more than words and a selective default by Greece might well signal a likelihood of Ireland doing something similar notwithstanding this "inflexible determination" to honour its commitments. Words alone from a sovereign are worth very little, especially given the track record in this area.

We welcome the progress made on the implementation of the programmes in Ireland and Portugal and reiterate our strong commitment to the success of these programmes. The EFSF lending conditions we agreed upon for Greece will be applied also for Portugal and Ireland. In this context, we note Ireland's willingness to participate constructively in the discussions on the Consolidated Common Tax Base draft directive (CCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ pact framework.

The troika's recent review said as much about Ireland, but the markets did not pay a lot of positive attention. And there is the recent downgrade to junk status suggesting that Ireland is not being rewarded for its belt-tightening. The CCTB language was probably to appease Sarkozy and signals that Ireland is continuing to receive pressure in this area despite its best efforts at resisting tax harmonization.

All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest. In this context, we welcome the budgetary package recently presented by the Italian government which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in 2014.

These commitments are not new. The EU has looked away in the past when states including Ireland ran up deficits several times the permissible limit. What is needed is enforcement, and binding legal commitments that entail monitoring. One can expect the Germans to be more aggressive than they have been in the past as these mechanisms are fleshed out.

We look forward to the rapid finalization of the legislative package on the strengthening of the stability and growth pact and the new macro economic surveillance. Euro area members will do their utmost to help reaching agreement with the EP

We commit to introduce legally binding national fiscal frameworks as foreseen in the fiscal frameworks directive by the end of 2012.

As I wrote previously in the Wall Street Journal, the original Greek bailout is illegal. This summit statement is an acknowledgement of that reality. One hopes that the EU comes up with a legal framework that allows for transparent mechanisms to address such situations as they arise.

We agree that reliance on external credits ratings in the EU regulatory framework should be reduced, and look forward to the Commission proposals in this respect.

This is pure hogwash. The EU is living in la-la land if it thinks it can ignore market credit ratings and bully ratings agencies into hiding the truth. While the ratings system has many faults, these agencies have been willing to tell uncomfortable truths on sovereign credit. That might not please the politicians but it has kept them from selling us whoppers.

The full draft announcement is available here. My article calling for a hybrid conservatorship for Greece is available at Huffo here.

EU Finance Ministry?

Mr. Jean Claude Trichet, President of the ECB, delivered a speech yesterday in Aachen proposing the establishment of a finance ministry for the EU. Some key points from his speech:
Would it go too far if we envisaged, at this second stage [when member states fail to restore stability] , giving euro area authorities a much deeper and authoritative say in the formation of the country’s economic policies if these go harmfully astray? A direct influence, well over and above the reinforced surveillance that is presently envisaged?

The rationale for this approach would be to find a balance between the independence of countries and the interdependence of their actions, especially in exceptional circumstances.
...
We can see before our eyes that membership of the EU, and even more so of EMU, introduces a new understanding in the way sovereignty is exerted. Interdependence means that countries de facto do not have complete internal authority. They can experience crises caused entirely by the unsound economic policies of others.
...
In a long term historical perspective, Europe – which has invented the concept and the word of democracy – is called to complete the design of what it already calls a “Union”.
...
In this Union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the Union?

Not necessarily a ministry of finance that administers a large federal budget. But a ministry of finance that would exert direct responsibilities in at least three domains: first, the surveillance of both fiscal policies and competitiveness policies, as well as the direct responsibilities mentioned earlier as regards countries in a “second stage” inside the euro area; second, all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services; and third, the representation of the union confederation in international financial institutions.

Trichet's remarks are not entirely surprising. Virtually everyone has known for quite a long time now that the EU project is fundamentally flawed and that a monetary union alone is not sustainable when you have states as disparate as Greece and Germany trying to walk lockstep. The present approach whereby the EU seeks to fix problems in Greece, Ireland, Portugal etc with bandaid, with wishful thinking to back it up, was never going to be a satisfactory solution in the long term. Something has to give and Mr. Trichet's solution is one logical solution if deeper integration is the objective. However, the speech illustrates the vast gulf between Europhiles like Trichet and those who live more modest lives in the member states. From the evidence of recent elections and opinion polls, citizens in bailout recipient states and bailout donor states alike resent the EU and the popular mood is very much against further dilution of national sovereignty. The last thing anyone wants is more power for unaccountable EU bureaucrats.

Notwithstanding the earnest desires of Europhiles, the United States of Europe might be quite a long distance away.

Funny EU Maps

The talented graphic designer Yanko Tsvetkov has some very funny maps of the EU. Here's a taste:

The EU according to the US:

Spain Following Greece?

Greece's government did the country no favours by issuing constant denials and contradictions when decisive action was needed. The Prime Minister repeated over and over again that his country did not need a bailout only to be shown up by later events. Ultimately, he had to eat a large dose of humble pie and take unpopular measures to address the underlying problems.

Now Spain seems to be following the same script. Via the NYT:
On Friday, Spain suffered another downgrade of its debt even as calls were increasing for early elections after the close budget vote. Together, the two events suggest to political leaders throughout Europe that voters and investors are fed up with the lack of resolve and leadership in dealing with the economic situation.

“The government made a real mistake in being late in recognizing this crisis and continues to make a mistake in the ‘drip by drip’ measures to solve it,” said Jordi Sevilla, one of Mr. Zapatero’s former ministers. “You can only get credibility by presenting one strong and coherent package.”
Coming up with something strong and coherent that would satisfy all the various constituencies is no easy task. And Mr. Zapatero is under pressure from all sides.
In light of the international rescue package for Greece, investors want Spain to demonstrate that it can cut its bloated deficit fast enough to avoid emergency aid. Given the size of the Spanish economy, a rescue would be much more costly than the Greek bailout. Yet a debt default or severe restructuring would be even worse, crippling foreign banks whose lending underpinned Spain’s debt splurge.
...
In neighboring Portugal, the main rival parties recently agreed on an austerity package, but in Spain the Popular Party voted against spending cuts last week, without convincing most analysts that it had anything better to offer.

With 25 billion euros in refinancing coming due in July and with Spain’s cost for issuing new debt now elevated by more than a full percentage point, Mr. Campa acknowledged that even the government’s best efforts may not appease impatient investors.
“We have to get ahead of the curve for the markets,” he conceded.

Fitch downgraded Spain's credit rating last week to AA+. The question is whether Spain's leaders will heed this message and swallow the bitter pill or continue with a drip-drip system of puny reforms. Recent incidents have proved that nothing short of decisive action on a massive scale will suffice to give markets confidence. Let's hope Spain got that memo.

Greece Bailout Roundup

I'll have more to say about the Greek bailout in the coming days but here is some reading material for now:

• Economic government: Wolfgang Schäuble, Germany's finance minister, has asked officials to prepare a plan in time for a summit of EU leaders on Thursday, according to reports in the German media. The options include either a loan from EU states or some sort of institutional EU response. Germany's apparent backing for a bail-out comes despite worries that it will lead to the breakdown of fiscal discipline across the Club Med region. It also raises troubling questions of fairness. Ireland has tackled its own crisis by slashing wages and going far beyond any measure so far offered by Greece, yet Dublin has not received help. Germany's dramatic shift in policy changes the character of the euro project. It follows weeks of soul-searching in Berlin, and after increasingly loud pleas from Brussels, Paris and southern capitals. The deciding factor was concern that letting Greece fail risked a "Lehman-style" run on Club Med debt, with systemic spill-over across Europe.
• European Finance Ministers under pressure: After European leaders made pledges of support for Greece last week that stopped short of committing public funds, investors are looking for greater detail, as well as clues to whether an agreement on Greece could also be applied to Portugal or Spain. Even as the risk premium on Greek debt fell last week on the prospect of European support, the euro weakened on concerns the plans may fall short.
• Greek risk exaggerated: European Central Bank council member Athanasios Orphanides said Greek bond spreads suggest investors may be exaggerating the risk of Greece defaulting on its debt. Orphanides, whose mother’s family hails from Greece, said he trusts the Greek government will do “whatever is necessary” to tackle its fiscal crisis. The statement by EU leaders was “very positive,” he said. Greece’s Prime Minister George Papandreou said he will freeze public workers’ wages, reduce benefits, crack down on tax evasion and raise the retirement age as he tries to convince investors of his country’s credit-worthiness. Strikes shut down schools, hospitals and flights on Feb. 10 as unions protested against the austerity measures. Another walkout is set for Feb. 24.
• Greek accounting tricks:A Greek government inquiry uncovered a series of swaps agreements with securities firms that may have allowed it to mask its growing debts. Greece used the swaps to defer interest repayments by several years, according to a Feb. 1 report commissioned by the Finance Ministry in Athens. Greek Prime Minister George Papandreou, who came to power in October after defeating two-term incumbent Kostas Karamanlis, more than tripled the 2009 deficit estimate to 12.7 percent. Greek officials last month pledged to provide more reliable statistics after the EU complained of “severe irregularities” in the nation’s economic figures.
  
  ‘Political Interference’
  The Finance Ministry report blamed “political interference” for the collapse of credibility in Greece’s statistics. There were “serious weaknesses” in data collection, especially with spending figures, as information often came from second-hand sources, the report found.
• Wall Street role in hiding debt 

My Wall Street Journal Op-Ed on Italy's Race Riots

I've blogged here previously about immigration issues. The recent race riots in Italy are a good illustration of the kind of social unrest guaranteed to result from faulty immigration policies. The WSJ published my piece on the subject today. Here's an excerpt:
Italy's recent race riots are only a forerunner of things to come. Massive illegal immigration and native resentment are inevitable by-products of the European Union's broken immigration system, while xenophobia and rampant racism undermine its moral authority and put it in the camp of many of the tyrants it claims to despise. Italy and other European countries must learn from the American experience that comprehensive immigration reform is essential. Here's why.

You can read the full article by clicking on this link.

My Irish Times Op-ed on Iran

The Irish Times published my op-ed calling for the EU to play a more active role on Iran today. It is available here.

Greece in the Doldrums

The Independent is reporting about the Greek financial crisis and prospects for the eurozone. The piece notes that "Athens is already facing possible sanctions from Brussels for running a deficit way above the 3% maximum of GDP permitted under the eurozone stability rules. But the true scale of the problem is worse than expected - at nearly 13%. Greek government debt is also off the eurozone scale at well over 100% of GDP - compared with the maximum permitted debt ceiling of 60%."

Der Speigel had an excellent article a couple of days ago on the same topic, calling the situation a "ticking time bomb." What is surprising is the extent to which the numbers were off the projections - how on earth does the budget deficit go from a projected 6% to the actual 12.7% of GDP? Greek numbers have been dodgy right from the time it qualified for the currency union, and this recent instance of skulduggery will only undermine international confidence in its reporting mechanisms even more.

There is a real prospect that the country may become insolvent with adverse consequences for the system as a whole. Does systemic risk justify intervention at the EU level to bailout Greece? If yes, would other states ask for handouts too? What about Ireland? There are no easy answers to these tricky questions.

Euro Tax?

The new EU President is allegedly trying to introduce a new EU tax. The Irish Independent quotes him as saying "The financing of the welfare state, irrespective of the social reform we implement, will require new resources," [t]he possibility of financial levies at European level needs to be seriously reviewed."

Imagine how much more mischief the bloated Brussels bureaucracy would get up to with more money!