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The Need for a Referendum on the European Stability Mechanism

A briefing from the People's Movement.

What is the European Stability Mechanism (ESM)?

The ESM will from 2013 have responsibility for providing loans to Eurozone Member States in difficulties – strictly conditional on the implementation of a range of “adjustment measures” and if the granting of the assistance is considered indispensable to safeguard the “stability of the euro area as a whole”. Or to put it more accurately “assistance” conditional on turning a recipient country into a social and economic wasteland for the greater good of the Euro.

Why amend the Lisbon Treaty’s Treaty on the Functioning of the European Union (TFEU) to establish the ESM?

The EU authorities propose to amend one of the EU Treaties, the Treaty on the Functioning of the European Union (TFEU) to give themselves a legal basis to establish the ESM using one of the self amending provisions of the Lisbon Treaty. The Government propose to ratify this amendment without reference to the people by way of a referendum. Part of the current temporary EU ‘bailout’ arrangements will end in 2013. It was established under Article 122(2) of the TFEU but is under challenge in the German Constitutional Court. German Chancellor Angela Merkel and French President Nicholas Sarkozy determined towards the end of 2010 to try to head off any further constitutional challenge and at the same time take a further significant step along the road to total EU control of the economic policies of weaker Member States. The ESM, together with the Euro Plus Pact represent a quantum leap in terms of EU economic government.

How can you argue that there must be a referendum on the ESM when the Government and Fianna Fail ‘Opposition‘ refuse to countenance one?

Article 6 of the Constitution proclaims the right of the people “in final appeal to decide all questions of national policy, according to the requirements of the common good” The Supreme Court laid down in the Crotty case that as legal sovereignty in this State rests with the Irish people only they can surrender sovereignty to the EU by referendum or else refuse to surrender it as the case may be. The ESM is about much more that making permanent the temporary mechanism by which Ireland, Greece and Portugal are currently being “bailed out” The ESM represents a surrender in matters of control of national economic policy necessitating an amendment to an EU Treaty. The purpose of a referendum would be to determine whether or not the Constitution should be changed so as to make EU law superior to Irish law in the area set out in the proposed amendment. The refusal of the Government to publish the Opinion of the former Attorney General, Mr Paul Gallagher and any legal opinion that it has obtained since coming into office attests to the fear among the Fine Gael/Labour/Fianna Fail troika of an assertive public opinion demanding what is the democratic and constitutional right of the citizens of this country. Government decisions of fundamental importance for the future of this country for generations to come such as the disastrous bank guarantee and more recently the EU/ECB/IMF “bail-out” were made without reference to the citizens of the country. The almost seamless continuity between the policy of the new Government with that of the previous one has denied citizens an opportunity to say Yes or No to these decisions.

What will Ireland‘s ESM financial liability be?

The State will be legally obligated to the ESM to the tune of approximately €11.13 billion, €1.28 billion in cash and the rest in the form of callable capital and guarantees. Ireland has not been given an opt-out.

But that’s not the figure the Government gives?

No. Tanaiste Eamon Gilmore gave a figure of €9.87 billion in response to a question in the Dail on 13th April 2011 but in fact the country’s contribution is a set 1.59 per cent of the total subscribed capital of €700 billion i.e. €11.13 billion. Gilmore confused the subscribed capital figure of €700 billion and the callable capital/guarantee figure of €620 billion when making the calculation. (Dail Reports 13th April 2011)

But was Eamon Gilmore not at least correct to claim that ‘the manner in which the ESM is structured means that each country’s contribution will not impact on its general government deficit’?

There is no cheap hassle free way out of the current crisis. Certainly not through buying into the ESM. Ireland will have to issue debt to raise the money to be able to pay the €1.29 billion of paid in capital for the ESM. This is finance that could make a substantial contribution to the survival of the country’s health service or our welfare and education systems. Also post 2013 will be the worst time to be lumbered with such a commitment. We should have exited the present EU/ECB/IMF ‘bailout’ regime from late 2012 and returned to the market. The country would (in theory) have to refinance a lot of its own debt from the bailout, and at the same time go into additional substantial debt to pay its share of the ESM. In short, the ESM simultaneously would make our bonds riskier and more susceptible to restructuring and require more of those very bonds to be issued, in order to pay for itself.

But it’s an example of EU ‘solidarity?

The ESM would need €700 billion in order to borrow the €500 billion that would constitute its lending capacity; €80 billion in paid-in capital and €620 billion of “committed callable capital”. And Ireland, Greece and Portugal, the three countries that are currently being subjected to eurozone austerity programmes will together be required to cough up or guarantee €49 billion of that sum. Its not ’solidarity’, its robbery!

Could a situation arise whereby Ireland, Greece and Portugal would have to fork out more cash?

The German court of auditors recently showed how this could happen. In a report to the Bundestag’s budgetary committee the court discovered that the paid in capital that Germany and indeed any other eurozone member might have to provide between 2013 and 2017 could be higher than foreseen. According to the decisions of the EU summit in late March Germany would pay €21.7bn out of the €80bn of paid-in capital for the ESM. Chancellor Merkel had insisted that the German government should be able to pay that money in five equal yearly tranches of €4.35bn, which will be counted as expenditure in the budget. But the auditors pointed out that this agreement becomes invalid, if one country is unable to bear its share of paid in capital and if at the same time another state requires the aid of the ESM. In this case the rate of paid-in capital in relationship to its total of €700bn could decline under the 15% that is required by the rating agency to guarantee the ESM AAA rating. In that case the ESM shareholders could decide by simple majority – and as a consequence against Germany’s wishes – that the capital stock and thus the German contribution needed to be increased. This anomaly applies equally to Ireland, Greece and Portugal. But for weaker eurozone countries there is an additional problem. With regard to callable capital and guarantees eurozone countries like Ireland will be required to pay up front. Germany and France, whose sovereign bonds have a triple-A rating, would not need to put up actual money to cover any shortfall of paid-in capital. A guarantee would do. But since a guarantee has to serve as the equivalent of a prepaid cash payment, a guarantee by a non-triple-A rated country would not cover the shortfall so countries with lower ratings – yes, you guessed them correctly! – would have to pay cash. So we are in a perverse situation. Countries with easy access to capital can provide cheap guarantees, while the weaker countries must put up cash.

Michael Noonan recently announced a plan to impose “substantial” losses on senior bondholders in Anglo Irish Bank and Irish Nationwide Building Society. He has now gone silent. Is there currently any legal obstacle to him doing this under the present bailout regime and what would the position be under ESM?

No. In fact this is a good illustration of the qualitative as opposed to ’purely copper fastening’ nature of what is involved. Mr Noonan obviously lost the run of himself in New York where he made the threats about Anglo and Nationwide. His current silence is more to do with political than legal pressure. Post 2013 and the ESM, it would be a different matter. The ‘implications for euro-area stability’ would continue as a priority concern but the conditions under which a troubled eurozone member such as this country could impose ‘haircuts’ would be much more restricted and controlled. For ‘implications for euro-area stability’ read interests of French, German and Dutch banks. A key part of the process would be the ‘debt sustainability analysis’ Debt sustainability is defined as when a borrower is expected to be able to continue servicing debt without ‘an unrealistically large correction to its income and expenditure’ Would Ireland be in that category today? Would Greece or Portugal? ‘If it is decided that austerity ’is working’ then Mr Noonan would not be permitted to impose haircuts but could introduce initiatives to encourage the main private investors ‘to maintain their exposures’ Who or what will authorise this? – the Board of Governors of the ESM i.e. the Ministers of Finance of the euro-area Member States deciding by mutual agreement. And who or what is to supervise it? – the Commission, the IMF, the ECB and the EBA. It would only be if the sustainability analysis showed the country to be in such a disastrous state that even the most ruthless austerity measures ’cannot realistically restore the public debt to a sustainable path’ Mr Noonan could engage in active negotiations to ‘secure their direct involvement in restoring debt sustainability’ or in other words make them take some degree of hit. A good practical test for Mr Noonan, the Government and indeed the ‘Opposition’ is whether they have a clue about the sort of economic surveillance and control regime that they are blindly prepared run the country into.

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This document was last modified by Mick Carty on 2011-07-12 10:13:39.
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