02/29/2012 11:46 AM

Fiscal Pact Referendum

'A Decisive Moment' for Ireland in Europe

By in London

Irish Prime Minister Enda Kenny has announced his country will hold a referendum on Europe's fiscal pact. A "no" vote in Ireland could cause uncertainty on the financial markets and even put the future of the common currency in doubt. But with the country still dependent on EU aid, the Irish can't afford to say no.

Tuesday was a good day for democracy, but a bad one for German Chancellor Angela Merkel. First, Germany's Federal Constitutional Court declared the panel of lawmakers set up to approve urgent action by the euro rescue fund to be "in large part" unconstitutional and ordered that it would need to be enlarged to include more than just its current nine members.

And on Tuesday afternoon, Irish Prime Minister Enda Kenny announced his country would hold a referendum on the euro fiscal pact. This threatens to throw a spanner in the works of the euro's new architecture: It's possible that only 16 euro-zone countries will accept the fiscal corset that Germany would like them to wear in the future.

Both developments come at an inopportune time for Merkel. The executive powers of Europe's leaders have grown rapidly during the crisis -- especially those of the German chancellor. Merkel's ideas were first given the nod by leaders of the European Union member states in Brussels before later getting implemented in each country.

This top-down approach has now suffered a setback.

In Germany, the country's highest court has ruled against this model, indicating that greater democracy is required in euro-related decisions. And in Ireland, too, the requirement for greater democratic participation has also come, in part, from the threat of similar court rulings. In Kenny's case, he appears to have been acting preemptively. If he hadn't called for a referendum on the fiscal pact himself, there's a good chance the issue would have been taken up by the country's Supreme Court.

As the news arrived from Brussels, Merkel's aides in the Chancellery probably thought to themselves: Not those Irish again! After all, the Irish have a history of opposing further European integration through referenda. In the cases of both Nice and Lisbon, the Irish rejected both EU treaties in referenda in 2001 and 2008, respectively, before approving them in second votes. A "no" this time around is also conceivable -- and it would have unforeseeable consequences for the euro.

Politically, Kenny Had No Alternative

For weeks now, negotiators in Brussels have been tweaking the language of the fiscal treaty in order to make it more certain of surviving any referendum. Just last week, Michael Link, Germany's state secretary for European affairs in the Foreign Ministry, confirmed to the Irish Times that the treaty was being constructed in a cautious enough way that a referendum could be avoided. "We are trying to design everything that is on the table in a way which would be okay in the eyes of the attorney general and the Irish Constitution so that no referendum is needed," he told the paper. But earlier this week, the Irish attorney general advised Kenny "on balance" that a referendum would be required in order to ratify the treaty.

The attorney general's advice gave Kenny an excuse to take the step. Politically, he had no alternative. The opposition party Sinn Fein had announced it would take legal action in the event that the government avoided holding a referendum. And Ireland's Supreme Court would also have insisted on a plebescite, according to constitutional experts.

With his initiative, Kenny is defusing the accusation that he is afraid of letting voters have a say. In his speech to the Dail, the Irish parliament, the prime minister gave a taste of how he wants to persuade the electorate to vote yes. Ireland has made great strides in the past year, he said, adding that investors have regained confidence again. "I want that flow of investment to continue and expand," he said. Ratification of the treaty would be "another important step in the rebuilding of both Ireland's economy, and our international reputation." In other words, Ireland can't afford to say no.

Good Chances for 'Yes' Vote

As it happens, the chances are good that Kenny will win the debate. The Irish are admittedly resistant to monitoring by Brussels, and euro-skepticism in the country has grown. But the government has compelling arguments on its side, most notably that Ireland would not get access to the euro rescue fund, the European Stability Mechanism (ESM), if it does not ratify the fiscal pact. And Irish doubts that the country can get back on its own feet without external assistance are at least as large as the anger directed at the troika of the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF).

On top of that, Kenny does not have to contend with the problem that his predecessor Brian Cowen had in regard to the 2008 referendum on the Lisbon Treaty. The rejection of the treaty back then was largely intended to teach the then-government a lesson for plunging the country into its serious financial crisis. Kenny, however, has not been in office very long, his conservative Fine Gael governs in a grand coalition with the center-left Labour Party and has the backing of the population. A "no" in the referendum would be a vote of no confidence which could, in the worst-case scenario, lead to new elections. Few people in Ireland are likely to want that.

'A Truly Decisive Moment' for Ireland in Europe

And what would a "no" mean for the fiscal pact? It would certainly not be as momentous as the Irish votes against the Nice Treaty in 2001 and the Lisbon Treaty in 2008. The EU treaties require unanimity, making the Irish "no" tantamount to a veto. The fiscal pact, on the other hand, will enter into force once it has been ratified by 12 euro-zone countries. An Irish "no" would not torpedo it.

Nevertheless, if a euro-zone country were to back out of the pact, it would cause uncertainly on the financial markets -- and possibly endanger the whole euro zone. Just the announcement of the referendum was enough to cause the value of the euro to slump. A "no" vote would fundamentally threaten the credibility of the fiscal pact, which many observers already feel is entirely symbolic.

Alex White, a Labour Party member of the Dail and a financial expert in the government's parliamentary group, said that the referendum was "a truly decisive moment" for Ireland in Europe. "Do we join others in addressing the flaws in the euro currency or do we go our own uncertain way?"

Angela Merkel, for one, is curious to hear the answer.


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