Surprise! Another referendum.

By Eoin Fahy, Tuesday, 28th February 2012 | 0 comments

Against most expectations, the Government has announced this afternoon that a referendum will be held on the "fiscal compact" deal. At a time when many things seemed to be going well for Ireland, this throws the cat among the pigeons and raises serious risks about Ireland's ability to continue to receive bailout funds after next year. This uncertainty is likely to continue at least for a couple of months, and there is of course absolutely no guarantee that the electorate will vote Yes.

The government surprised the country, and the financial markets, by announcing this afternoon that a referendum will, after all, be held to approve (or not) the Fiscal Compact. This was not at all expected as the treaty text had been drawn up with the explicit intention of avoiding the need for a referendum, and as the government presumably wanted the referendum about as much as a turkey looks forward to Christmas! The euro weakened after the announcement, and Irish bond yields rose, though in both cases the moves were not especially large.

The timetable is not fully clear, but this will not be a quick process. As a first step, the government will have to publish the legislation to provide for the holding of the referendum. Presumably that will take a week or two, at the least. Then that bill will have to be approved by the Dail and Seanad and signed by the President. While that process can often take several weeks, it can be done quite quickly, say within a week or two, if it is seen as a very urgent priority.

After the legislation is passed, the date for the referendum will be set, which is usually at least a month after that. So if we assume that the Bill passes sometime in late March, a guesstimate for the date of the referendum would be sometime in May.

The political merits or otherwise of the Fiscal Compact are not a matter for this blog, but from an economic/investment point of view it is worth taking a look at the consequences of a No vote. The key "black and white" issue is that Ireland will not be able to borrow from the ESM (the EU bailout fund that takes over from the current bailout mechanism, the EFSF, next year) if it does not sign up to the Compact. So the current bailout funds are not at (direct) risk from a No vote, but if Ireland cannot return to the markets within the next year or so, and fund itself, it will be in very severe difficulties as it will not be able to get a second bailout.

Of course there are "greyer" consequences as well. While Ireland can continue to draw down funds from the current bailout, it will certainly lose goodwill from other EU countries [except the UK of course, which has opted out of the compact], and could hardly be expected, for example, to get concessions re the €30bn+ promissory note on which there is so much focus by government at the moment. A No vote might also make some inward investment companies, and bond investors, think twice about the wisdom of investing in a country that (again!) votes against an EU treaty, if they think that that might mean that Ireland will leave either the eurozone or the EU.

On the other hand, of course, the irony is that the Compact is supposed to give taxpayers in richer countries such as Germany some comfort that their money will not be used to support countries which cannot, or will not, get their fiscal affairs in order. But most economists agree that even if it had been in place during the boom years in Ireland, it is unlikely to have made much, if any, difference, and Ireland would not have broken any Compact rules until after the bubble burst, by which time of course the damage had already been done. Many economists also argue that the fiscal rules in the Compact are not well designed and would be quite difficult to enforce in practice.

No doubt we will all be discussing these and related issues in much greater detail in the weeks ahead, but for now, perhaps the biggest impact will be in the uncertainty that will not be resolved for, perhaps, two to three months while we await the vote.

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