Ireland, Spain Cast Doubt on Europe’s Austerity Pact

Opposition in Ireland and a worse fiscal outlook for Spain could jeopardize Europe’s fiscal compact.

When Europe’s leaders committed themselves to stricter budget discipline in December, it was hailed as a victory for prudent Germany which had insisted that the only long-term solution for the continent’s debt woes was fiscal consolidation. Three members of the currency union could yet challenge that proposition.

Irish voters will have their say on the fiscal treaty in May or June. Where their government, composed of conservatives and Social Democrats, supports the treaty and likes to portray the referendum as a vote for or against Europe, the left-wing opposition has dubbed the fiscal compact an “austerity treaty” and will seek to rally nationalist sentiment against what it perceives as Germany dictating fiscal policy to the rest of the eurozone.

The threat of an Irish “no” previously necessitated the rewriting of a European constitution treaty in 2005 after Dutch and French voters rejected the charter in referendums. The Irish voted against the revised Lisbon Treaty in 2008 but voted for it in a second referendum a year later.

A recent opinion survey revealed that 40 percent of Irish voters favor the new fiscal treaty with 29 percent opposed. More than a quarter said they were undecided.

If Ireland rejects the treaty, it isn’t dead yet. It would prohibit Ireland from seeking further financial assistance from its fellow eurozone members and not commit it to write a balanced budget provision into national law.

The Czech Republic and the United Kingdom will stay outside of the treaty but other non-euro states are expected to join. An Irish pullout would frustrate Franco-German attempts at fiscal integration within the single currency zone.

The more direct threat to the contents of the fiscal treaty comes from France and Spain. Neither is likely to meet their fiscal targets for 2013 when eurozone countries are supposed to have reduced their deficits to under 3 percent of gross domestic product.

In France, the Socialist Party presidential candidate who is likely to replace Nicolas Sarkozy in three months has called for a renegotiation of the fiscal compact. François Hollande, who is leading the incumbent in preelection polls, promises to raise taxes and government spending while aiming to balance the budget by the end of his first term in 2017.

In Spain, the conservative government that took office in December says it will fail to meet its obligation to reduce its shortfall to 4.4 percent of GDP this year because last year’s deficit, left by its socialist predecessor, was worse than expected.

Prime Minister Mariano Rajoy insists that he will cut the deficit to 3 percent in 2013 which would put his country back in line with European rules. Because unemployment is rampant however and the government wary of further raising taxes, he will be hard pressed to make good on this promise.

Under the new fiscal compact, if a member states fails to meet its budget obligations, the European Commission submits a counterproposal, the implementation of which would be monitored as is currently the case in Greece.

A supermajority of European states can prevent such a move but it would send a terrible signal after leaders have sought to persuade markets that they’re serious about fiscal consolidation.