Important Background & Analysis on SCG ("Fiscal Compact") Treaty, for Dáil Debate on Irish Referendum (Wed., Thurs., Fri.)

A referendum on the Fiscal Treaty (‘SCG’/Stability, Coordination and Governance) is to be held in Ireland in May but the related European Stability Mechanism Treaty (‘ESM’) is not to be similarly scrutinised, much less put to the people for approval. Yet both treaties are explicitly linked and interdependent. According to the ESM Treaty both treaties are ’complementary’. The ESM Treaty is illegal under EU law as it stands and is therefore unconstitutional, being in breach of existing EU treaty principles which have been approved by the Irish people in previous referendums and are now part of our law.

Under the Irish Constitution economic, fiscal and budgetary powers are entrusted by the people to the Executive. But under the ESM Treaty a new permanent €700bn loan fund - the ESM - is to be set up with power to call on Ireland, at a time of that institution’s choosing, to make contributions of up to €11.15bn in various forms of capital 'irrevocably and unconditionally' (Art. 8 ESM Treaty). This is equivalent to one-third of Tax Revenue for 2011. This figure can be increased at the sole behest of the ESM at any time in the future - without limit.

• The first step in the process of establishing this European Stability Mechanism(ESM) was an amendment to Article 136 of one of the two main EU treaties, the Treaty on the Functioning of the European Union (TFEU), an amendment which still awaits approval by all 27 EU Member States 'in accordance with their respective constitutional requirements'.

The 27-Member European Council used a 'simplified' procedure introduced into the EU Treaties by the Treaty of Lisbon for this purpose. Under this procedure the European Council can make amendments in the policy areas of EU Treaties as long as such amendments do not increase the Union’s powers and competences.

The amendment reads in part: 'The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole.'

This means in effect putting the Economic and Monetary Union on a wholly new basis from the one which Ireland signed up to under the Maastricht and Lisbon Treaties - making it more a Fiscal Union for the Eurozone incorporating a range of new supranational controls over national budgetary policy.

The amendment does not say that 'some' Member States may establish such a mechanism, but 'The Member States', i.e. all of them.

Yet the ESM Treaty can come into effect once eight, a minority, of the 17 Eurozone States – viz. those subscribing 90% of the permanent loan capital – ratify it, while the Fiscal Compact Treaty can come into force once 12 Eurozone States do so.

• Thus the ESM Treaty stands outside the main EU framework in allowing a sub-group of Eurozone States to exert control over the ESM for the benefit of that sub-group, with no obligation to exert that control for the benefit of the whole euro area.. In other words, they may choose not 'to safeguard the stability of the euro area as a whole.' As such they are not authorized by Art. 136, on which Ireland has a veto.

The ESM Treaty which the Government wishes to ratify would set up an Economic and Monetary Union on quite different principles from the EMU which the Irish people agreed to accede to under the Maastricht and Lisbon Treaties. The current EMU is based on the 3% of GDP maximum annual deficit rule and the 60% of GDP maximum government debt rule.

If these rules had been enforced there would probably be no euro crisis. It was because they were expected to be enforced that the Art.125 'no bailout' rule was inserted into the EU Treaties.

But when Germany and France broke these 'excessive deficit' rules in 2003 those Treaty provisions were effectively abandoned. It was as a consequence of this failure that the Eurozone debt crisis erupted and it is to deal with that failure and to find a way round the Art.125 'no bailout' provision in the EU Treaties that the 17 Eurozone Governments have agreed the ESM Treaty and the complementary Fiscal Compact Treaty for just the Eurozone countries.

These two Eurozone Treaties are therefore in breach of EU law and the EU Treaties in that they would:

• (a) come into force without being ratified by all 17 Eurozone Member States;


• (b) institute a 0.5% annual public deficit rule and a quasi-constitutional permanent balanced budget rule as against the 3% rule set out in the EU Treaties;


• (c) impose a 'reverse majority' rule whereby sanctions on fiscally delinquent Eurozone States are automatic unless lifted by majority vote, instead of the other way round as in the current EU Treaties, and (d) give significant new functions to the EU Commission and the ECJ in what are nominally 'intergovernmental' treaties going well beyond what is permissible under EU law.

• Ireland would have real bargaining power in relation to approving by referendum the Art.136 amendment to the main EU treaties which authorises the ESM – as all 27 EU States must approve it before it can come into force - but we have no bargaining power in relation to the ESM Treaty and the Fiscal Treaty, which as they stand can come into force regardless of Ireland’s position.

Instead, the Government claims that if the people reject the Fiscal Treaty in the 31 May referendum, then the State will be ineligible to seek ESM funding it might require after 2013.

Such an assertion is profoundly misleading. The clause threatening this was not in an earlier ESM Treaty which was signed by Mr Michael Noonan and the other Eurozone Finance Ministers in July 2011 but which was never sent round for ratification. It was however put into a second ESM Treaty which was signed in February 2012 and which the Oireachtas is now expected to approve ratifying so that it can come into force by this July - even though the Art.136 amendment that authorises it does not come force until 2013.

Moreover, this earlier ESM Treaty provided for 'burning' bondholders and for private investors to make sacrifices as a condition of Eurozone Governments getting ESM loans. That provision was dropped from the ESM Treaty which now awaits Irish ratification.

The Government must explain why they allowed these changes and, more importantly, they have a serious obligation to do everything possible to protect the country’s interests in this unusual situation.

• Surely it would be absurd of Irish voters to be asked to vote in the May referendum in favour of imposing austere rules on ourselves in order to obtain access to a proposed permanent Eurozone loan fund, when the quite separate ESM Treaty establishing that fund is arguably illegal under EU law, unconstitutional in Ireland, has not yet come into force, and may never do so.

We hope that TD's will agree, and that this position will inform their input into the forthcoming parliamentary debate on these two Eurozone treaties.