Irish pose next democratic test for EU austerity

DUBLIN (AP) — When voters in Greece and France got the chance, they dealt a resounding "No!" to parties backing austerity measures. The Irish could be next to give the European Union's austerity plans a black eye.

A May 31 referendum here asks the public to approve an EU treaty that aims to control nations' annual deficits and longer-term debts. But critics say the treaty ignores the competing need to stimulate growth.

Ireland, once staunchly pro-EU but increasingly euroskeptical, is the only member of the bloc putting the agreement to a national vote.

Analysts of the 3-year-old eurozone crisis say an Irish rejection of the treaty, combined with Francois Hollande's victory as France's president and a hard-left turn in Greece's parliamentary elections, could force the continent to shift in favor of less cutting and greater investment in growth.

And they agree that, even if the fiscal treaty is ratified by the minimum 12 nations required, it is likely to be an economic dead letter before it comes into force next year. Its key goal — to bind nations into tighter debt and deficit limits under the threat of EU fines — seems downright perverse in the face of widening recession.

"This is the weakest treaty that the EU has ever come up with. It's rapidly been overtaken by events and looks increasingly meaningless," said Simon Tilford, chief economist at the Centre for European Reform think tank in London.

Here are the key issues driving the debate over the future of Europe's fiscal treaty.

THE INCOMPLETE EURO

Economists broadly agree that the EU powers that be, chiefly in Germany, remain in public denial about the real underlying reasons for the eurozone crisis: the faulty, half-baked design of the euro common currency, with no central coordination of debt funding.

Its repair, they say, will require German Chancellor Angela Merkel and her uneasy electorate to accept the need for national debts to become European property.

University College Dublin economist Colm McCarthy, one of Ireland's foremost fiscal troubleshooters, described the treaty as "essentially an evasion, designed to provide political cover, particularly in Germany, for measures which will have to be contemplated if the crisis persists." He said its drafters seek to defend a fictional pretense "that Europe's problems derive entirely from budgetary excess."

McCarthy argued that, had the fiscal treaty been law since the euro's launch in 1999, its supposedly tough spending rules would have made no difference in preventing the current banking and debt-financing problems, with the single possible exception of Greece because of its track record of fraudulent government accounting. Nor would the treaty forestall further debt crises, he said.

Economists emphasize that the treaty contains broad get-out-of-jail-free clauses that permit higher deficits in cases of recession or unspecified external pressures.

Joerg Kraemer, chief economist for Commerzbank in Frankfurt, said the fiscal treaty was "not very strict." He noted that it permits a deficit-violating nation to justify its spending by citing "negative circumstances that you can't control. This could be anything. There are a lot of loopholes, and it's a bad sign that France does not even accept such a watered-down agreement."

THE RISE OF HOLLANDE

France's electoral embrace of Hollande deals a hammer blow to the central guiding force for austerity demands: the right-wing alliance between Merkel and ousted French leader Nicolas Sarkozy, known by the portmanteau "Merkozy."

Hollande campaigned on the need for EU leaders to forge a new growth-focused agreement that reduces the dead weight of debt on the most struggling eurozone economies. He says this will require the launch of eurobonds issued by the European Central Bank for funding the debt-refinancing needs of the entire 17-nation eurozone.

That idea is understandably detested by Merkel and many Germans, because it would transform other EU countries' separate debt-financing efforts into a European, and principally German, responsibility.

But the many critics of the eurozone system say this is exactly what the common currency needed from its infancy to combat the current funding crisis, which has already forced Greece, Ireland and Portugal to take EU-International Monetary Fund bailouts and is pushing eurozone heavyweights Spain and Italy down the same road.

They argue that other EU nations offered Germany its promise of greater spending rectitude, as embodied by the fiscal treaty, in expectation this would give Merkel new room for maneuver in her homeland to expose Germany to more of the continent's debt liabilities.

"The French even under Sarkozy had great reservations about Merkel's focus on austerity, but they went along with it in the hope they could extract concessions in return. With Sarkozy gone, Germany will become increasingly isolated," Tilford said. "Germany will eventually weaken its position."

WILL MERKEL BUDGE?

There's no public sign of that. Analysts forecast this means the crisis will have to spread, and deepen in Spain and Italy, before policy shifts. They are confident it will, noting that Spain is still just starting to tackle the toxic property-based debts in its banking system, announcing this month it will nationalize the largest real-estate lender, Bankia. Spain, just like Ireland, spent a decade bingeing on the cheap credit that euro membership underpinned to inflate its housing market.

On Thursday, Merkel told Germany's lower house of parliament, the Bundestag, she would support growth only through "structural reform," jargon for boosting a nation's efficiency and competitiveness. Economists tend to emphasize that such long-term reforms, while laudable, offer little immediate impact on deficit reduction as the crisis requires.

"Growth through debt would throw us back to the beginning of the crisis, and that's why we haven't done it and won't do it," she said, dismissing eurobonds as a "supposed miracle cure."

But borrowing more doesn't necessarily mean more debt as Merkel asserts, any more than spending less ensures less debt. It's all about encouraging or deterring growth, which in turn boosts or lowers tax collections.

Tilford said he expects Germany eventually to support a loosening of the fiscal treaty's proposed rules on maximum deficits, so that countries with healthy credit ratings and an ability to borrow freely would have EU permission to pump extra money into job-creating, tax-generating projects as Hollande and others want. He also foresees German acceptance of eurobonds and a more aggressive role for the European Central Bank in taking direct responsibility for banks' toxic debts.

But Merkel's grassroots would need major persuading. A poll published Wednesday in the German magazine Stern found 59 percent of Germans reject the idea of borrowing more to stimulate growth, while 61 percent called for Merkel to hold her ground. The poll had a 3-point margin of error.

All these issues will be debated at the next European Union summit May 23, Hollande's first. It's not known who will represent Greece, where most voters now back anti-austerity parties and no new governing coalition has emerged, making another early election likely.

IRELAND'S CONFUSION

Europe's political turmoil is complicating the Irish government's campaign this month to secure a majority "yes" for the treaty, which it has branded "The Stability Treaty." Prime Minister Enda Kenny emphasizes that Ireland must accept it to ensure future access to EU bailout loans.

But many on the left and right alike argue the referendum should be delayed until the autumn, to see whether other countries continue to ratify the treaty through their parliaments or a new, growth-emphasizing treaty emerges in coming months of EU summitry.

"With (Hollande's) election, an enormous argument about the right balance between fiscal responsibility and the need for growth is just beginning," said Fintan O'Toole, an influential Irish author and commentator. "Carrying on with a referendum as if none of this was happening is a classic case of fighting the last war."

Sinn Fein, the Irish nationalist party leading the anti-treaty campaign, wants the vote to go ahead May 31 because it smells political blood.

Sinn Fein has branded it "The Austerity Treaty" and takes inspiration from the fact that Ireland's voters initially rejected the EU's previous two treaties in 2001 and 2008. The Irish governments of the day overturned those results by staging second referendums, but Kenny has ruled out that option this time.

Economists say Ireland, and fellow bailout recipients Portugal and Greece, cannot hope to avoid several years more of austerity no matter how they vote. All are dependent on subsidized EU-IMF loans and will regain the power to resume normal borrowing on bond markets only when would-be investors are confident that these countries represent safe bets to repay their loans without outside help. That means reining in deficits that, in Ireland, stood at 13.1 percent last year.

"The country is bust, and rejecting the treaty cannot alter that condition," McCarthy said. "It could, however, make things worse."

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Associated Press writers Geir Moulson in Berlin and David McHugh in Frankfurt contributed to this report.