The debate in the opening week of Ireland’s referendum campaign on the Treaty on Stability, Co-Ordination and Governance has largely been driven by those advocating a No vote. These campaigners argue that the treaty will lead to additional austerity in Ireland and hence advocate a No to the “Austerity Treaty”. The Yes campaigners respond by asking where Ireland will get the money to fund budget deficits.  This morning‘s discussion on RTE’s Pat Kenny show between Joan Burton and Mary Lou McDonald largely conformed to this pattern.

What is odd about this pattern is that Yes campaigners have failed to highlight that the treaty does not, in fact, imply additional austerity in the coming years relative to what would occur if there was a No vote, even if the EU did decide to fund Ireland via EFSF or some other vehicle. The fiscal parameters laid down in the treaty are all part of the existing EU fiscal framework that Ireland is already operating within and would continue to operate within after a No vote.

Here I’ll focus on three different numbers that come up time and again in the treaty debate:

• The 0.5% deficit figure set out in Article 1(b) of treaty.
• The 3% deficit that Ireland is projected to reach in 2015 according to current projections.
• The 1/20th per year clause relating to debt reduction set out in Article 4 of the treaty.

The 0.5% Figure

The 0.5% figure does not represent a deficit limit that countries must obey at all times. Rather Article 1 of the treaty says that its terms are respected

if the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised Stability and Growth Pact, with a lower limit of a structural deficit of 0,5 % of the gross domestic product at market prices.

So the 0.5% refers to something called a “medium-term objective” (MTO) for fiscal policy, which is already part of the existing Stability and Growth Pact. These MTOs vary across countries depending on their fiscal situation.

Do you want to guess what Ireland’s current MTO is? Yep, you guessed it: a deficit of 0.5%.  Here‘s our latest Stability Programme Update. Go to page 31 and you’ll find this

Ireland’s ‘medium-term budgetary objective’ (MTO) currently stands at -0.5% of GDP.

So anyone who objects to this treaty on the grounds that it would make Ireland’s MTO be equal to 0.5% of GDP can go ahead and vote No if they wish. But Ireland’s MTO will still be 0.5%. Nothing will have changed and whatever role the MTO plays in generating austerity will remain as before. (See this post by Seamus Coffey for further discussion of MTOs.)

The 3% Figure

The No side regularly argue that the treaty requires more austerity because current plans see the deficit reduced to 3% in 2015 but the passing of the treaty would then require the deficit to be reduced further to 0.5%, hence extra austerity due to the treaty.  This claim is wrong in assigning extra austerity to the treaty on three counts.

First, you might recall that 3% is the deficit level that triggers an excessive deficit procedure under the existing Stability and Growth Pact. A plan to stay at 3% would be a plan to remain permanently in an excessive deficit procedure.

Second, as just noted, Ireland’s MTO is a 0.5% deficit and compliance with the existing Stability and Growth Pact would require continued gradual movement towards this target.

Third, deficits of 3% would see Ireland maintaining very high debt ratios for a long time even if the economy returned to growth. See below for a chart showing the debt-GDP ratios that would occur after 2015 with 4% nominal GDP growth for two different fiscal policies: The first maintaining a 3% deficit and the second gradually reducing the deficit to 0.5% after 2017.  It is extremely unlikely any responsible Irish government would choose the black line trajectory over the blue line.

The One-Twentieth Figure

I plan to write a separate post about the one-twentieth rule. For now, I just want to note that this rule also will still be in existence even if Ireland votes No. Last year, the EU agreed a comprehensive set of revisions to the Stability and Growth Pact process. This featured six legislative documents and is known as the “six pack”. Details here.

The first of the new regulations introduced is Regulation 1177/2011, which amends the previous regulation on the excessive deficit procedure. It introduces into EU law the following:

When it exceeds the reference value, the ratio of the government debt to gross domestic product (GDP) shall be considered sufficiently diminishing and approaching the reference value at a satisfactory pace in accordance with point (b) of Article 126(2) TFEU if the differential with respect to the reference value has decreased over the previous three years at an average rate of one twentieth per year as a benchmark, based on changes over the last three years for which the data is available.

So, as with the 0.5% MTO, if you don’t like the one-twentieth rule, voting No does nothing to get rid of it.

Note all of these rules will apply, irrespective of whether the EU decides to offer Ireland a bailout after a No vote, perhaps via the EFSF. The existing SGP rules will not go away just because some people wish they would.

At this point, it is incumbent on the Yes side to explain that, even if future bailout funding could be secured after a No vote, that vote would do nothing to reduce fiscal austerity. The additional point that a No vote does jeopardise bailout funding—and thus could trigger massive and instantaneous austerity—is also worth making. But not at the expense of debating the basic premise of the No side’s “Austerity Treaty” argument.