A Strategic Analysis Suggests that Ireland Should Vote Yes in the Referendum on the Fiscal Stability Treaty

A risk management perspective also suggests that a yes vote is the current best choice for Ireland.

With so much uncertainty and conflicting information, perhaps the only rational way to evaluate which way to vote in the referendum on the Fiscal Treaty is to look at it from a strategic/risk management perspective based on likely developments in the euro zone over the next few years. Considering the impact on Ireland of those possible and foreseeable alternatives should clarify what a rational voter should do. This is necessary as it is most likely that Ireland will be voting in advance of any of the development set out below.

1. Greek exit/euro zone muddles through, a.k.a. “interregnum”

I assume a Greek exit to be a strong  possibility now. Greece is a special case in that, unlike Spain and Ireland in particular, it has been a “fiscal mess” for some time, manipulated statistics, and despite protests to the contrary this was well known in the EU. It probably never really fitted into the euro zone and would not join it today if it had the choice. [If it miraculously succeeded in staying in the euro zone, there would still be an interregnum while the euro zone muddled on, and eventually arrived at alternatives 2, 3 or 4 below.] The exit could occur through Greece deciding it wants to adopt the drachma again or the ECB deciding it would no longer fund Greece.

An Irish no vote under this scenario puts Ireland closer to Greece’s plight in every sense, increasing pressure on Irish banks and on Irish sovereignty debt funding costs, and reducing leverage in the EU and with the IMF.

An Irish yes vote means continued and likely increased ECB/EU/and IMF support in what would be a difficult interregnum period. It also gives Ireland a voice, however small, in the likely changes needed to euro zone structures.

2. Euro zone breakup

This is the worst option for Ireland and the world. It is now a 50-50 possibility. Many Irish voters are likely to underestimate such a possibility.

It could arise because Germany (see my Autumn 2011 Studies examination of this) cannot make up its mind “in time,” or because European banks, which as I have pointed out repeatedly, are central to the problem, finally collapse under the weight of their manifold weaknesses. These weaknesses include their direct correlation to many problems sovereigns countries through their heavy sovereign bond investments in their “own” country, their extensive, and now almost worthless, investments in sub-prime mortgages, peripheral economies, and emerging markets, and poor management overall. It is now clear that when the ECB introduced its Long Term Release Operation (LTRO) bank funding a key reason was that German and French banks were at that time going through a “Lehman-type moment”.

The impact of euro zone breakup would be severe, possibly leading to the collapse of the EU, and certainly impacting significantly on the single market and a “Europe with no borders”.  It would lead to a Europe-wide depression with a consequent rise in political instability and the growth of extremist populist political movements.

An Irish no vote would leave the country with a very poor international reputation and therefore unlikely to access any financial support, particularly from the IMF, at a time when many larger states also needed such support.

A yes vote would be slightly positive in inhibiting a breakup, and would make IMF funding in those very difficult circumstances somewhat more likely.

3. The euro zone is rescued

For this to happen Europe would need significant effort, a lot of wisdom and a huge amount of luck. Effort there undoubtedly is, but wisdom and luck have been sorely absent to date. The rescue would start in the short term with increased ECB support in a broad sense, with euro zone-wide bank resolution structures and deposit guarantees. Longer term it would require a combination of the Fiscal Treaty now being voted on and significant reform and growth, and a transfer union.

Significant strategic issues arise with this scenario. For Ireland the relationship with its largest EU customer country – the UK – would be difficult, particularly if the UK eventually left the EU itself. Different it certainly would be , and there could be significant differentiation between  many states in the EU.   For example, EU and non-EU states in the Balkans, Eastern and South Eastern Europe will face a potentially very difficult situation – those within the euro zone pondering whether to stay in, and those outside considering whether to join the euro zone or not, while EU membership would be very different animal altogether.

There would also be significant political issues for countries such as Ireland in what would effectively be a federal Europe.

A no vote could effectively exclude Ireland from its biggest market and from the critical political decision-making in arriving at the achievement of this scenario.

A yes vote gives Ireland a voice in the decision-making and the option to say yes or no later to those subsequent developments in a later referendum. It also makes much more likely a deal on Irish/EU bank debt.

4. A smaller euro zone

This scenario could arise from conscious decision-making or it could be forced upon various countries, including Ireland in the wrong circumstances, through market pressure.

A key question for Ireland would be which countries are included.  Some experts believe that Italy and Spain would not be able to maintain a stable economic relationship with Germany in such a currency union and therefore would not be included. Interestingly, some French commentators see France equally unable to maintain the appropriate economic relationship with Germany in a smaller euro zone without federal-type structures.

An Irish no vote excludes Ireland from consideration for the smaller core group. A yes vote gives Ireland the opportunity to decide if its interests lie within or without the core group. A yes vote also increases the possibility of a cutting a deal on Irish bank debt.

The next few years will see significant if not revolutionary change, huge risks and significant uncertainty, in Ireland and in the rest of the world. For a country such as Ireland with one of the highest levels of personal, bank, and government debt in the developed world, taking risks with its access to future funding appears nonsensical.

Overall, from a strategic perspective, a yes vote makes most sense. It also gives Ireland a voice in what would be the more important referendum on changes to European governance (if this became necessary in the interregnum period) or on the fiscal and other requirements attaching to a smaller currency union or an effective federal Europe.

I can find no strategic or risk management upside in voting no in the referendum on the Fiscal Pact, and significant downside in potentially removing Ireland from the discussions on what will be the more serious and decisive decisions yet to be made by the euro zone and in reducing Irish access to international funding, just when it is most needed for our survival.

The choice on May 31, 2012 is not a choice between austerity and a kind of rugged Celtic self-sufficiency – it is between austerity and greater austerity, a choice between inclusion and relative isolation. We tried isolation in the 1930s, it didn’t work then and it won’t work now. This strategic and risk management assessment confirms that Ireland has grown up now and cannot avoid awkward adult problems by reverting to childhood dreams.

Richard Whelan is a geopolitical analyst, and an Irish chartered accountant with 40 years experience of applying risk management to business decision-making. His website is www.richardwhelan.com.

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