Ireland to Hold Vote on EU Fiscal Treaty

Courtesy of Benzinga.

Irish Prime Minister Enda Kenny announced today that the Irish people will be given the choice of whether or not to accept the European Union’s new fiscal treaty. The fiscal compact requires national budgets to either be in balance or be in surplus and contains correction mechanisms that will automatically go into effect if the balanced budget rule is broken.

Kenny previously said that he would sign the fiscal compact but later decided that he would instead put it to a vote because of legal advice he received from Attorney General Maire Whelan. Prime Minister Kenny was notified by Attorney General Whelan that because the new fiscal treaty would require constitutional changes, a referendum must be called in order to pass it.

The Irish referendum is the latest obstacle faced by European leaders who are trying to avert a financial disaster from destroying the euro zone. Important European Union treaty changes have already been defeated in Irish referendums twice in the last ten years, so it’s not out of the question that the Irish could say no to the new fiscal treaty. Although Irish leaders managed to pass the referendums in subsequent attempts, a no vote on the fiscal compact from Ireland could stun the markets.

Because passage of the treaty is considered vital to the euro zone’s survival, European leaders decided that the treaty only needs 12 of the 17 euro zone countries to approve it in order for it to go into effect. Although the new European Union (EU) fiscal treaty only needs to be approved by 12 of the euro zone’s 17 member states, a no vote could be a precursor to Ireland leaving the euro zone.

An important provision in the new treaty says that any country that votes against the new treaty will not be allowed to receive any financial aid from the European Stability Mechanism bailout fund. Failure to pass the referendum could see Ireland’s borrowing costs skyrocket, which would increase the chances of an Irish default.

Irish supporters of the fiscal treaty are calling it a vote on Ireland’s membership of the euro zone. Polls suggest that a majority of the Irish people support the treaty but the margin is slim and could easily shift before the vote takes place on a yet to be announced date.

Opponents of the fiscal treaty argue that it could lead to more of the painful austerity measures that troubled euro zone countries were forced to accept in order to receive bailout funds. The austerity measures are unpopular wherever they are put in place because the combination of tax increases and spending cuts limit the chances of economic growth and help push some countries further into recession.

Although the Irish vote by itself won’t determine the future of the euro zone, investors should pay close attention to the results because they could signal the direction that the euro zone is headed.

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