- Ireland plans to hold a referendum on the European Stability Treaty. It has been suggested the referendum is likely to take place in late May or early June.
- Although Ireland remains a pro-euro country, the love-affair with Europe has definitely suffered in recent years and a “yes” vote should not be taken for granted.
- The referendum may cause some negative sentiment for Irish sovereign risk, in terms of question marks over Ireland’s long-term position within the Euro area and how the government hopes to return to the bond markets later this year.
- We believe the impact of an Irish “no” vote for the wider euro area and thus for
- general market sentiment would be much smaller than at previous Irish referendums.
- We expect Ireland to vote “yes” eventually – possibly in a second vote à la Lisbon II. Referendum on European Stability Treaty
Yesterday Irish Taoiseach Enda Kenny announced that the government had decided to put the ratification of the European Stability Treaty to a referendum following advice from the Irish Attorney General. In our view, this was the most likely decision, for political as much as legal reasons, but the negative market reaction showed that a lot of investors were not expecting this. The referendum could, therefore, be a “bigger deal” than assumed, at least in terms of new uncertainty for the market to absorb.
The decision to hold a referendum was due to the “unique” nature of the instrument, which was outside the “European Union architecture”, according to Enda Kenny. Kenny immediately framed the debate as about ensuring that Ireland “reaffirmed” its membership of the euro area, as well as committing to the rest of the world that the “reckless economic mismanagement”, which had plagued the country in recent years, would not be repeated in the future.
Putting in place this “credible commitment to responsible budgeting” would be key to keeping “interest rates low and unlocking credit availability”, according to Kenny.
Our view is that Ireland’s ratification of the Treaty cannot be taken for granted (the only major opinion poll taken, last month, showed 52.6% yes), given the public dismay about how they feel Ireland has been treated by the EU and the ECB (in particular) over the course of this crisis. Ireland is now five years into the crisis and there is a palpable sense of anger from many that the EU’s handling of it, particularly with respect to the alleged enforced backstopping of the Irish financial system, has been unfair, and has led to the crisis lasting longer than it should have.
Although Ireland remains a pro-euro country, the love-affair with Europe has definitely suffered in recent years. The general rule of thumb in Ireland used to be that there was a fairly even split between pro/anti/undecided on the question of closer EU integration (i.e.referendums on EU Treaties, not on the question of euro membership). We would argue that the split is now more like 30/40/30, with the Treaty-sceptic wing now the biggest bloc as a result of the crisis.
A history of “no” but then “yes”
Ireland has a history of voting “no” in EU referendum, even during the boom years, having rejected the initial Nice and Lisbon Treaty offerings, before affirming them second time around. What was believed to have been crucial for the eventual successful passing of the Lisbon Treaty was concessions gained on the issue of retaining an EU Commissioner, as well as safeguards over the corporation tax issue. Likewise, we believe that significant progress on the long-running promissory note saga in the near term offers the best chance of ensuring a “yes” vote on the treaty, with the long lead-in time to the vote giving all sides the opportunity to get something agreed.
In terms of the political establishment, the three largest political parties, Fine Gael/ Labour (coalition government) and Fianna Fáil (together these represent 77% of the Irish parliament), have all publicly announced their support of a “yes” vote, while opposition Sinn Fein (which had surged to 25% in the most recent opinion poll) and the independents are generally arguing for a “no” vote.
We expect Ireland, after some opinion poll scares and perhaps some political wheeling and dealing and possibly a second vote à la Lisbon II, to vote “Yes” eventually but this should not be taken for granted. No firm date for the referendum has been given yet but late May or early June has been suggested.
It is uncertain what the ramifications of a ‘no’ vote would be for Ireland, with no immediate impact on the existing EU/IMF financial assistance package but potential problems further down the line in terms of Ireland’s participation in any ESM support, should that ever be required.
Certainly there is potential for some negative sentiment for Irish sovereign risk, in terms of question marks over Ireland’s long-term position within the euro area and how the government hopes to return to the bond markets later this year. Certainly, a near-term return to the markets by the NTMA, as reported by numerous domestic media outlets this week, now seems highly unlikely.
The impact of an Irish “no” vote for the wider euro area and thus for market sentiment in general should, in our view, be much smaller than at previous Irish referendums. The other countries will go ahead with the European Stability Treaty as soon as 12 countries have ratified it.
We might see the Irish call for a referendum igniting demand for referendums in other countries. A referendum in France could potentially derail the European Stability Treaty, as it would make little sense to go ahead without the second largest economy in the euro area. Nicolas Sarkozy is ruling out a referendum on the Treaty as it is “too complicated”. François Hollande, who is expected to win the French presidential elections, has said he wants to renegotiate the fiscal treaty to include a clause on growth measures but he has also ruled out the idea of a referendum, at least for now.