From the emerald hills of Donegal to the shores of Cork, the Irish go to the polls Thursday in a referendum on a regionwide fiscal treaty inked in January that would impose strict limits on budget deficits and debt. European governments that ratify the treaty will effectively surrender a measure of sovereignty over two of their most sacred economic rights — how much they can borrow and how much they can spend — to the bureaucrats in the region’s administrative capital of Brussels.
The referendum, in many ways, is shaping up as a litmus test of the willingness of Europeans to more deeply link their economic fortunes. As the region’s crisis deepened, European Commission President Jose Manuel Barroso underscored the urgency on Wednesday, heightening calls for radical rule changes that would begin to make the 17 member nations of the euro zone act more and more like the 50 U.S. states.
A fund drawn from all euro-zone members, he said, should be used to rescue ailing banks throughout the region, shifting the burden away from national governments. In addition, he called for the adoption of a regional deposit-insurance program, similar to that of the FDIC in the United States, and the creation of a regional banking supervisor. He reiterated calls for eurobonds — or collective debt that could replace national bonds across the euro zone — under which the risks posed by
wobbly nations, such as Greece
, Ireland and Spain, would be offset by the might of the German taxpayer.
One of the biggest obstacles, however, is fiscally conservative Germany, the powerhouse of Europe. Germany is reluctant to use its financial clout to back weaker euro-zone countries that have disastrous finances. Thus, Berlin has called the new fiscal treaty essential. The Germans contend that the pact, by strictly limiting spending in profligate nations, will prevent a repeat of the credit-fueled decade that has brought the euro zone to the brink of breakup, while allowing Berlin to consider bolder steps toward integration.
Many fear the kind of timetable the Germans are working on — months on some measures, years on others — will not be fast enough to quell the current crisis. At the same time, concern that Europe’s woes could damage the already fragile global economy dramatically spiked Wednesday, with growing angst over Spain’s ailing banks — which might force Europe into its biggest bailout to date — sending Madrid’s borrowing costs soaring while investors drove stocks sharply down and sent yields of safe-haven U.S. Treasurys to record lows.
At the same time, some Irish are asking whether enshrining austerity in law is really a bright idea, given that France’s new president, Francois Hollande, is pressing for a pact that shifts the emphasis of Europe’s response from austerity to growth and with German Chancellor Angela Merkel facing tough opposition to treaty ratification in her own parliament. The Irish, in fact, are being asked to make that decision as waves of budget cuts aimed at meeting the terms of their $113 billion bailout from the European Union and the International Monetary Fund have already plunged the country back into recession.