Dáil Éireann debate -
Thursday, 19 Feb 1998

Vol. 487 No. 5

Central Bank Bill, 1997: Second Stage (Resumed).

Question again proposed: "That the Bill be now read a Second Time."

Mr. J. Mitchell

I am glad to have the opportunity to speak on this Bill which is a harbinger of one of the most important developments since we joined the EU and one of the most important decisions we have taken since we achieved independence.

The Bill is an enabling one which will prepare us for the transition from an independent Central Bank in Ireland to a system of central banks in the member countries of the new currency and a European central bank in Frankfurt.

I wish to repeat what I said more than a year ago when I was chairman of the Select Committee on Finance and General Affairs. As a country we are sleepwalking all the way to Frankfurt. The Minister is, of necessity, restricted in what he can say publicly or privately in the run-up to the establishment of a single currency. He has expressed his views on the currency in the House and at the select committee.

One of the views the Minister cogently expressed as an Opposition Deputy, with great prescience, was the danger of speculation against currency and turbulence in the money markets in advance of entry, which is exactly what has happened. The sensitivity of currency and exchange rates means that they properly, and of necessity, do not become the subject of political debate. They are not a subject for party political division.

Nevertheless, someone in this House must express concern about the present currency situation, which is wholly untenable. We have a booming economy, following several years of incredible economic growth which is a multiple of the EU and OECD average. However, our currency is at its lowest level ever. It is not as if this is of no consequence. Today the Irish punt is trading at 83 pence sterling. Not so many months ago it was trading at £1.05p. This is an effective devaluation of 22 per cent in sterling terms. We have devalued our assets by 22 per cent, in international terms, at a time of incredible economic criteria — economic growth, low inflation, low interest rates, trade surplus, balance of payments surplus and falling unemployment. It is clear our currency is grossly undervalued and something should be done about it.

The Celtic tiger, of which we are so proud and which is producing great growth, will soon turn sour. One of the reasons for the economic boom is that people have a say through social partnership and political consensus and share in its benefits. These benefits will dissipate and this will become more apparent as the year goes on. People will take their holiday abroad and find the pound in their pockets will buy 22 per cent less. That is the reality.

In real terms, we have revalued the foreign element of our national debt upwards. This may not be the full 22 per cent because it must be weighed against the basket of currencies involved in that debt. The foreign element of our national debt represents over 40 per cent of our total national debt. We have increased the foreign element of our national debt by approximately 22 per cent because we have allowed our currency to float downwards. This can be justified only if one believes a weak currency helps the economy and improves competitiveness. That is a contradiction in terms. I have always countered that argument by asking what strong economy became wealthy on the back of a weak currency. If an economy is strong, its currency should be strong. Our economy is strong under almost every heading. Our national debt has been reduced from 130 per cent to approximately 60 per cent of GNP. The picture is even better because of the free reserves in the Central Bank which amount to approximately £1.5 billion. After we join EMU those reserves will be available to reduce our national debt further. However, I would prefer if they were used to set up a contingency fund under the control of the Central Bank. That would be a way of cementing our current economic progress for the future. I will refer in more detail to the question of a contingency fund later.

I strongly criticise those elements in society who believe a weak currency or a punt worth 83p sterling is good for them or the country. That is short-term thinking. The question of an appropriate rate for the punt is a matter for debate. Any competitive disadvantage that may have existed has been largely dissipated by the fact that in the past six or seven years we have had lower inflation and interest rates and higher economic growth than the UK, and that is without taking currency into account. Our currency should be close to parity with sterling, which would mean a significant revaluation. It would only put us back to the position we were in a few months ago.

The correct timing for such a decision is also important. The Minister has a great deal of advice available to him in that regard. Some people believe a decision of this nature could not be made until the relevant meeting is held in Brussels in May, but others believe it would a mistake to leave it until then. I believe that would be a mistake. If we allow the low currency level to continue, we will become used to it. A weak currency leads to weak discipline in the economy. Conversely, a strong currency leads to tight discipline in the economy. In other words, if we had a strong currency we would have to remain competitive to sell our goods abroad and we would do that by keeping industrial relations, costs and productivity under control. Therefore, there is a strong argument for a revaluation sooner rather than later and a rate as high as parity with sterling would be justified by the underlying economic realities.

I already referred to the question of a contingency fund. The Central Bank has reserves of between £5 billion and £6 billion. Some of those reserves are moneys on deposit from the NTMA, some are on deposit from the Minister and more are on deposit from banks as a hedge against a collapse in the banking system. There is no call on at least £1.5 billion of those reserves. They are the internal or free reserves of the Central Bank which can be used as a hedge against currency speculation and for which there will be no call after we join EMU. The legislation does not state what should be done with that money after EMU.

We should use that £1.5 billion as the foundation for a contingency fund. By a contingency fund I mean a fund that could not be called on by the Minister for Finance unless certain criteria, as set out in legislation, are met or a real contingency arises. The Governor of the Central Bank should be the person to certify whether those criteria are met. If we do not have a contingency fund and a contingency arises which warrants significant borrowing over and above the 3 per cent limit allowed under EMU rules, we could be snookered. We may need to engage in temporary borrowing to deal with a crisis, but under EMU rules we will not be able to do that. A contingency fund is essential to secure the future and we have an opportunity to set up one with the £1.5 billion reserves in the Central Bank. The Minister should introduce an amendment to this effect on Committee Stage.

The alternative would be to reduce the national debt by £1.5 billion and thus reduce it by another few percentage points, but a contingency fund would be a hedge against future problems. However, such a fund would work only if it is out of the control of those of us who are subject to the political pressures of elections or by-elections. Central Banks will lose many of their powers after EMU. Therefore, we should assign control over such a contingency fund to the Central Bank.

If the principle of such a fund is accepted as a way of securing our prosperity into the future, we would then have to decide on an appropriate amount for the fund. A sum of £1.5 billion would not be adequate, we should aim for a significantly higher figure. We should take another step and legislate to ensure future budget surpluses or annual contingency funds are used only if genuine contingencies arise during the year in question. Any unused part of the surplus should be transferred for a period of years to the proposed Central Bank contingency fund until it reaches a certain level. I do not see any argument against such an idea. It would secure our future and give us a real hedge against future catastrophes and ensure a significant cushion against some downside effect of EMU.

We are sleepwalking all the way to Europe. This is a political project but when it comes to economic matters it has to be backed up by economic reality. The problem is that if we are locked into EMU, as we will be irrevocably, and some unforeseen major disaster arises in, say, Germany, France or Italy it could have the effect of scuppering the entire EMU and having adverse effects on us. Not only should there be a national contingency reserve but the idea of a European contingency reserve should be urgently considered so that in the event of a catastrophe in one of the larger countries or across the Single Market we would have a means of dealing with it without upsetting the Maastricht criteria which should be observed to the letter. If anything is to endanger the currency it would be a willingness to fudge the criteria.

Over a year ago Commissioner de Silguy, among others, came before the Select Committee on Finance and General Affairs. He was determined that the timetable should be met. That determination is shared by all the political heads of the 11 prospective members. The timetable and the criteria are sacrosanct. A question arose as to what happens in the event of a conflict between the timetable and the criteria. The French budget looked dodgy, using once off payments as a means of getting under the magic 3 per cent deficit, the Italian position is far from certain and in Belgium the national debt is way above 60 per cent, yet excuses are made that it is not so bad since most of it is internal debt. There is nothing in the Maastricht Treaty that provides for internal debt but not external debt. It refers to national debts approaching 60 per cent. The Belgian national debt is more than twice that figure, yet it is considered as one of the inner circle countries which will join the EMU. Herein lies a danger.

Currency values are determined by the markets based on their confidence in certain areas. If certain criteria are not met and we are soft or false about these targets nobody will detect it more quickly than the markets and that could have devastating effects. The Minister should consider the idea not only of a national contingency reserve but the need for a European contingency reserve.

Minister for Finance (Mr. McCreevy)

I thank Deputies for their contributions to the debate and assure them I will give consideration to the matters raised prior to Committee Stage.

On the general issue of economic and monetary union, I thank Deputies for their constructive and supportive remarks. I agree the decision to be part of EMU is, in the final analysis, a political one, even though experts, whether economists or otherwise, may have a role in assisting politicians in coming to their decisions.

I agree with Deputies that monetary union will go ahead and that it will be irreversible. It is vital, therefore, that all parties concerned accept this fact and act accordingly. The Government shall continue to press this point home through its various information campaigns. I agree with Deputy Noonan that the question of economic policy to be adopted following EMU must be addressed on a strategic basis and I assure the House that this is something of which my Department is fully aware.

A number of Deputies raised the question of the accountability of the European Central Bank and the national central banks. Arrangements in place at national level, under which national central banks are accountable to national parliaments, will remain in place, so long as they are not in conflict with the provisions of the treaty which guarantee the independence of these central banks and that of the European Central Bank.

Those provisions on independence are clear. Article 107 of the treaty states:

When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.

The question of influencing the European Central Bank simply does not enter into it.

However, the independence of the European Central Bank must be complemented by accountability, and this is the case. If, for example, the European Central Bank is to do its job within the framework of the Union's economic policy, then a dialogue with the Council of Ministers is essential. The arrangements agreed for accountability and dialogue mean that the European Central Bank must present an annual report on the activities of the ESCB, that is the European Central Bank itself and the national central banks, to the European Parliament, the Council of Ministers and the European Commission as well as to the European Council, Heads of State and Government. That report must cover the monetary policy of the previous and the current year. When the European Central Bank President presents this report to the Council and the European Parliament they have the right to hold a general debate on that basis. The President of the European Central Bank and the other members of the executive board may be heard by the competent committees of the European Parliament, either on their own initiative or, perhaps more importantly in terms of accountability, at the request of Parliament.

The treaty also provides a framework for continuous dialogue between the Council of Ministers and the European Central Bank. The President of the Council of Ministers can participate in meetings of the European Central Bank Governing Council and can submit motions for deliberation, although he or she has no vote. In turn, the European Central Bank President shall be invited to participate in Council meetings whenever the Council is discussing matters relating to the objectives and tasks of the ESCB. Furthermore, the Economic and Financial Committee to be set up under Article 109c of the treaty will provide opportunities for dialogue at senior official level. Members of that committee will be appointed by the member states, the Commission and the European Central Bank. The key feature of the ECB in this regard is that it is a European institution and the ECB's accountability is principally provided for via the European Parliament, as is clear from what I said.

It should not be lost sight of that the members of the key decision-making bodies of the ECB will be appointed by democratically elected politicians. In this way governors of national central banks will continue to be appointed, as at present, by member states while the president and executive board of the ECB will be appointed by the Heads of State or Government of participating member states, on a recommendation from ECOFIN and in consultation with the European Parliament. The arrangements for the initial appointments are a pointer to the role of Parliament in exercising accountability over the ECB; it will hold extensive hearings with the candidates proposed for the board before giving its formal opinion.

The question was raised about what happens if the Presidency is held by a non-participating member state. The treaty provides that the President of the Council may submit motions to and participate in meetings of the ECB's governing council. There is only one Presidency. The key point is that it is the Union as a whole which needs to engage in dialogue with the ECB in the context of economic union, as it affects all concerned — the Presidency represents the Union, not a particular member state. Furthermore, the Council, which includes both "ins" and "pre-ins", remains the body in which relevant decisions are made by Ministers, even if the "pre-ins" do not vote on particular issues.

Deputies also mentioned the question of the reserves of the Central Bank. There has been much comment in relation to there being possible "surplus" reserves of European central banks, including the Central Bank of Ireland, following the establishment of the ECB. In responding to Deputies' points, I wish to clarify the position generally.

All central banks hold assets of various kinds. In most countries, a proportion of those assets is held in foreign currencies, known as the external reserves. Such external reserves are held for two principal purposes — to assist in protecting the currency and to ensure the country does not lack the foreign currency needed to pay for essential imports.

With the establishment of the ECB and the adoption of the single currency, it will be the euro-area as a whole rather than individual participating member states, such as Ireland, which will need such external reserves. Consequently, the ECB is empowered under its statutes to call up, from participating national central banks, up to 50,000 million euro in foreign exchange reserves, that is, assets in currencies other than the euro. Each national central bank's contribution will be in proportion to its shareholding in the ECB which, in turn, will be in proportion to each member state's share of the euro-area's GDP and population, like shareholdings in the EMI.

On that basis, the Irish contribution to the EMI is currently 0.8 per cent. The initial Irish contribution to the ECB will depend on the final figures for GDP and population in recent years, the member states in EMU in 1999 and the total assets called up. However, it is likely to be around 1 per cent of the total; something around £350 million, depending on the conversion rate and the actual proportion. In addition, the Central Bank will be subscribing to the capital of the ECB, which is to total 5,000 million euro; the Irish subscription is likely to be around £35 million.

These will remain assets on the balance sheet of the Central Bank, although they will not be under its control. However, it should be noted that the foreign reserves contribution and the capital shareholding will earn income for the Central Bank and thus indirectly for the Exchequer, as the participating national central banks will share the profits of the ECB among themselves.

This will leave a substantial amount of assets, both domestic euro assets and foreign non-euro assets, with the Central Bank. However, just because they are not needed as official external reserves does not make them "surplus". Certain commentators on this issue, speaking of billions of surplus reserves, appear to have forgotten that the Central Bank's balance sheet includes liabilities as well as assets; these include deposits from financial institutions, the Exchequer deposit and legal tender notes.

The Central Bank does have some assets which are not currently matched by liabilities; these are known as the "accounting reserves". However, the value of these reserves fluctuates, depending on changes in the values of the assets held by the Central Bank; for example, between 31 December 1995 and 31 December 1996, its accounting reserves fell from £1,370 million to £947 million, as the value of its foreign assets was reduced by the rise in the exchange rate of the Irish pound.

It is too early to say what the balance sheet of the Central Bank will look like, immediately after 1 January 1999 in EMU. There are too many unknowns — what countries will participate in the single currency at the start; the approach to be taken by the ECB to the management of foreign assets — its own and those of participating central banks — and money market operations; and how the foreign exchange market will initially perceive the euro. What we can say with certainty is that both the overall level of assets and the surplus reserves of a central bank contribute to its credibility. It is not my intention to act in a fashion which could undermine the credibility of the Central Bank, and indirectly the ESCB, or the credibility of the Government.

It is not possible to assess whether the Central Bank will have assets in EMU which are surplus to its requirements and I do not intend to engage in hasty action. However, the situation will be kept under review as the shape of EMU unfolds.

The contribution which any surplus assets of the Central Bank would make to the Exchequer should not be exaggerated. Assets of the Central Bank earn a return which is reflected in its profits. After provision for reserves, the Exchequer receives the profits of the Central Bank, thus indirectly benefiting from its accounting reserves. If those assets were transferred to the Exchequer, the Exchequer would receive a lower transfer from the Central Bank each year. Therefore, the benefit of transferring part or all the accounting reserves to the Exchequer from the Central Bank would be marginal — essentially the difference between the return on the Central Bank's investment and the interest rate paid by the Exchequer for borrowings. More specifically, if the Central Bank's accounting reserves were to be used to reduce the national debt, the net annual benefit to the Exchequer would be the difference between the cost of servicing the repaid debt and the return the Exchequer receives by way of Central Bank profits on the assets in the accounting reserves.

When there is a clearer picture of the Central Bank's balance sheet in EMU, the possibility may arise of there being surplus reserves which could be used by the Exchequer. Deputies have given me a number of suggestions as to what use these funds could be put and I will consider them. It would not be my preferred option to use such reserves for day-to-day spending given the revenue that the reserves currently earn for the State each year and the one-off nature of any transfer of these reserves to the Exchequer.

The primary purpose of the Bill, as Deputy Jim Mitchell said, is not to revise Central Bank legislation but to adjust it to ensure it will be compatible and not in conflict with our membership of the new European Central Bank. Some of the matters raised during the debate should be raised at another forum but I will deal with them briefly.

Deputy Jim O'Keeffe raised the question of the McCracken and Moriarty tribunals. Under section 16 of the Central Bank Act, 1989, the Central Bank has an obligation to respect confidentiality. The section provides that the Central Bank cannot disclose information except under certain circumstances. A tribunal is not covered as one of these exceptional circumstances. However, the Central Bank has disclosed information to the Moriarty tribunal on exchange controls. On the question of supervision, the Central Bank is complying fully with the discovery order issued by the Moriarty tribunal, the terms of reference of which include a provision which obliges it to look at the Central Bank's role as a supervisor of financial institutions and to make whatever recommendations it may consider appropriate. I await the tribunal's report and will consider any recommendations made in this regard.

Deputies O'Keeffe and Mitchell raised the question of the exchange rate. Deputy Mitchell reminded me, fairly, that when in Opposition I said that the setting of a date in currency matters would inevitably lead to speculation. From my good knowledge of currencies acquired over many years, that is what the markets love as it is the time when one can make money. Before certitude there is uncertainty. If one looks back over the past 40 years, there was an occurrence or event which caused speculation. I have adopted a consistent mantra which I do not need to repeat. It would not be right for any Irish Minister for Finance to give an indication one way or another. That leads me to some of difficulties posed by the questions put by Deputy Jim Mitchell. If I were to enter into debate on any of the aspects raised about the bank rate or whatever, that might signal to the markets how I was thinking and I have guardedly not done that.

The Deputy and I served on the Finance and General Affairs Committee and all the meetings concerning this were public, some were held in this Chamber, some were in the Seanad and most were in Kildare House. People ranging from those who were die-hard opponents of the whole concept to those who were absolute proponents of it were brought before the committee. We had a wonderful debate on this matter under the Deputy's chairmanship over nearly two and a half years and for most of that time, except for some reasonable coverage at one stage by one national newspaper, we might as well have been speaking to ourselves. As the Deputy pointed out when he was chairman, despite our best efforts, we found it amusing, if nothing else, to read commentary in newspapers that Irish politicians were not concentrating on this matter. Those same newspapers did not cover any of the excellent work done by that committee on this area. EMU took up more of the time of the Financial and General Affairs Committee than any other topic. I am already on record inside and outside the House for complimenting Deputy Mitchell in that regard. A reading of the Official Report of those committee meetings will reveal the wide range of opinion on the issue. I and others found it a great learning experience.

Deputy O'Keeffe commented on inflation and on the security of the banking system. He raised the issue as to how legislation relating to depositors' money in other banks would be covered by the Central Bank. That does not come under the scope of this Bill, but there are very adequate powers of regulation and supervision and we comply fully with EU directives and best international practice.

Deputy O'Keeffe made interesting comments about dormant accounts. He tabled some parliamentary questions on this since I came into office and other Deputies also have an interest in this area. I said in reply to those questions that there were difficulties involved. This subject has also interested me for some time and I have not let the matter rest. This would create great difficulties in that it would involve an inordinate amount of work for some institutions, but there is a good deal of sense in what the Deputy said. From my background in finance I can readily identify with some of the examples he gave. This matter is not an immediate priority for me, but I will not let it wither away given the various reports done by outside institutions in co-operation with the Department of Finance. I take this opportunity to say I will investigate this matter further during my term of office.

Deputy Enright said that according to his information France and Germany are buying gold, but my information is they are selling it because the price of it is falling. In any event gold is a very minor element in the Central Bank's balance sheet. In Irish terms out of £5.446 billion it represented £76 million at the end of 1996. The amount of gold held by the Central Bank as part of its reserves is a fraction of 1 per cent. In Irish terms gold is not the problem. The role of gold in the reserves of the European Central Bank is being considered by the Economic and Monetary Institute. This question will ultimately be a matter for the European Central Bank. Deputy Enright also made a case about the Irish pound vis-a -vis sterling and I dealt with that matter at length during my Second Stage contribution.

Deputies Enright and Perry raised a number of items related to bank charges. This may be considered a great example of passing the buck, but under the Consumer Credit Bill which was steered through the Dáil when the Minister, Deputy O'Rourke, was spokesperson on that area, the terms and conditions attached to loans and other charges levied by financial institutions for services are regulated by the Director of Consumer Affairs. I do not have any direct statutory role in those matters. Deputy Perry gave the example of bank charges on a referred cheque for a £30 transaction in a supermarket. The supermarket was charged £7.50 on its bank statement and the writer of the cheque was charged £7.50. To my knowledge those figures are correct. He said that such charges would result in an inordinate percentage being taken off of the bottom line of his business in the supermarket area. However, this is something that can be referred to the Director of Consumer Affairs because under the 1995 Act bank charges come within his remit.

I thank the Deputies for their co-operation. As pointed out by others, this is an important Bill. It is not particularly momentous, but the steps on which we are about to embark in joining the monetary union are momentous. It is the most significant decision taken by an Irish State in a long time. This Bill is necessary to ensure our Central Bank legislation complies with our new commitments in regard to the euro. I thank Deputies on all sides of the House for their co-operation.

Question put agreed to.