The purpose of the Bill is to bring legislation governing the Central Bank of Ireland into conformity with certain provisions of the EC Treaty as amended by the Treaty on European Union and also with certain provisions contained in the Statute of the European System of Central Banks and the European Central Bank contained in Protocol No. (3) to the Treaty establishing the European Communities. The provisions of the Bill are designed to cater for the streamlining of the independence of the Central Bank of Ireland along with its institutional integration into the European System of Central Banks and the European Central Bank.
These amendments are a necessary part of our preparations for full participation in economic and monetary union. In fact, the Treaty lays down that, in assessing the fulfilment by member states of their obligations for achieving EMU, the European Commission and European Monetary Institute — or EMI — are to examine the compatibility between each member state's legislation, including the statutes of its national central bank, and both the relevant provisions of the Treaty and the statute. In that respect, the compatibility of our central banking legislation is additional to the more well known convergence criteria in the key areas of prices, the Government's financial position, the exchange rate and long-term interest rates. Both the EMI and the Commission were consulted on the terms of this Bill and the response of both organisations has been generally positive.
Before I go into the details of the Bill, I wish to place the legislation in its proper context by reminding Senators not only of the institutional aspects of EMU with which this legislation is directly concerned, but also the timetable for EMU and the background. The Treaty envisages EMU being reached in three stages. Stage one involved the completion of the Single Market and closer co-ordination of the economic policies of member states.
Stage Two, which began on 1 January 1994, involved intensifying the co-ordination of member states' economic policies, based on multilateral surveillance within the context of broad guidelines laid down by the Council of Economic and Finance Ministers, or ECOFIN. Most importantly, stage two brought into operation the excessive deficit procedure set out in Article 104c of the Treaty which requires an annual examination of each member state's budgetary performance to see if it meets the deficit rules laid down in the Treaty, with the Council making a recommendation for ending the excessive deficit of any member state which does not meet them. Ireland has never been the subject of such a recommendation. Stage two also saw the establishment of the EMI. The EMI is the forerunner of the European Central Bank and has, inter alia, the task of developing the regulatory, logistical and organisational framework for the ECB to perform its task, as well as assessing the readiness of member states for participation in the third stage.
Stage three is the final stage of EMU and will begin on 1 January 1999. On that date, the euro will become a currency in its own right and the conversion rates of the currencies of the participating member states will be irrevocably fixed. At that stage the ECB will begin operating the single monetary policy in respect of the euro.
The major part of the arrangements necessary for the transition to the single currency are now in place. Last December the Luxembourg European Council adopted a resolution setting out principles and arrangements for strengthened economic co-ordination among states sharing the single currency and between those states and other states not yet in a position to participate in the euro.
The European Council also concluded that the organisation of an ongoing and fruitful dialogue between the Council and the European Central Bank, respecting the independence of the bank, is an important factor in the proper functioning of EMU. I will return to the matter of dialogue with the ECB.
The decision on who will participate in the third stage of EMU is to be made at the beginning of May this year in accordance with the procedures laid down in Article 109j of the Treaty. The ECOFIN Council will assess whether each member state fulfils the necessary conditions for the adoption of a single currency on the basis of convergence reports from the European Commission and the EMI. On the basis of these reports ECOFIN, acting by a qualified majority on a recommendation from the Commission, will recommend its findings to the Council meeting in the composition of the Heads of State or Government. The Council will then, after receiving the opinion of the European Parliament, confirm which member states fulfil the conditions.
It is expected that the Commission and the EMI will produce their convergence reports on 25 March next, allowing time for the Council and the European Parliament to examine them in detail before their formal decisions. The changes included in this Bill, which will make our legislation compatible with the Treaty, must be passed by both Houses of the Oireachtas in time to be taken on board by the Commission and the EMI when they are finalising their convergence reports.
There will be a pre-announcement of the bilateral exchange rates of currencies of participating member states during the first week-end of May 1998 once the decision is taken on which member states will adopt the euro. These rates will become effective on 1 January 1999 and, in line with the Treaty, the actual setting of the conversion rates against the euro can only take place on that date.
As regards the Irish pound, I repeat what the Minister has said already, namely, that the Irish Government's intention is that Ireland will join EMU at an exchange rate that meets the needs of the economy in the fullest sense of the word and that the decision cannot be finalised until next May. In the meantime we will be keeping the issue under active review. Obviously, therefore, the final decision will take account of all the elements, including inflation and overall competitiveness, which contribute to the balanced development of our economy.
As soon as possible after the decision on the participating member states, the executive board of the ECB will be selected. The president, vice-president and other members will be appointed by common accord of the Governments of member states at the level of Heads of State or Government on a recommendation from the Council and after consulting the European Parliament and the Council of the EMI. Under the Treaty the ECB will be formally established after 1 July 1998.
While the euro will become a currency in its own right on 1 January 1999, euro notes and coins will not be introduced into circulation until 1 January 2002. Legal tender status will have been withdrawn from national currencies at the latest by 1 July that year.
The European system of central banks is one of the three core elements of EMU. The other two are the establishment of a single currency among participating member states and the intensified co-ordination of economic and budgetary policies among participating member states.
Article 4a of the Treaty provides for the establishment of a European system of central banks, or ESCB. The primary objective of the ESCB, which will comprise the ECB and the national central banks of the member states, is to maintain price stability. Without prejudice to the objective of price stability, the Treaty requires that the ESCB shall support the general economic policies in the Community with a view to contributing to the objectives of the Community. These include the promotion of harmonious, balanced and sustainable development of economic activities, sustainable and non-inflationary growth, a high level of employment and of social protection and economic and social cohesion and solidarity among member states. In carrying out this function the ESCB shall act in accordance with the principle of an open market economy with free competition favouring an efficient allocation of resources.
The basic tasks of the ESCB will be to define and implement the single monetary policy, to conduct foreign exchange operations consistent with the provisions of the Treaty in relation to exchange rate policy, to hold and manage the official foreign reserves of the member states and to promote the smooth operation of payment systems. Of course, member states with a derogation, or which have exercised an opt-out, are excluded from the ESCB's monetary policy responsibilities.
The ECB's independence is guaranteed by the Treaty. When exercising their powers and carrying out their tasks and duties, neither the ECB nor national central banks may seek or take instructions from Community institutions or bodies, from any government of a member state or from any other body. Furthermore, the Treaty provisions in relation to the governance of the ECB and the ESCB are designed to copperfasten that independence. The decision-making bodies of the ECB, which also govern the ESCB, are the executive board and the governing council.
The executive board must be appointed from among persons of recognized standing and professional experience in monetary or banking matters by common accord of the governments of the participating member states. The members of the executive board will be appointed for eight year terms — with some exceptions for the first round of appointments to ensure that subsequent vacancies do not all arise at the same time — and appointments will not be renewable. The governing council comprises the members of the executive board together with the governors of the national central banks of participating member states — whose independence in turn is guaranteed by the Treaty provisions with which this Bill is concerned. This independence will ensure that the ESCB focuses on its primary objective of price stability. This independence will generate confidence in the euro as a stable and secure currency. It will also ensure that in deciding issues the ECB will be guided by the interests of the Community as a whole rather than being unduly influenced by the views of a particular member state. Of course, this independence must be complemented by appropriate arrangements for accountability, and the Minister is personally very conscious of this fact.
In that regard the ECB must present an annual report on the activities of the ESCB to the European Parliament, the Council of Ministers and the European Commission as well as to the European Council of Heads of State or Government. The report must cover the monetary policy of the previous and the current year. It will be presented by the ECB President to the Council and the European Parliament who may hold a general debate on that basis. The President of the ECB 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 at the Parliament's request. Of course, whatever arrangements are 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 their independence and that of the ECB, and this is as it should be.
In this respect, Senators will be interested to note that section 17 of this Bill provides that the Governor of the Central Bank will attend, if so requested, before a Joint Committee of the Oireachtas. Unlike the previous provision which related to a Committee of the Dáil only, this brings Senators into the process. The Governor shall furnish to that Committee such information as it may request, while having due regard to the independence of the Bank and the provisions of the Treaty. These would include the independence fo the ECB and of the national central banks in relation to the decisions taken on monetary policy issues and in particular the fact that, in making such decisions, instructions are not sought or taken from any outside bodies including the Parliaments or Governments of the member states. Also, the governor will be constrained, for confidentiality purposes, in relation to the extent and type of information on ECB decisions which he or she may be entitled to make public.
As a European institution, the ECB's accountability is principally provided for by the provisions I have outlined in relation to the European Parliament. In addition, the Treaty provides a framework for dialogue between the ECB and the Council of Ministers which is of essential importance. Of course, any dialogue will respect the respective competencies of the Council and the ECB.
The President of the Council of Ministers may participate in meetings of the ECB governing council and may submit motions for deliberation, although he or she has no vote. In turn, the ECB President may attend council's meetings whenever the council is discussing matters relating to the objectives and tasks of the ESCB. In addition, the economic and financial committee to be set up under Article 109c of the Treaty will provide regular opportunities for dialogue between central bankers and Department of Finance officials at senior level. Members of that committee will be appointed by the members states, the Commission and the ECB.
Before addressing some of the consequences of EMU for Ireland, I would like to make the following points. Firstly, the global economic environment is changing fast. This process will continue and would continue even if EMU had never been thought of. Secondly, the formation of EMU will mark a substantial change in the economic environment of the Union as a whole. This is true for all member states whether or not they join the EMU. In other words, continuation of the status quo is not an option for any member state. EMU will change things even for member states who do not join it.
The effects which EMU is likely to have for the Irish economy were analysed in the ESRI study The Economic Implications for Ireland of EMU published in July 1996. The ESRI report concluded that EMU participation by Ireland would yield a net benefit to the Irish economy, even if the UK remained outside the euro zone, estimated at 0.4 per cent of GNP on an annual average basis over the medium-term. This conclusion was also endorsed by the National Economic and Social Council in a report European Union: Integration and Enlargement which was published in March last year.
The principal benefit of EMU participation by Ireland identified in the ESRI report was the prospect of a lower trend in the level of interest rates for Ireland within the single currency area. The ESRI report also examined potential but unquantifiable effects of EMU participation. It concluded that some of these — such as the increased attractiveness of Ireland as a destination for foreign direct investment — could be substantially positive and hence strengthened the case for Ireland's participation in EMU.
When the Maastricht Treaty received the endorsement of the Irish people, it did so without qualification or any provision for Ireland to opt out from the provisions for EMU. Ireland at present meets all of the convergence criteria laid down in the Treaty for qualification for EMU and is in a strong position for participation in the Third Stage of EMU.
There has been enhanced integration of the Irish economy with the continental EU countries over the past two decades, a trend that should continue to be reinforced as the full potential of the European single currency is realised. Irish based firms can continue to exploit new opportunities for market and product diversification in the euro zone. Ireland's capacity to participate successfully in EMU is also supported by our strong convergence performance over recent years, including growth in per capita income levels relative to the EU average, strong growth in employment and the reduction of unemployment, while maintaining low inflation and low budget deficits and achieving continued reductions in the debt ratio. The launch of the euro presents us with an historic opportunity to build on the economic and social progress which we have achieved over recent years by promoting accelerated economic convergence and integration of the Irish economy with our EU partners.
According to the autumn economic forecasts published by the EU Commission on 14 October 1997, the Commission view is that a majority of member states should be capable of meeting the necessary conditions to participate in the euro from 1 January 1999. Enhanced internal flexibility of the economy has a crucial role to play in underpinning Ireland's international competitiveness in EMU. This applies equally to those sectors of the economy likely to benefit from the expected lower trend in interest rates in EMU, but also likely to be sheltered from the direct impact of any competitiveness shock that may arise.
A key concern of many Irish firms is that sterling might be volatile against the euro. Irish industry that might be particularly exposed in the event of such an occurrence must prepare appropriately for it. Potential problems would exist not only for those companies which are largely dependent on UK markets but also for those who are in competition in the Irish market with UK producers and those who are competing with UK producers in the markets of third world countries. Clearly the sterling issue is important but we must be careful not to overstate its importance. When we talk about a sterling shock we are talking about a sharp fall from its equilibrium level. At present sterling is well above what most commentators, including the Bank of England, consider to be its equilibrium level. Therefore, sterling would have to fall a very long way before it could be considered to represent an economic shock.
Private sector preparation for possible shocks in an EMU scenario is, like all issues of competitiveness in the market place, primarily a matter for the individual companies. The most obvious measures to concentrate on are to maintain as much flexibility as possible in their cost base and to take steps to minimise their exposure to sterling. For example, they could examine their sources of supply and their opportunities for hedging.
We have seen over recent years how policies designed for EMU qualification have helped secure our exceptional economic performance. The challenge presented to us from l January 1999 is to ensure the best return for the economy and for employment from our membership of the euro zone and to deliver on the Government's commitment in its Action Programme for the Millennium to share the benefits of Ireland's EMU participation among all sectors of the workforce.
It will be evident that costs associated with the changeover to the euro, and their timing, will vary from company to company according to various factors, including the nature of the company's business. A reliable estimate of such costs is not available. It will be in companies' own interests to minimise such costs by appropriate planning and by making changes arising from the changeover in conjunction with other changes which would arise in the normal course of events. It should be borne in mind in this context that EMU should bring significant benefits to companies. Furthermore, such benefits will be ongoing, while of their nature changeover costs will be once off.
The Government believes that EMU will commence on time and that Ireland will be a member from the outset. Ireland has always supported the process of European integration and EMU will be a substantial step in that process.
I will now turn to the specific provisions of the Bill which, as I have previously indicated, we must introduce in order to comply with our Treaty obligations. In order to be able to participate in the ESCB or the ECB other member states are involved in similar legislative exercises.
Section 1 contains the short title, construction and commencement provisions. While these do not normally require special mention, the commencement provision in section 1(3) allows the Minister for Finance to commence any provision or part, thereof, on any day. This is necessary in that, as decisions are taken at EU level, each of the relevant provisions in this Bill can be commenced at the appropriate time. Section 2 is an interpretation section which defines certain terms used in the Bill.
Section 3 is a technical provision which amends section 5 of the Central Bank Act, 1942, by providing that the exercise and performance of the duties of the Central Bank of Ireland shall be subject to the provisions in the new section 5A of the Central Bank Act, 1942, which will be inserted by section 4 of this Bill.
Section 4 inserts, as I said, a new section 5A in the Central Bank Act, 1942, and provides that the Central Bank of Ireland shall perform any function or duty or exercise any power required by, or under, the provisions of the Treaty or the Statute. The section also provides that sole authority and responsibility for the implementation of ESCB/ECB tasks and duties in Ireland shall rest with the Governor of the Central Bank. This is a significant change and I would like to take some time to explain where it came from.
As I explained earlier, the EMI was consulted on the terms of the Bill and it was a concern raised by the institute that has led the Minister to propose a change in the policy concerning the voting rights of directors of the Central Bank in relation to ESCB/ECB issues. In previous reports by the EMI on the compatibility of all member states' legislation with the obligation of Central Bank independence, it had been indicated that the presence of the Secretary General of the Department of Finance on the board of the Central Bank of Ireland, with a right to vote on ESCB/ECB related issues, was incompatible with such independence. Accordingly, the Minister had originally intended that the Secretary General would not be empowered to vote on these issues.
However, during consultations, the EMI went further by stating that no part time director should have a vote on ESCB/ECB issues because of the danger of a potential conflict of interest. Removing voting rights in this area from the part time directors would effectively leave the Governor as the only board member with a vote. To maintain "voting" in such circumstances would not make sense. Accordingly, the Government decided that sole authority for ESCB/ECB related issues should be vested in the Governor. It should be emphasised this involves input by the Irish Governor to discussions at the European Central Bank where policy decisions will be taken. The EMI and the Commission favour this approach.
Section 4 also provides that the Governor shall keep the board informed of, and may discuss with it, the discharge by him of these ESCB/ECB powers, tasks and duties. Provision is also made that, in instances where the office of Governor becomes vacant or the Governor is unable, for any reason and for whatever length of time, to discharge the ESCB/ECB related powers, tasks and duties imposed on him by the section, the authority and responsibility for their discharge shall become vested, for the period of such vacancy or inability, in the Director General of the Central Bank of Ireland. The Governor's new role, as set out in the section, will only apply to the bank's activities within the ESCB. The board of the bank will continue to operate with the same voting rights as it has with regard to all its other, non-ESCB, activities, such as the supervision of financial institutions.
Section 5 deals with the general functions and duties of the bank and its independence in the discharge of its functions as set out in section 6 of the Central Bank Act, 1942. Under section 6, the bank is given a role independent of the Government in the discharge of its general functions and duties. Article 105 of the Treaty provides that the primary objective of the ESCB shall be price stability. Section 6(1) of the 1942 Act will be amended to unambiguously reflect this primary objective. The opportunity is also being taken to specify the Central Bank's other main objectives given the expansion in its responsibilities since 1942.
Article 107 of the Treaty provides that, when exercising ESCB/ECB related tasks, members of national central bank decision making bodies shall not seek or take instructions from any outside organisation whether governmental or otherwise. It also contains a declaration by the Treaty signatories, namely, the member state Governments, that they will not attempt to influence decision makers in national central banks. Section 6(2) of the 1942 Act, however, allows the Minister for Finance to request the bank to "consult and advise with him" in regard to the execution and performance by the bank of its general function and duty and it must comply with every such request.
As far I know, the powers in section 6(2) have never been formally invoked. However, it is not unusual in practice, and indeed necessary to the proper administration of public policy, for the Minister and the Department, on his behalf, to request the Governor and the bank to consult on the day to day operation of monetary, exchange rate and financial policies. This liaison has always been forthcoming. However, the wording of section 6(2) as it stands, particularly the requirement to "consult" on monetary policy, runs counter to the requirements in Article 107 of the Treaty. A requirement for the bank simply to "inform" is, however, acceptable.
Accordingly, it is proposed to replace this section with a provision which allows the Minister to continue to require the bank to consult with him on the execution and performance of all its tasks, with the exception of those related to the duties conferred on it by the Treaty. In such cases the bank shall only be obliged to keep the Minister informed.
The amendments proposed will not affect the right of the Minister to seek information and advice from the bank and it is not envisaged that there should be any change of substance in existing practice. The exercise of the Minister's right will be a matter for sensible and prudent judgment so as not to overstep the line laid down by Article 107 of the Treaty. There is no reason whatever to believe that the bank will not act in an entirely reasonable manner in this regard.
Section 6 amends section 7 of the 1942 Act, as substituted by section 21 of the Act of 1997, which sets out certain specific powers of the bank. It confirms the bank can participate in the ESCB, by contributing assets or liabilities to the ECB, and pooling its monetary income with the ESCB generally, in accordance with the Treaty; and also that it can perform any function necessary to give effect to the obligations imposed on it by the Treaty and the statute.
Section 21(2) of the Central Bank Act, 1942, provides that the President may, on the advice of the Government, remove the Governor from office for cause stated if the directors of the Central Bank, by unanimous vote, ask the President to do so. Article 14 of the statute of the ESCB/ECB requires that the Governor may only be removed in such cases if he has been guilty of "serious misconduct" and provides that he may appeal to the Court of Justice. The wording of section 21(2) is being amended to bring it into conformity with the provisions of the Treaty and, accordingly, it is proposed in section 7 to amend the section by substituting the words "on stated grounds of serious misconduct" for the phrase "cause stated". The section also provides for the right of appeal, afforded in Article 14(2) of the statute, to the Court of Justice by the Governor against a dismissal.
Article 5 of the statute provides for the European Central Bank to collect statistical information from economic agents either directly or through the national central banks. Section 8 extends the scope of section 18 of the 1971 Central Bank Act, which places an obligation on certain defined institutions in the State, for example, credit institutions and financial intermediaries, to provide information and returns to the Central Bank of Ireland, to include "reporting agents designated by the European Central Bank".
Section 9 allows the Central Bank of Ireland to require institutions in the State to hold special deposits, observe certain liquidity ratios, etc., on behalf of the European Central Bank in accordance with Article 19 of the statute of the ESCB/ECB. The bank already has both powers referred to in sections 8 and 9 in the case of banks for the purposes of domestic monetary policy but these may have to be extended to other institutions to allow the bank facilitate the ECB's monetary policy operations.
Section 10 amends section 16 of the Central Bank Act, 1989, as amended by the Stock Exchange Act, 1995, the Investment Intermediaries Act, 1995, and the Central Bank Act, 1997, to provide for the disclosure by the Central Bank of Ireland of information to the European Central Bank and to any auditor appointed by the European Central Bank in accordance with article 27 of the statute. The section also provides for technical amendments to section 16 consequent on the amendments in section 5.
Section 11 provides that the accounts of the Central Bank of Ireland may, in addition to being audited by the Comptroller and Auditor General, be audited by independent auditors appointed by the European Central Bank in accordance with article 27 of the statute.
Section 12 amends section 23 of the Central Bank Act, 1989, which deals with the general fund of the Central Bank of Ireland, to cater for the bank's participation in the European system of central banks by providing for the pooling of the bank's monetary income as well as for accounting regulations. The section also adapts the Minister's power under section 23 to regulate the periodical determination and distribution of the Central Bank of Ireland's surplus income by requiring him to pay due regard to the powers, tasks and duties conferred on the Central Bank of Ireland by or under the Treaty or the Statute.
Section 13 deletes subsections (2) and (3) of section 24 of the Central Bank Act, 1989, which give the Minister for Finance powers in relation to the exchange rate of the Irish pound, and require any exercise of those powers to be made public. Once Ireland joins the single currency, the exchange rate of the Irish pound vis-a -vis the euro will be irrevocably fixed in accordance with the Treaty, and subsections (2) and (3) can no longer apply.
Section 14 amends section 5 of the Decimal Currency Act, 1969, to accommodate the fact that article 105a(2) of the Treaty provides that the issuance of coins is subject to the approval by the European Central Bank of the volume of issue.
Section 15 amends section 44 of the Central Bank Act, 1971, as inserted by section 120 of the Central Bank Act, 1989, to remove the specific conditions in that section for the issuance of notes, in order to allow for the issuance of euro notes authorised by the European Central Bank under uniform conditions in the euro area.
Section 16 amends section 118 of the Central Bank Act, 1989, to accommodate the fact that article 105a(1) of the Treaty gives the European Central Bank the exclusive competence to authorise the issue of all banknotes from 1 January 1999, and to provide for the issue by the Central Bank of Ireland of euro notes for which the ECB has authorised the issue.
The section also provides that all euro notes for which the ECB has authorised the issue will be legal tender in Ireland, whether those notes have been issued by the Central Bank of Ireland, by the ECB itself, or by the other participating national central banks.
Section 24 of the Central Bank Act, 1997, provides for the attendance by the Governor of the Central Bank, if so requested, before a Select Committee of Dáil Éireann and for the furnishing to that committee of such information as it may request, while having due regard to the independence of the bank. In practice, this was the Select Committee on Finance and General Affairs. As that committee has now essentially been replaced by the Joint Oireachtas Committee on Finance and the Public Service, section 17 amends section 24 to have the effect of ensuring that the Governor will be obliged to attend before a committee of the Oireachtas rather than a Dáil committee. Also, to be consistent with article 107 of the Treaty, section 17 provides that such attendance and provision of information shall have due regard to the provisions of the Treaty.
Sections 19 and 20 of the Central Bank Act, 1942, prohibit the Governor of the Central Bank from being a director of, or holding shares in, a licensed bank. Section 26 of the Central Bank Act, 1997, extended this prohibition to cover all commercial credit institutions and financial institutions. The purpose of section 26 is to avoid a conflict of interest involving the Governor, in view of the bank's new role in supervising a wide range of financial institutions under recent legislation. This prohibition, however, does not apply to the Governor being a member of the European Monetary Institute. Section 18 extends this exemption to the European Central Bank.
Section 19 substitutes a new section for section 134 of the Central Bank Act, 1989, which empowers the Minister for Finance, after consultation with the Central Bank of Ireland, to direct that certain business transactions be suspended if he considers it necessary "in the national interest or for the purpose of safeguarding the currency of the State". The new section recognises the competence of the European system of central banks in the field of monetary policy and the transfer to Community level of all monetary powers of member states participating in Economic and Monetary Union by deleting the reference to the Minister, in exercising this power, having regard to "the safeguarding of the currency of the State".
Section 20 is an enabling provision which allows the replacement of the current pay-as-you-go arrangements under the bank's superannuation scheme with a funded system.
I commend the Bill to the House.
I must inform the House of a misprint in the text of the Bill. This relates to the reference in section 10 to "section 7". This should, of course, read "section 5". I request the Cathaoirleach to ask the House to agree that a correction to this effect be made in accordance with Standing Order 103.