I move:
That Dáil Éireann takes note of the Conclusions of the Presidency presented by the Taoiseach to the Dáil on 18th July, 1978, following the meeting of the European Council in Bremen, and, in particular, the conclusions on closer monetary co-operation.
Both this House and the Seanad were in recess when the European Council was held last summer in Bremen. Because it was, therefore, not possible to present, orally, the conclusions of the Council, I arranged in July that they should be laid before the Houses and these have been available since to Deputies and Senators.
The purpose of this debate is to discuss the conclusions and to afford the House an opportunity of considering and expressing views on the proposals put forward there for a European Monetary System. A fair amount of work has been done on these proposals but this work is as yet incomplete. It is, therefore, not possible to come to firm decisions. I will discuss them in general terms and the Ministers mainly responsible will go into more detail, particularly on progress so far. We will deal as far as we can at this stage with the implications of the scheme for Ireland. I will be particularly glad to have the views of Deputies at this formative stage. As I said here on 11 October, there can be a further debate when the issues are clearer. Before that debate takes place a paper will be provided giving further information on the proposals.
The conclusions of the Bremen Council relate essentially to the economic and social situation and the Community strategy for dealing with it. There was general agreement that countries without inflation and balance of payments problems should seek to increase domestic demand and the rate of economic growth. Countries with steeply rising prices undertook first to concentrate on undesirable inflationary developments. Measures on these lines have since been announced in a number of countries and I think that in fact recently there has been some quickening in world trade and prospects internationally seem better than they have been for some time.
The Bremen Council affirmed its determination to strengthen the open international trading system and emphasised the importance it attached to substantial and balanced results in the multilateral trade negotiations. The aim of the negotiations is to liberalise world trade further by reducing tariff and non-tariff barriers. Although considerable difficulties remain to be resolved, it is now hoped that an acceptable package will be agreed by 15 December this year.
Generalised policies to deal with economic growth cannot, of themselves, solve one of the major problems of this generation. I mean youth unemployment. By 1985, the population of the Community will grow by an estimated six million. The labour force will grow by approximately nine million. In other words, the Community faces a massive increase in the number of young workers. In Ireland, a recent survey showed that though people under 25 constitute 30 per cent of the work force they number 44 per cent of the unemployed. At the Bremen Council, I stressed the need to speed up the special measures which had been in contemplation to deal with the problem. The Council agreed to ask the Council of Labour and Social Affairs Ministers for special measures to combat youth unemployment within the framework of the European Social Fund. In making that request, the Council sought to break a deadlock which had occurred at a meeting of the Social Affairs Council a week earlier, on 29 June.
Acting on the Council's request, the German Presidency has been conducting and arranging informal discussions. Some progress towards agreement has been made. While there are still differences to be overcome, we are hopeful that final agreement will be reached at a Social Affairs Council due to be held on 27 November so that the new measures, which are very important for the whole Community and for this country in particular, will take effect from 1 January next, as envisaged by the Council at Bremen.
Similarly, economic growth, in itself, will never achieve the convergence as between the different regions which is one of the basic aims of the Community. In fact, unregulated growth could well accentuate regional differences by pulling investment and labour even more irresistibly towards the central areas. Indeed, this influence is probably working strongly even now. In 1972, gross domestic product per head in this country was about 64 per cent of the average for the Community. In 1976 it was 60 per cent. This decline—which is on the basis of figures corrected for purchasing power parities—contrasts with the rise which has taken place in the major central economies. Obviously, influences other than membership of the Community contribute to this disparity in economic performance. Sometimes fiscal policy may not have contributed to growth. Sometimes we may have paid ourselves, as a nation, too much for what we were producing. But in all this we had the support which flows from membership of a rich and integrating Community. Indeed, I hate to think what our position would have been outside the Community. But the essential point is that notwithstanding the regional fund and budget transfers to Ireland under the present system, we appear, on these statistics, which are admittedly out of date, to be diverging economically from rather than converging with the more prosperous areas of the Community. For these reasons, I advocated again the need for a strong and coherent regional policy. The Bremen Conclusions specifically acknowledged that the envisaged common approach in economic policy should embrace the reduction of regional disparities.
The Bremen Council called for continued consideration of special agricultural problems in the Mediterranean regions and in other less favoured regions. The reference to "other less favoured regions" was included at my insistence. I regard this emphasis as particularly important. It is intended to cover further Community action to improve the structure of agriculture in the west of Ireland. Discussions have been taking place in Brussels between the Commission and officials of the Department of Agriculture about new Community measures in this respect and we hope for a substantial and favourable outcome.
The increase in oil prices aggravated the world recession. In Ireland, the cost of imported oil in 1972 was approximately 2.4 per cent of GNP. In 1977, it was 6.5 per cent of GNP—or more than £350 million. Depletion of world reserves and economic growth will accentuate this trend. Indeed, every 1 per cent by which growth increases, increases the demand for energy here by substantially more than 1 per cent. We are thus faced, before we start, in every programme for economic expansion with a strong in-built brake on growth. Every time we push up our growth rate, our oil imports rise. This is the reason for the special attention being given by the Minister for Industry, Commerce and Energy to measures which could counteract these adverse effects. The Bremen Council agreed on the need for a logical and concerted policy on energy. In essence, this means measures to reduce the relationship in the Community between the increases in energy consumption and economic growth from its present high level to approximately .8 per cent for every 1 per cent of growth. This will have obvious implications for energy policy here. It could, for example, mean special EEC aid for exploration and for measures to increase efficiency in the use of energy, including an inter-connector between this country and Britain, so as to permit of access to the continental grid and of the more economical use of generating capacity both here and abroad. Economic growth, unemployment, regional disparities, agricultural policies and energy are all aspects of the same central issue.
All of these policies seek to achieve the better functioning of the economic system. If there is one element common to them all it is the medium in which economic values are expressed. Currency is that medium. It is the means by which trade is financed; through which investment can take place and in which the returns on investment are made. Over the last 30 years, international economic interdependence has emerged as a fundamental and pervasive fact of life, affecting every economy in the world. In these circumstances, disorder in the international relationship between currencies can have and has had the most extensive and pernicious effects. It was for this reason, particularly, that the European Council, first in Copenhagen last April and then in Bremen, discussed ideas on how the Community could make a contribution to world-wide monetary stability that would be commensurate with its importance as the world's major trading bloc.
Deputies will probably be aware from newspaper reports that we had before us in Bremen proposals jointly sponsored by Chancellor Schmidt and President Giscard d'Estaing which had been developed in the interval following the Copenhagen meeting. These proposals gave rise to prolonged and intense discussion. They resulted in the conclusions which are summarised in the text and the annex of the document issued by the Presidency immediately following the meeting. That document has been before the House since July but it may be helpful if I refer briefly to some of its main features.
They are concerned essentially with two issues—
first, the monetary arrangements which should govern parity changes with particular reference to the need to create a zone of monetary stability in Europe, and
secondly, studies of the measures needed to strengthen the economies of the less prosperous member countries of the Community in the context of these arrangements.
The Bremen Council envisaged a durable and effective scheme. Here, we had in mind the need to avoid a recurrence of the pattern of events in 1972 when within seven weeks of joining the Community exchange system, massive pressure on sterling led to the withdrawal of the British and Irish pounds from the system, followed very quickly by the Italian lira and, in January 1974, by the French franc. We agreed that measures to strengthen the economies of the less prosperous member states would be essential if the zone of monetary stability is to succeed. Studies of the measures were to be concurrent with further studies we also commissioned on the detailed working of the monetary scheme. In Bremen I pressed the need for these concurrent studies which have been under way since July and the Government attach considerable importance to the outcome. The conclusions note that following the two sets of studies, a decision can be taken and commitments made at the meeting of the European Council on 4/5 December.
The annex to the conclusions document sets out the proposals we had before us. These were very much in outline form and left many questions to be answered. The subsequent studies under the aegis of the Community's Monetary Committee and the Committee of Central Bank Governors have been concerned with the answers to these questions. The Tánaiste and the Minister for Economic Planning and Development will be bringing Deputies fully up to date on developments both in relation to the discussions in Europe and the likely effect of the various options on the prospects for this country.
The basic thinking remains largely as proposed at Bremen. The proposals there envisaged essentially a system of management of exchange rates at least as strict as the present "Snake" system in which, as Deputies will be aware, fluctuations of up to 2¼ per cent on either side of central rates are permissible. It was envisaged that for a short initial period, countries not now in the "Snake" might opt for somewhat wider margins.
The creation of a zone of monetary stability in Europe is a desirable objective. This conclusion is based on the experience of the past seven years since the international monetary system established at Bretton Woods after the war received a mortal blow when dollar convertibility was suspended. New rules have been drawn up to codify the practice and the regime of floating exchange rates but the conviction has gradually gained ground that a new approach, based on greater stability, is needed.
What is then the background to the proposals? The major reserve currency in the world now is the United States dollar: it is through the dollar that most trade is financed. Other currencies also play a major role in this area but it will simplify things if we concentrate purely for the sake of illustration and without any other significance than that of achieving simplicity on what has happened to the dollar since fixed parities were abandoned.
The figures I quote relate to the relationship between the dollar and the "Snake" currencies but, of at least equal importance, certainly for important interests of this country, have been the variations between Community currencies. During the second half of 1973, the dollar rose by about 20 per cent against European currencies within the Snake: then fell by about 10 per cent during the first months of 1974. After a brief rally, it fell again by about 15 per cent until March 1975. In August 1975 it increased by 15 per cent. Between August 1975 and October 1976 it stayed more or less constant and then fell after the adjustment of currency values within the Snake. Over the year from August 1977 to August 1978 the rate of appreciation of European currencies in relation to the dollar was approximately 15 per cent for the currencies of the "Snake", 13 per cent for the French franc, 11 per cent for the pound sterling, and 5.5 per cent for the Italian lira. All of these figures are of necessity approximations. I give them to explain to the House the order of magnitude of the instabilities which have been affecting currencies.
The fact that most of our trade is in sterling does not take from the destabilising effect of the changes I have mentioned. Indeed, in this decade sterling has gone from a parity of $2.40 to the £ to under $1.60 to the £: and recently rose briefly to over $2 to the £. These changes affect in the most fundamental way the competitiveness with which we can sell, our rates of inflation, and ultimately the levels of economic growth and employment we can attain.
The basic idea behind the proposed EMS is greatly to reduce such fluctuations by building up the monetary influence of the Community to be more commensurate with its collective economic weight. Stability of exchange rates between all the currencies of member states would itself contribute to this.
What, it might be asked, are the disadvantages that flow from instability and what gains could be expected from ending it? First, there are the consequences for trade. These arise directly in the difficulty of gauging the costs in national currency of buying from abroad or of the return on exports. It is, of course, possible to obtain forward exchange cover but it must be remembered that for many firms, exporting is already a venture into unfamiliar markets, subject to sufficient unknowns and uncertainties and that the effects of exchange rate shifts may be enough to discourage such firms. The ordinary person can understand this, perhaps, if he thinks of his reaction to being asked at the airport for an unexpected currency surcharge on the price of his carefully budgeted holiday abroad. There is also an indirect influence through the spur given to protectionist tendencies when growth slows up.
There are, of course, reasons other than currency, why international trade has not been growing as fast in recent years as it had been; but the fluctuations I have mentioned are an additional and substantial hazard to anyone thinking of buying or selling across monetary boundaries. These boundaries have, in fact, been as effective a form of protectionism as any customs barrier.
The Community cannot flourish if trade does not flourish and individual member states are affected in the same way to a greater or lesser extent. We, with imports and exports equivalent to more than 90 per cent of gross national product, are particularly vulnerable. Other things being equal, the greater the expansion in international trade, the greater the benefit to us.
Monetary instability is one of the elements which hinders a resumption of growth at a satisfactory rate. Countries whose currency is appreciating excessively find that exporting becomes difficult as profits in export industries are squeezed. Countries whose currency is depreciating find that the cost of buying essential materials abroad is rising and these suffer inflation from which domestic measures alone cannot relieve them. This acts as a brake on any stimulation of the economy, due to fear of balance of payments pressures causing further depreciation, leading to a vicious downward cycle. We in Ireland have had ample experience of this sequence. Indeed, because of the extreme openness of our economy, any transitory gains from depreciation of our pound were negated more rapidly than in larger economies, less dependent on trade. It is now generally accepted that rapid inflation is not only bad in itself, but thoroughly inimical to growth. By the same token, the relative stability of our pound, in line with sterling, last year and this year, has facilitated a reduction in the rate of inflation in this country and in the UK.
Growth is also adversely affected by the effects of currency fluctuations on investment. A person considering the erection of a factory, an office, a hotel or anything else requiring substantial capital must look with care at where he is investing. Will the currency which he is using appreciate or depreciate? This is no mere academic exercise. Success depends on the correctness of the answer. If currencies fluctuate widely, the risks of international investment are intensified and investment is, to say the least, discouraged. We, like most countries, depend on investment for the success of our economic programmes. We must, therefore, look with favour on any proposals which would lessen these disabilities.
A point of particular importance to us is that monetary instability has had serious effects on the functioning of the common agricultural policy almost since we joined the Community. It has led to the development of the system of monetary compensatory amounts which has broken the unity of the market, impeded trade, penalised our exports and, worse, created anomalies which have threatened serious adverse effects on employment here. The cost of MCAs to the Community has added to the pressure for basic changes in the CAP which, if it were ever successful, could gravely harm our interests.
On a more political note, success in the implementation of the proposed system would represent a significant step towards closer economic integration in the Community. Further steps along that road cannot but have profound implications for the political development of the Community.
We are in Europe. In 1972, the people of this country voted overwhelmingly for membership of the European Community. Although in some respects developments since then have not been as favourable as many wished, and this feeling could be reflected in a poll now, there is no denying that membership has brought immense benefits, both economically and politically: and the Community has been a stabilising force in the world, often regarded with a great deal more respect by those outside it than by member countries themselves.
We want to see this Community grow and prosper, but monetary instability as between the different member countries can pull it apart. The proposals which we are discussing now will, if they are successful, be a powerful force in the opposite direction. They can help to achieve further integration. Indeed it is axiomatic that in a monetary union, to which the proposals are leading, there can be only one monetary authority. Such an authority connotes also a degree of political authority. For this reason alone we must look with a little more than sympathy at the proposals. While safeguarding the national interest, we must play our part in any development which promises to further the cause of Europe.
There is another aspect. In what I have been saying, I have been referring to the effect here of events outside this country. These effects cannot be totally avoided. Interdependence is a fact of life, but, we must also ask ourselves the degree to which we find it acceptable that our currency should depreciate as a result of totally fortuitous events elsewhere. It is one thing if we manage our own affairs in such a way that the value of our money depreciates. We have only ourselves to blame for the consequences of our folly. It is altogether a different thing to find that the value of our money has depreciated because of events or policies in other countries which, however natural to their home environment, do not match our requirements. As a small open economy, our freedom of action in currency matters is inevitably restricted. A new monetary system will not change this fact of life but it could certainly weaken the adverse influences from which we have suffered.
It was recognised in Bremen that an essential condition for success is action to strengthen the economies of the less prosperous member states. This aspect will be covered in greater detail by the Tánaiste and the Minister for Economic Planning and Development. There are, however, some broad considerations I should mention.
In this country's case, action both by the Community and by ourselves is required. The need for Community action arises from the policy stance which the Government are compelled to adopt in the face of this country's low level of development and the employment challenge facing us. This stance has implications for our ability, without Community aid, to sustain the obligations of participation in the system.
The Irish economy is in the process of a fundamental restructuring of the sort which happened long ago in the other countries of Europe. There the proportion of the population engaged in agriculture is, on average, less than half what it is here. They have gone through the many stages of the industrialisation which we are only now engaging in on a significant scale. It could be that without the strains imposed by this restructuring we would, in fact, have no unemployment problems, instead of having one of the highest rates in the Community. For example, more people have left the land over the past 15 years than are now numbered in our unemployment registers.
Our structural problems are aggravated by the strong demographic pressures which have emerged in recent years. Even if we did not have the problems of industrialisation, we would still have to face the extraordinary difficulties—or opportunities—created for us by the fact that the proportion of young people moving into the labour force here in the next few years is likely to be about three times the proportion for the Community as a whole. In other words, as well as the problems of restructuring and of one of the highest unemployment rates in the Community we have the problem of a very high proportionate inflow of young workers to the labour market.
We are not in European terms a rich country. Our gross domestic product per head is the lowest in the Community. There are no regions here of sufficient size or wealth to enable us to dispose quickly of these problems and achieve convergence with the economies of Continental Europe. We here, as a nation, must ourselves make an immense effort. That is the basis of the programmes on which the Government are working. We must expand our economy by our own efforts and make investment here attractive and profitable. That is the reason why we are committed to a level of expenditure which creates for us possibly the highest public sector borrowing requirement in the Community. And that is why we tolerate a deficit on our current balance of payments which is also extraordinarily high by Community standards though not when measured in relation to our reserves. It is the reason why we must continue to aim for and achieve some of the highest rates of economic growth in Europe.
Participation in a European Monetary System could raise difficulties for three reasons.
First, the greater degree of economic integration within the Community could mean an accentuation of the strong tendency for the central areas to draw wealth and resources towards them. The new system if it succeeds will be a step towards economic and monetary union: and on all experience, unions of this type have meant an intensification of the pull of the central areas of the union.
Our second concern is that in the initial period of operation of the system the parity of our currency may be higher than it would otherwise be. This could impose severe strains on our competitiveness, and the necessary adjustments would take time.
Our third concern is that the balance of payments deficit on current account may have to be reduced to lower levels more rapidly than is at present envisaged, if we are to maintain generally stable parities without an excessive loss of reserves. We have made the case that in our circumstances it would be quite wrong to do this by deflation. Far from considering measures to reduce investment, every effort should be made to increase it. This would lead, over time, to a reduction in the trade deficit as an expansion of capacity led to an accelerated increase in exports and the abatement of some imports. Community aid would promote such an adjustment over the medium-term: in the short term, it would relieve difficulties in financing the public capital programme on which the necessary investment, including private investment, is heavily dependent but which is constrained by the need to reduce the public sector borrowing requirement and to avoid increased taxation. It would also cushion the effect on our reserves of the increased imports which would initially be induced by the necessary acceleration of investment.
Apart from Community aid, we are also seeking to ensure that the design of the system itself will not impart an excessively deflationary bias to the conduct of economic policy. The Tánaiste and the Minister for Economic Planning and Development will be expanding on our case on these respects.
Essentially, we require Community action to avoid a situation in which our membership of the system would lead either to an even greater flow of resources away from the peripheral regions, or to the necessity of measures to slow or reverse the economic growth we have managed to achieve in recent years. This was recognised at Bremen and as I have said specifically mentioned in the Presidency conclusions.
Our interests in Europe and in this island are such that our first preference, by a long stretch, is in seeking that all countries of the Community go into the new system. I want to stress, however, that our decision will be based on an assessment of the balance of advantage for this country. If the circumstances are right, we will be joining the system.
An important element in our assessment will concern the implications of participation in the system on relations with Northern Ireland and progress towards the objective of national unity by consent. The most favourable outcome from this viewpoint would clearly be the establishment of a durable system on a basis that would embrace both the United Kingdom and Ireland and would have a beneficial impact on both economies.
An acceleration of economic development in this part of the country would enhance the economic attractions of cross-Border economic co-operation and of eventual national unity. With both countries in the system the disadvantages for trade and business relations with Northern Ireland which could flow from a departure from the one-for-one exchange rate between the Irish pound and sterling would be avoided.
If the British Government were to decide against joining the system, our participation could give rise to such disadvantages, although they might not be so extensive as is often supposed. The Government would, in these circumstances, have to assess the implications for people's consciousness of the country as a unit and the weight of these implications relative to other elements affecting people's consciousness and attitudes towards unification.
Among these other elements would be included, of course, the effects of participation on this basis on our economic development. Deputies may be assured that, if the question arises, these considerations will receive the most careful attention.
I said earlier that our successful participation in the system requires Community action and national action. I have briefly outlined our case for Community assistance. I now want to deal with the implications for economic behaviour here in Ireland. There is no point in going along with the belief that any mechanism to safeguard a currency can of itself protect us from the effects of folly. The value of a currency is fixed by the strength and vitality of the economy on which it is based. Arrangements to safeguard parities can never succeed of themselves unless they are backed by sound policies and actions.
Even as things stand now we must govern our affairs with foresight and responsibility. If the new system comes, the need for discipline will be even greater. The Government will have to operate fiscal and monetary policies which will sustain growth, encourage employment and keep down costs. The social partners will be under an inescapable obligation to complement these efforts. In particular, it will be essential to ensure that the rate of increase in incomes does not outstrip productivity. Expectations must be rapidly adjusted to the sharply lower rate of inflation that may be expected to rule in the EMS. We all want a stop to the gallop of inflation; and certainly within the scheme the rate of price increase in the different countries of the Community must converge if the value of currencies is to remain stable in relation to each other. Failure to observe the disciplines inherent in the system will result inevitably in lower growth and less jobs.
The new system can increase investment and trade. It can reduce unemployment and inflation. But it is equally true that none of these things will happen if we diverge too widely from the standard of practices which have ensured the success of the major continental economies. In particular, we cannot maintain and increase employment if we pay ourselves more than our production warrants and allow our costs to get out of line with those of other countries within the system. That is why the forthcoming negotiations on wages and the economic and financial policies of the next year will be crucial. If the new system works, investment in this country can flourish at a rate never before experienced. Inflation can be reduced and employment, on which in our circumstances the success or failure of all policies must be judged, can grow so that no one is ever of his own volition without suitable work in his own country.
