With the permission of the Ceann Comhairle, I will make a statement to the House on the outcome of the meeting of the European Council in Brussels. The meeting has not as yet led, as it normally does, to comprehensive conclusions set out by the President of the Council but I have laid before both Houses the two documents which have been made public, the resolution on the European Monetary System and the terms of reference for the "Committee of Wise Men". The discussions on the EMS and on the action necessary to strengthen the economies of the less prosperous countries took up almost the full two days of discussion in the formal meeting and very little time remained to consider other matters with which we were to deal. However, before dealing with the EMS, I will refer briefly to the discussions that did take place on other topics.
We discussed the proposal made by the French President that "Three Wise Men" should be commissioned to report on certain problems. We agreed to call upon a number of eminent persons with special knowledge of European affairs to give thought to such affairs. The committee thus formed is comprised of Mr. Barend Biesheuvel, formerly Prime Minister of the Netherlands, whose period of office included the occasion of the Paris Summit of 1972; Mr. Edmund Dell who, up to the time of his recent resignation was trade secretary in the British Government, and M. Robert Marjolin, a former Vice-President of the European Commission, who earlier in his career was Secretary-General of the OEEC, the forerunner of the present OECD, and who has already headed a group which produced a valuable report on a possible path towards economic and monetary union.
The mandate of the committee is:
To consider the adjustments to the machinery and procedures of the Institutions which are required for the proper operation of the Communities on the basis of and in compliance with the Treaties, including their institutional arrangements, and for progress towards European Union. It emphasises the interest it attaches to having available specific proposals in this connection which may be implemented swiftly and which take into account experience to date and the prospective enlargement to twelve. The European council requests the Committee to report back on its conclusions in October 1979.
Since our accession, this country has consistently advocated the improvement of decision-making in the Community and has more recently stressed the need to bring about improvements in advance of the further enlargement of the Community. We have also, of course, been concerned to maintain the balance of the Treaties, to support the institutions established under them and to maintain the equality of status of all member states of the Community. We could not accept a Community with two tiers in its institutional structure. I believe that the mandate which has been agreed contains satisfactory safeguards in these respects.
We also considered the remuneration of members of the directly elected European Parliament and concluded that members elected next June should be paid the same salaries as those of members of the Parliament of the country they represent; that their salaries should be subject to national taxation in their own country; and that they should receive satisfactory allowances for such expenses as travelling, subsistence and support staff. It will be for each member state, in relation to members holding the dual mandate, to decide whether they may retain both salaries.
There was some discussion of the common agricultural policy of the Community, arising largely from discussion on transfers of resources, in the EMS context, although there was a separate paper from the Commission arising from an unofficial or informal mandate for reflection given to it by the Bremen meeting of the European Council. The paper reiterated that the CAP was a cornerstone of the Community, reconfirmed the principles on which it is based and outlined its achievements over the years. It saw the CAP facing three main areas of difficulty at present—surpluses in some markets, regional income disparities within agriculture and monetary upheavals, and noted that a major part of agriculture expenditure results from the disposal of surpluses and the application of monetary compensatory amounts.
It put forward certain guidelines for future action which it asked the European Council to endorse. In fact, for lack of time, the meeting did not specifically discuss these guidelines and they were not endorsed: Indeed, no conclusions were reached on the Common Agriculture Policy. I understand that the President of the Commission subsequently expressed the view that on the basis of the discussion that had occurred, he felt the Commission was free to put forward proposals based on the suggested guidelines in its proposals for the annual agricultural price-fixing package. If the Commission in fact follows this course, the proposals will have to be considered by the Agricultural Council where the Minister for Agriculture can be relied upon to point out the deficiencies in the Commission's analysis and to ensure that this country's interests are served by whatever decisions are eventually taken. The Commission paper will be fully considered at the next meeting of the European Council.
There was also a cursory discussion, at the very end of a protracted meeting, of fisheries policy in the light of attitudes at, and the outcome of, the last Fisheries Council. However, time did not permit of any progress and the subject goes back to the Fisheries Council for further attempts to resolve the differences that prevent agreed solutions. However, the European Council expressed the wish that there should be an early resolution of the matter.
The most important proposal discussed at the meeting was that for the creation in the Community of a zone of monetary stability by means of a European Monetary System. I have described the main outlines of this proposal in this House before. It may, however, be as well to outline again, now, the main features of the scheme.
The proposals envisage a system modelled closely on the present "Snake" arrangement but with an additional role for the European Currency Unit which is now referred to as ECU. The ECU will be a basket consisting, like the present European unit of account, of a specified amount of each of the Community currencies and the weights of the currencies in the basket will be subject to review. Each currency will have a central or starting point expressed in terms of the ECU. This central currency rate will be used to get an exchange rate against each other currency in the system.
Participating central banks will intervene in the foreign exchange markets in order to maintain the currencies within an agreed margin of fluctuation. The normal margin will be 2¼ per cent as in the present "Snake". However, during a transitional period, there will be an option of a wider margin of up to 6 per cent for currencies not in the "Snake".
When two currencies reach the fluctuation limit against each other, an obligation to intervene will apply to the two central banks concerned. Intervention will give rise to debit and credit balances which will have to be settled in due course by transfers of reserve assets between the central banks.
The system will be under-pinned by expanded credit facilities. The proposed new European Monetary Fund will not be set up for two years but, in the meantime, the expanded credit will be channelled through the existing Community short-term and medium-term schemes. It has been agreed that a total amount of 25 billion ECU, or £17 billion, should be available from the start of the new system.
Each central bank will deposit 20 per cent of its gold and 20 per cent of its dollar reserves. In return it will receive a supply of ECUs which may be used in settlements between central banks arising out of intervention operations. The deposits will be managed initially by the existing European Monetary Co-operation Fund. Other European countries with particularly close economic and financial ties with the Community may participate in the EMS intervention arrangements, but these would not have access to the Community credit facilities.
The aim of the system is to create within Europe a zone of monetary stability of the sort that exists in few countries in the world today. We saw great advantages in the proposal and have taken an active part in formulating the mechanisms and procedures through which it would work. Our attitude has been determined largely by the view that the scheme would advance the interests of the European Community and aid in its integration and cohesiveness. These consequences would flow, in a smoothly working system, from the practice among the Nine of working more closely together on monetary matters and from the benefits to trade and transnational investment which would follow from the elimination of the disruptions caused by frequent and illogical changes in currency parities brought about largely by speculation. There would be the further advantage, for us, that adherence to the system, and its disciplines, could reduce our rates of inflation to a level more closely approximating to that of the most successful economies in Europe.
However, we estimated that immediate and unconditional adherence to the system could cause problems for a number of reasons. The first is that within the system it would not be unlikely that, over time, the value of the Irish currency would be higher than it would have been outside the system. This would happen because the value would be fixed in relation to currencies whose values are likely to rise. With a sensible incomes policy and increases in productivity of which I know this nation is capable, we could offset this obstacle, given time.
The second problem arises from the comparatively under-developed state of the Irish economy and certain difficulties peculiar to it. We have the lowest gross domestic product per head in the European Community. The proportion of the population engaged in agriculture is over twice the Community average. With more than 50 per cent of the population under 25 years of age, we have one of the youngest populations in Europe. This has advantages and disadvantages.
Basically, in the present case, it means that the inflow of young persons to the labour force is approximately three times the average in the European Community, as a whole. This problem is aggravated by the fact that the level of unemployment here is among the highest in the Community. The inflow of young people can, therefore, accentuate the already serious difficulties in the labour market.
The third problem is that a fully developed monetary union—towards which the new system is tending—would increase the gravitational pull on investment and labour of the central areas of the Community, and thus make more serious the difficulties which distance from the centre creates for trade and industry here. This particular difficulty is increased greatly by the comparatively underdeveloped state of our social and productive infrastructure.
These difficulties would not be a decisive obstacle to our adherence to the system. We have the capacity as a nation to increase our competitiveness and productivity. We have a favourable attitude to investment and its benefits. Indeed, we have one of the highest investment ratios in the Community. By exercising foresight and restraint, we can provide jobs for our young people who are our greatest asset. And we can improve the efficiency of our roads, communications and other infrastructural facilities.
During my visits last month to the French President, the British Prime Minister and the German Chancellor I explained both our positive attitude to the monetary proposals and the difficulties which we anticipated in the transitional period should we decide to join the system. I said that in our view the Irish people were politically and psychologically willing to join with their partners in Europe in the creation of a zone of monetary stability but that the difficulties I have mentioned would preclude their joining unless there was a significant transfer of resources. The size of this transfer may, obviously, be the subject of debate and many different views can be taken.
I notice, for example, that the Leader of the main Opposition party in his contribution to the debate on this subject on 19 October 1978, put his price—for full monetary union—at five times the level the Government had been seeking. The Labour Party Leader said in this House on 30 November that we should accept what we were asking only if our European partners were to give it to us without conditions as to how it was to be spent, as between capital or current, or in any other way. We were simply to be given the money—and that was that.
I should like the House to consider the implications of these attitudes. We are asking the countries of the Community, who, powerful as they are, have, themselves, substantial problems of unemployment and economic restructuring, to forego the use of resources which they raise from taxation in their own countries, and to pay over these resources to us. In common sense, our case for this transfer must be well founded and responsible—as I believe it is. It should not be embroidered with fantasies or made look ridiculous by the addition of impossible conditions.
During my discussions with the French, British and German leaders I received a great deal of understanding and support. During the meeting in Brussels, each of the three leaders was at great pains again to emphasise his support and understanding of the Irish case. However, in the mechanisms and procedures of the Community that case became inseparably linked with other arguments and views, the net effect of which we are now discussing.
The debate in Brussels continued over the greater part of the two days and nights. It was concerned essentially with (1), the technical and monetary aspects of the new system; and (2), the measures necessary to aid the less prosperous countries. Almost the entire first day was occupied by the former, and the measures in respect of the less prosperous states were not touched on until late on the second day.
On both of these, a major issue was the extent to which the United Kingdom wished to participate in the new system. Essentially, they wished to be part of the management but not to take part in the exchange rate mechanism. The conclusions as they emerged will enable the United Kingdom to join the system if they wish.
On the monetary aspects, the first difficulty concerned the degree of obligation on a country to intervene in the money markets when the exchange rate of its currency is moving out of line with its central rate. The British wished for compulsory intervention. The Germans took the view that this could not be. In the event, the decision was that when a currency crossed its threshold of divergence there would be a presumption that the authorities concerned would correct this situation. If measures are not taken, on account of special circumstances, the reasons shall be given to the other authorities.
A second difficulty concerned the division of the reserve fund of 25 billion ECUs as between medium and short term credit for currency support. This was resolved by the division of the fund into 14 billion ECUs for short-term monetary support and 11 billion ECUs for medium-term support.
There are many other highly technical aspects of the system before the meeting. Important as these are —indeed, they are vital to the proper functioning of the system—I will not detain the House with a description of them here. The conclusions which emerged are adequately described in the document headed "Resolution of the European Council of 5th December, 1978, on the establishment of the European Monetary System (EMS) and Related Matters", which I have included among the papers I am laying before the House.
The major issue in so far as we were concerned was the question of resource transfers which is dealt with in Part B of that document. Our position, for the reasons I have outlined, was that to participate successfully in the scheme and to counteract its adverse effect in a transitional period, we would require a resource transfer of approximately £130 million a year over five years on the assumption that the United Kingdom was within the system.
This is a realistic figure. It results from as objective an appraisal as we could make of the effects of the system. I think that it is fair to say that during my discussions with the other leaders our case was, in the main, accepted, with some reservations as to the size and form of the resource transfers involved. This acceptance was confirmed and, indeed, reiterated many times during the Brussels meeting. However, because of the relationship with what would happen if the Irish case were met and something similar done for other countries, the total consequences of support to the degree that we were seeking went beyond what members of the Council felt they could recommend. In the event, the Council agreed that the European Investment Bank might make available for a period of five years loans of approximately £670 million a year to the less prosperous member states participating in the new system. These loans would be subsidised to the extent of 3 per cent a year, subject to a limitation of £670 million approximately on the total amount involved over the five-year period.
Any less prosperous member country participating in the mechanisms would have the right of access to these facilities. Member states not participating effectively and fully will not contribute to the financing of the scheme. The United Kingdom will obviously be in that position. Of the totals I have mentioned, Italy would be entitled to a maximum of two-thirds and Ireland, a maximum of one-third.
The details of the scheme are not included in the resolution. However, they would provide for a 15-year loan term, with a moratorium on principal repayments of three or five years. The present value of a 3 per cent interest subsidy, with a three-year moratorium on capital repayments is equivalent to approximately 20 per cent of the value of the loan—discounting at 9 per cent.
Under the scheme, therefore, Ireland could draw on loans of up to £225 million a year, approximately, from the European Investment Bank. If we did draw on these loans, they would be subsidised to the extent of approximately £45 million and this subsidy could be paid as a lump sum grant in the first year of the loan term. Thus, if Ireland availed of the offer to the full and borrowed up to the limit I have mentioned, it would benefit from a resource transfer of approximately £45 million a year—which is the grant equivalent of a loan of £225 million. This figure of £45 million a year for a period of five years corresponds to the estimate of £130 million a year which I mentioned as representing our estimate of the size of the resource transfer necessary to offset our entry into the scheme in the transitional years.
Because of the disparity, I told the council that I could not at that stage indicate to them that I would recommend joining the scheme but that I would consider the matter further in consultation with my Government, particularly to see whether there could be any further basis on which I could contemplate a positive response.
I said I would convey our decision in a short time. This process of consultation is continuing.