Dáil Éireann debate -
Tuesday, 22 Mar 1983

Vol. 341 No. 3

Private Members' Business . - EMS Realignment: Statements .

Mr. O'Kennedy

: I welcome this opportunity to seek clarification of the formal statement of the Minister for the reasons for the devaluation of the Irish pound and particularly the effects that will have on the size of our foreign debt, on living standards generally, on the expected rate of inflation which will be aggravated seriously by this decision and, perhaps most important of all, on the future stability of our currency and the general stability of our economy.

There are a number of basic reasons clarification is necessary. Within the very recent past the Minister — I just want to put it on the record, and I am quoting here from an article by John Cooney in The Irish Times of 18 December 1982 — after a first meeting of Finance Ministers when, apparently, already this matter was the subject of rumours at a press conference after that meeting clearly indicated that he was opposed to devaluation. This article commenced by saying:

The sizeable drop in Ireland's inflation rate in recent months was used in Brussels yesterday by the Minister for Finance, Mr. Dukes, as an argument against a devaluation of the pound within the European Monetary System.

The sizeable drop in Ireland's inflation rate over the previous 12 months was the main reason the Minister gave at that time for his opposition to devaluation. He went on to say that he pledged himself to bringing inflation down even further. Finally, according to this report:

..... he poured cold water over rumours of an imminent realignment of EMS currencies.

At that press conference the Minister instanced specifically the drop in the inflation rate from 23.3 per cent the previous year to 12.3 per cent as being a very good reason — with which I would agree — for avoiding any devaluation at that time.

Soon afterwards his predecessor, Deputy John Bruton, said in a radio interview in January that this would only fuel inflation. In fact he said that the benefit from lowering the pound's value would be temporary only — this was in an RTE interview on 12 January — and would set in train a wave of inflation. I suppose both of them could be consistent in making statements of that sort because, in their Joint Programme for Government in June 1981, they said that devaluation of the currency would mean more inflation. Apparently at least there was agreement then — I presume agreement that would be confirmed by them now — that to say the least of it it would have a significant inflationary impact, as has been the experience of any country that has devalued its currency.

Other reasons have been adduced recently, more particularly by the Taoiseach in his extraordinary comments in Dublin while negotiations were going on in Brussels. Basically the Taoiseach said that he wanted to restore the relationship that existed with sterling generally during 1981 and 1982, that this was necessary in view of the fact that we had become less competitive as a consequence of the appreciation of our currency against sterling in recent months. This was significant for two reasons. First of all, it is quite clear that this devaluation would go no way to restoring that relationship that had existed over that period. In fact, today our pound is being quoted at over 89p against sterling whereas during the period in question it was of the order of 80 pence to 81 pence. If that was the reason being adduced by the Taoiseach, self-evidently it was a specious one. In my view it was specious for a different reason because, apart from the fact that the facts do not bear it out, if we are concerned about the relationship of our currency with sterling then a realignment within the EMS in which Britain does not participate at least as an active as distinct from an associate member — and they have an extraordinary kind of associate membership — cannot, of course affect the relationship of our currency with sterling. For that reason I have said in public statements since this news was being mooted and announced prematurely by the Taoiseach last Sunday that there are, of course, grounds for concern about the relationship between our currency and sterling. The fluctuations, having regard to the level of trade existing between us, can have a distorting effect on that trade and our economy generally. Mind you, this is something now being recognised not just here but even in Britain, and not just vis-à-vis Ireland but in Britain's role trying to bring about currency stability in Europe generally. Here I might quote the last paragraph of the leader article in the Times this morning which says:

Britain's attitude is discouraging. Alternately, proponents of sound money or full employment policies simply see active membership of the EMS as a device to promote or obstruct their domestic policies. The notion that currency stability might itself be a more vital aid to the economy is scarcely entertained.

It is quite clear that this significant fact is of considerably more concern to us in view of the Taoiseach's statement, and the Minister's also, than the EMS realignment in which we took part recently. These trends were clearly there in December when the Minister made his statement and have been there all the time. Undoubtedly until such time as we can get full participation of Britain in the EMS then, with Britain floating outside the system, the Minister and everybody else knows there is no way in which we can guarantee the impact of that fluctuation on our currency in so far as it is affected by our trade with Britain. The by-election in Darlington this week may have an impact one way or the other; we know that as a political reality. A general election in Britain this year may have an impact one way or the other; we know that also as a political reality. Apparently the Minister forgot in December that a German election could have an impact, as it in fact did have. It is political developments of that kind against which one must guard.

I just want to say for the record here that that being so, this Government, in the light of these rumours and perhaps speculation which was well based, were tardy to say the least in not pursuing this matter, particularly in view of the fact that they knew then that the British Government would be represented — as they always have been — at the Finance Ministers' meeting yesterday.

The Minister in his Budget Statement — and we might just look at it in the terms of the targets the Minister has set for himself — set certain priorities. One of the priorities was to reduce the budget deficit. In any event that target had been set beforehand. It is quite clear that the effect of this devaluation will be to increase that deficit by at least £50 million as an immediate consequence of the increased interest we shall have to bear on foreign debt.

The Minister said in his Budget Statement — I just want to raise this point at this stage because we may see the chickens come home to roost later — that if there was any question of increased pressure on the Exchequer because of public service pay agreements which were not quantified, the Minister would come back to the House with a supplementary budget.

Mr. Dukes

: No. It is in the budget speech but, apparently, the Deputy did not read it.

Mr. O'Kennedy

: The Minister gave a clear indication that if necessary he would come back to get the House to consider further taxation measures.

Mr. Dukes

: No.

Mr. O'Kennedy

: I will check the record later.

Mr. Dukes

: I will read it for the Deputy later.

Mr. O'Kennedy

: I want an assurance from the Minister that if he finds our deficit is to grow by £40 million or £45 million we will not find any such extra taxation provisions being proposed to maintain the Exchequer provisions as outlined in the budget. The Minister also told us that he was determined to reduce our foreign debt and that was a considerable element in his budget statement. With the alignments that took place yesterday, and Ireland being the only country that has devalued against all other countries in the EMS there were effective devaluations of about 5.3 per cent against the US dollar, 9 per cent against the Swiss franc, 4.1 per cent against sterling and 4.9 per cent against the Japanese yen. As most of our borrowing, about 93 per cent, is in hard currency from the US, Japan, the Netherlands and other countries, excluding sterling and some other small loans we raised elsewhere, the effect of this devaluation will be an increase on our borrowing of the order of about £366 million to £400 million. On that basis it seems that the second of the Minister's priorities in his budget has been undermined directly by this action.

The Minister, in the course of his budget speech, addressed the country at large about the need for restraint to ensure our competitiveness abroad. Devaluation may benefit us in the short term but in the final analysis our competitiveness will suffer a severe blow because of the extra inflation that will follow from the Minister's action. The Minister asked workers, and those concerned, to show restraint so as to ensure that we trade profitably and effectively with our partners. Having regard to the fact that the inflation trend in the countries we trade with mostly has been, fortunately for them, decreasing at a regular pattern of decrease while since the Minister took over it has been going the other way here, I do not think that will hold out much for us in terms of competitiveness. Our workers, apart from the budget provisions, will have to face an increase in the cost of living of about 2 per cent and for that reason the Minister should consider the consistency of his words and actions, or the lack of it. We must also consider the effect this will have on a community that should expect something from the Minister, those in receipt of social welfare payments. Those payments were already below what was required for the year and will be at a norm of about 7 to 9 per cent from June-July to April 1984 with inflation running much higher. We have a fundamental responsibility for those people and this devaluation will hit them. It will also affect those who look to Government to bring about an order in our society that we could better respect and follow.

Over a period business people were encouraged to borrow with impunity when we joined the EMS, the EMS having the basic purpose of introducing stability in our system. What is to be said now of the blow to their confidence in borrowing? In the short term the advantage may be of considerable benefit but the fact that we will be continuing to buy our oil in dollars will mean that the benefit of falling oil prices — the Government have a significant advantage in that regard — will now be taken from the economy. We must wait to see if the Minister proposes any corrective action to ensure that the clawback to the Exchequer will be maintained at the level he envisaged when he prepared his budget. I hope we do not see any trend which will mean that Exchequer protection is the Minister's only concern in this.

The need to strengthen the EMS has been obvious. One reason was to include Britain and the second was to introduce the ECU as a parallel currency, something that has been under consideration for some time. Until that is done the EMS will not be an effective system of monetary stability. I know that that matter might not have been under consideration on the last day but I would press the Minister to ensure, in the interest of the stability with which we are concerned, that it would now be first on the agenda so that we do not have fluctuations of this type. I should like to ask the Minister, if devaluation was such a panacea, even in the short term, how it was that the French, who seem to have achieved what they set out to do — perhaps they forced positions on the Minister and others — and knowing from their experience what devaluation can give rise to in an economy, resisted to the end pressures to devalue further as between themselves and the Germans with whom they have a strong trading relationship. All the general arguments are against the Minister and I hope that the consequences of the decision we will have to live with, unfortunately, will not be as damaging as I anticipate they will be.

Minister for Finance (Mr. Dukes)

: I am disappointed, if the House will pardon the use of the word, that Deputy O'Kennedy's remarks on this important topic have been couched so much in terms of reproach, secondhand newspaper comments, allegations and suppositions as to what went on during the meeting over the weekend and that they have had so little bearing on what the real effects, causes and issues are in this case. I will get around to that in a moment. At first I should like to examine what was done over the weekend and clarify for Deputy O'Kennedy, and on a more general basis, what the objectives were and to what extent we are likely to be able to achieve those objectives.

The realignment of exchange rates in the European Monetary System which was concluded on yesterday had been expected for some time and, in anticipation of it, there was a massive build-up of pressures in European foreign exchange markets in recent weeks. This gave rise to the adoption by a number of countries of measures to protect their currencies. As Deputy O'Kennedy is aware, the pressures in the Dublin markets were an important factor in the increase in interest rates announced last week. A realignment of exchange rates in the EMS was essential, therefore, to remove the uncertainties and to ease the pressures in the markets. This view was widely shared among our EMS partners and the meeting was called by my Federal German colleague in recognition of this fact.

The discussions over the weekend were more protracted than had been expected, mainly because of the difficulty of settling the change in exchange rates between the Deutschemark and French franc. For this reason it was necessary effectively to close foreign exchange markets on Monday morning because the meeting had not concluded at that stage. The markets reopened, however, early in the afternoon following the agreement reached in Brussels.

The agreed changes in the central rates of the EMS currencies are as follows:

German mark	+ 5.5 per cent
Dutch guilder	+ 3.5 per cent
Danish krone	+ 2.5 per cent
Belgian franc	+ 1.5 per cent
Luxembourg franc	+ 1.5 per cent
French franc	- 2.5 per cent
Italian lira	- 2.5 per cent
Irish pound	-3.5 per cent

The Government welcomed the opportunity provided by the realignment to make an adjustment in the exchange rate of the Irish pound. An adjustment had become desirable because of the rapid rise since late 1982, for reasons outside of our control, in the overall value of our currency. The appreciation of the Irish pound was not justified by our economic circumstances but arose, rather, from the sharp fall in sterling on the foreign exchange markets.

Our objective going into this realignment was to secure a correction of the unwarranted appreciation of the exchange rate. This was agreed without difficulty with our EMS partners. It has resulted, following the realignment, in an immediate fall of 4 per cent in the Irish pound's exchange rate. The evolution of the overall value of our currency will, of course, depend on fluctuations within the EMS band and on movements of sterling and the dollar vis-à-vis the EMS currencies.

I want to underline the fact that the downward adjustment in the central rates of the Irish pound against our EMS partner currencies is a technical one designed, as I have already explained, to correct the unsought appreciation that had occurred.

In the Government's view it was desirable to avail of the opportunity to get the adjustment we have secured, so as to limit the reduction in competitiveness as a result of exchange rate changes. Not to have done so would have accentuated the competitiveness problems of Irish goods on the home and export markets, with serious consequences for employment. I am very surprised that Deputy O'Kennedy made not a single reference to this factor in the course of his remarks.

Mr. O'Kennedy

: I was following the precedent in the Minister's budget statement when he did not once mention unemployment.

Mr. Dukes

: I can see that Deputy O'Kennedy wants to be provocative. I will read him one passage from the budget speech to remind him of a point but I have a feeling I could read it all again because he seems to have forgotten most of it.

I should stress that the pulling back of the exchange rate to a more realistic level merely alleviates the deterioration in the competitive position of our producers brought about by exchange rate changes outside our control. It does not solve the fundamental problem of declining competitiveness.

As I have already indicated, the Government do not see devaluation as providing any solution to that problem. A lasting improvement in competitiveness can be achieved only through wage moderation as envisaged by the Government, combined with unrelenting attention to all the other cost and non-cost factors — management efficiency, product design, quality, delivery performance and so on — that are crucial to the ability of industry to compete and survive. The exchange rate adjustment that we have now made provides a new opportunity for all concerned to focus more closely on these fundamental determinants of competitiveness with which we must come to grips if we are to stabilise, let alone reduce, the level of unemployment.

The prospective inflation rate for 1983 as a whole should be no higher following the realignment than appeared likely at the beginning of the year. Because the overall exchange rate had been appreciating steadily since the start of the year our inflation prospects were improving more quickly than earlier expected but, as I mentioned previously, this was at the expense of a deterioration in our competitive position. For the year as a whole a rise in consumer prices of the order of 12 per cent is still likely on the basis of present exchange rates. The beneficial effects on our inflation of sterling's depreciation since late last year will continue to work their way through the economy for some months ahead. In addition, the beneficial impact of the change in our effective exchange rate on our competitive capacity will begin immediately. On the other hand, the effect on our inflation of increases in import prices will not begin to take effect until later in the year, against a background of a deceleration in the underlying rate of inflation.

Taking all these factors together, the likely effect of the adjustment on our inflation rate for the year as a whole is likely to be very small, if noticeable at all, in direct contradiction of the Deputy's claimed figure of something like 2 per cent, for which he has not given any basis or explanation as to how he would calculate it.

Mr. O'Kennedy

: Just as the Minister is not giving any basis for what he is now saying.

Mr. Dukes

: I have just said what the factors are. If the Deputy wishes to have a longer discussion this can take place on another occasion but it will be on the basis of an analysis of the effects of exchange rate changes on inflation and prices generally, not on the basis of figures plucked out of the air.

Mr. O'Kennedy

: If oil prices fall the Minister will take credit for that.

Mr. Dukes

: We will get to the oil prices in a moment. The Deputy should have a little patience. I note that during the past few weeks the Deputy has become very fond of interrupting.

Mr. O'Kennedy

: If the Minister invites interruptions he will get them.

Mr. Dukes

: The fall of about 4 per cent in the market value of the Irish pound that has taken place following the realignment will increase debt service costs for public sector borrowing abroad. In the case of the Exchequer the realignment will add approximately £17 million, not £50 million, to the cost of interest payments on foreign debt in the current year but the increase will be offset in part at least if the interest-rate reduction announced last week in Germany is followed in other centres. The Exchequer foreign debt expressed in Irish pound terms, will increase by about 5 per cent. The Government are determined that any increase in debt servicing costs this year will not be allowed to affect the overall budgetary arithmetic and it will closely monitor the trends in the public finances as a whole with a view to taking any necessary action to achieve the budget targets.

As a result of the exchange rate changes, there are monetary implications for the Common Agricultural Policy. As the Dáil is aware, these matters were not dealt with over the weekend but will be on the agenda for the next meeting of the EEC Council of Agricultural Ministers. The effects in that area are potentially positive in terms of returns to agriculture and the food processing industry.

It is important to keep the adjustment that we have made in perspective. Periodic realignments have been a feature of the EMS. We are participants in the exchange rate system and we must decide in each realignment what stance is in our best interests. The stance adopted on this occasion is basically little different from the one followed in previous similar realignments. In each previous realignment more distance was put between our central rate and that of the DM. On this occasion due to the depreciation in sterling since the latter part of last year there has been a new factor outside the terms of the EMS but one which was capable of influence by our action within the realignment. We have moved to deal with that in a positive manner which will be of benefit to our economy. To have failed to do so would have been to put our productive and exporting sectors in a progressively more difficult situation.

Had we followed a middle course in this realignment as on previous occasions, the central rate of the Deutschemark would have been revalued by 5½ per cent against the Irish pound. The only difference on this occasion from the middle course is that, in an effort to deal with the distortion caused by the weakening of sterling, we have taken an initiative to make some downward adjustment in our own bilateral central rates against the other EMS currencies. Given the importance of sterling in our trade we can hardly ignore its movements. This is the very point made by the Deputy but he seemed to be determined to ignore it in the rest of his statements.

It would, of course, be much more satisfactory from our point of view if sterling participated in the exchange rate system but this is essentially a matter for the UK. Member countries, including Ireland, have made clear that they would welcome participation by the UK. Deputy O'Kennedy knows as well as I do that the matter is not as simple as that.

I would hope that the realignment would help to stabilise both the foreign exchange markets and the money markets. This in turn should facilitate international efforts to lower interest rates. Our own Central Bank have already stated publicly that they expect to see a lower trend in interest rates this year and the recent increase in Associated Bank interest rates was, as I have said, an unavoidable reaction to exchange rate pressures. The Central Bank will closely monitor the markets in order to exploit any opportunity that emerges to bring down interest rates.

I should like to take up a couple of points made by Deputy O'Kennedy. He ventured the opinion that a fall in oil prices will be taken back from this economy. In simple arithmetic, the Deputy must know, if he reflects for a moment, that that is not necessarily the case. A reduction from $35 a barrel to $29 a barrel in my arithmetic is a reduction of about 16 per cent in prices.

Mr. O'Kennedy

: I did not say that.

Mr. Dukes

: If we have a charge of 4 per cent, as we have so far, in our effective rate against the dollar, it still leaves a large margin for the effect of reductions in dollar denominated prices to work their way back into our economy. I say "into our economy" because I have made no secret of our approach to oil prices.

I do not know what the Deputy meant when he said we should take care to guard against political developments. There is no exchange rate system in the world, there never has been any exchange rate system that can guard against political developments. I will make the point that the very fact that we use these realignments in order to bring about the kind of results I have been making represents a proper approach to guarding not against political developments but to steer the kind of course which we can most profitably steer through the very difficult circumstances of world money and exchange markets today.

I hope that will clarify the situation for the Deputy. I hope, in the interests of all of us who are most directly concerned with making this work, those who are now producing commodities, that the Deputy will actually address himself to the issues rather than make the kind of statements he has concentrated on this evening.