Dáil Éireann debate -
Friday, 7 Dec 1990

Vol. 403 No. 7

Exchange Control (Continuance) Bill, 1990: Second and Subsequent Stages.

Minister for Finance (Mr. A. Reynolds)

I move: "That the Bill be now read a Second Time."

The Exchange Control Act, 1954, as amended by the 1978 Act, is the legislative basis for Irish exchange controls. This Bill proposes to continue the legislation in operation for a further period of two years from 1 January 1991.

Exchange controls were a wartime measure first introduced in Ireland, under the Emergency Powers Act, 1939. When it was decided to give the controls a statutory basis of their own, the 1954 Exchange Control Act was originally given a life of four years, in the hope that the controls could eventually be dispensed with. Up to now, it has been found necessary to renew the Act at four yearly intervals, most recently in 1986.

During the war period, and in the years that followed, our exchange controls were a reflection of those which operated throughout the sterling area and they were operated on foot of our responsibilities as members of that area. Restrictions applied only to transactions with countries outside the system and there was complete freedom of capital movements between Ireland and the UK.

A new situation developed when Ireland decided to participate fully in the European Monetary System and the UK opted not to. For the first time, we were faced with the risk of exchange rate volatility vis-à-vis sterling and it was necessary to take steps to counter any resulting speculative and destabilising flows of funds. Thus, in 1978, an amending Act was introduced to extend the coverage of our exchange control system to the UK. In the years since then, the primary objectives of our exchange controls have been twofold — first, to strengthen the balance of payments and external reserves and increase the capital available for productive purposes within the State and second, to reduce disruptive currency flows at times of exchange rate uncertainty.

The 1954 legislation prohibited a wide range of payments and other financial transactions with non-residents. It did, however, vest discretionary power in the Minister for Finance, so that permissions could be given by statutory instrument, or administrative decision, for individual transactions, or ranges of transactions. Responsibility for administering the controls was delegated to the Central Bank of Ireland. In practice, even in the earlier days, general permissions were given covering a wide range of transactions. Payments relating to trade, commercial and other current transactions could be made freely and were merely supervised so as to ensure that unauthorised capital transfers did not take place in the guise of current payments. General permissions were also given for many capital operations. For example, inflows of capital from abroad for direct or portfolio investment were strongly encouraged and direct investment and investment in real estate by Irish residents within the European Community were freely allowed.

Nevertheless, at the time of the last renewal of the legislation in 1986, a fairly extensive range of controls still restricted the freedom of Irish residents to transfer funds abroad. The situation has changed dramatically since then. The remarkable recovery in the economy in 1987 and the proposals for a single EC market encouraged us to take a fresh look at our exchange controls. This review led to my predecessor's announcement, in October 1987, of the Government's intention to dismantle exchange controls on a phased basis.

This move was given impetus by developments in the European Community, where the liberalisation of capital movements had become a major focus of attention in the context of the development of the internal market and of the EMS. Some eight months after the Government's decision to phase out Irish exchange controls, the Council of Ministers adopted a new Directive, ordaining full freedom of capital movements within the Community. Under this Directive, eight member states were required to liberalise fully by June 1990. All did so — in advance of this deadline. Ireland, Greece, Spain and Portugal were permitted to take a further period — to the end of 1992 — to complete the process of dismantling their controls. Greece and Portugal also have the possibility of an additional extension of up to three years if their economic situation at the time should so warrant.

The process of relaxing Ireland's exchange controls began in January 1988, when resident investors were given certain limited freedoms to acquire foreign securities. In addition, the rules governing the forward cover market were eased and the scope of the market was expanded to allow access by service industries. The first steps towards easing the documentary requirements associated with exchange control were also taken.

At the beginning of 1989, in a most important phase of the liberalisation programme, all the remaining restrictions on residents' purchases of medium and long term foreign securities were removed. A third phase was implemented in April of this year. This reduced further the administrative requirements which had previously imposed a significant burden on the business and financial communities. It permitted greater access to some of the innovative instruments — like swaps, futures and options — which have become a major feature of international finance. It also allowed Irish financial institutions to freely accept Irish pound deposits from non-residents, as long as these deposits were for fixed terms of at least three months duration.

As you can see, very significant progress has been made since the Government took the initial decision to phase out exchange controls. I am happy to be able to say that, against a favourable economic policy background, the effect of the measures taken has been decidedly positive. There were substantial outflows, when the controls on foreign security investment were relaxed, as institutional investors moved to restructure their portfolios. Despite these outflows, our external reserves are now well above the end 1987 level and our interest rate differential with Germany has been reduced by two-thirds.

Such has been the reduction in the scope of our exchange controls over the last three years that the only controls that we now maintain vis-à-vis other EC countries are those relating to short term capital movements. For residents, these mainly cover the operation of foreign currency accounts, for purposes other than trade, and the use of Irish pounds for the purchase of short term foreign securities. In transactions with non-EC countries, certain limits also continue to apply to residents who wish to make a direct investment, purchase personal property, or make personal gifts or loans. In the case if non-residents, short term deposits in Irish pounds and Irish pound financial loans to non-residents have yet to be fully liberalised.

All these remaining controls will be phased out by the end of 1992 at the latest. I propose to make further substantial progress in dismantling them from the beginning of next year and the following is a brief outline of the principal measures that will be included in this next phase. The details of the changes are in a press announcement which will be issued later today.

The most important remaining control restricts the operation by residents of foreign currency accounts, whether located in Ireland or abroad, and of Irish pound accounts abroad. The removal of this restriction will undoubtedly create additional potential — but I would emphasise that it is only potential — for short term speculation against the Irish pound. In view of this, it would be useful to gain some experience in this area, before fully dismantling the controls. I am, therefore, proposing a modest relaxation in the short term, which will permit resident individuals to operate personal fixedterm foreign currency accounts with financial institutions in the State. The operation of these accounts will be subject to a number of conditions, including a minimum period of investment of three months.

A further consideration is that, under present legislation, this relaxation would provide scope for tax evasion, in relation to the deposit interest retention tax. To prevent a loss of tax revenue from individuals moving funds into such accounts, I propose, in the 1991 Finance Bill, to extend DIRT to cover interest from these new personal foreign currency accounts held by Irish residents. The implementation of this measure will, therefore, have to await the enactment of next year's Finance Bill. I must stress, of course, that this move involves no change as regards approved foreign currency accounts operated by companies for trade purposes, or foreign currency accounts held by non-residents; interest on these will continue to be exempt from retention tax. All the other relaxations, which I will now summarise, will become effective on 1 January 1991.

At the moment, individual residents are not permitted to use Irish pounds for the purchase of short term foreign securities — that is, those with a maturity, at date of issue, of less than two years. They may, however, borrow foreign currency to finance such purchases, or use the proceeds from the sale of similar securities. I propose to allow the conversion of Irish pounds, for purchases of short term foreign securities, subject to a limit of £10,000 per individual and an overall limit of £50 million for 1991. Institutional investors already have an allowance for such purchases of 12½ per cent of their previous year's cash flow. As that does not appear to be causing any problems, I do not propose to change it, for the moment.

Other relaxations in the securities area will include the extension to individual residents of the freedom which institutional investors have to purchase futures and options on foreign securities for hedging purposes. I am also removing the restriction on the use of Irish pounds for purchases of units in foreign undertakings for collective investment in transferable securities — or UCITS as they are generally called — which invest in short term instruments, as long as the UCITS in question are registered under the EC Directive on the Co-ordination of UCITS.

As I indicated earlier, restrictions currently apply vis-á-vis non-EC countries in three areas where the transactions concerned have been completely liberalised within the European Community. These are outward direct investment, the purchase of property for personal use and the issue of personal loans or gifts. I propose to remove the restrictions on personal loans and gifts and to increase the current limits in the other two categories. In the case of outward direct investment, the first £100,000 of any such authorised investment may, in future, be funded by conversion from Irish pounds and Irish pounds may also be used to fund up to 50 per cent instead of the current 25 per cent of the balance. In the case of property for personal use, there is, at the moment, an upper limit of £50,000 on the value of any property that may be purchased outside the EC and only 25 per cent of the cost may be funded from Irish pounds. I propose to remove the limit on the value of the property and to permit up to £50,000 of the cost to be financed using Irish pounds.

I propose also to begin relaxing the restrictions on financial loans in Irish pounds to non-residents. Financial loans are those that are not related to trade nor to other permissible transactions with residents, like direct investment or the purchase of property. Initially, long term financial loans — that is those for a period of five years or more — will be permitted.

The gradual removal of exchange controls carries with it both opportunities and risks. By the end of 1992 at the latest, Irish residents will be free to conduct, on a worldwide basis, all the financial transactions which they can carry out within Ireland today. They will be able to seek the best returns for their investments and the most competitive terms for any finance which they wish to raise. The business and financial communities will have access to all the risk management techniques and means of financing that are available to their overseas counterparts. The absence of restrictions, combined with good returns and sound economic management here will serve to increase our attractiveness as an international investment location.

At the same time, there will be a sizeable increase in the volume of funds that can move quickly into and out of the country. Domestic interest rates may be more volatile than we have been used to, as they will be required to play a greater role in regulating these flows and maintaining the exchange value of the currency. The degree of confidence in Irish economic prospects will be, by far, the most important ingredient in determining the scale and direction of future flows. This confidence will be crucial to attracting the overseas investment that we need and to influencing domestic savers to invest at home. The main condition for ensuring confidence is continued prudent management of the economy. This embraces a requirement that we be seen to continue on a path of fiscal responsibility and that domestic policies fully support the Irish pound's exchange value. In other words, how the risks and opportunities, arising from dismantling exchange controls, balance out will depend on how we conduct our affairs. In the light of the Government's firm commitment to effective management of the economy, I am confident that the benefits will continue to outweigh the risks.

In summary, we have already moved a long way towards our goal of complete capital liberalisation. Today, I have announced a series of significant measures which will advance our progress further. It is against that background of liberalisation that we find it necessary to renew existing exchange control legislation on a temporary basis. It is also against that background that I recommend the present Bill for the approval of the House. I would like the indulgence of the spokesmen for Finance opposite, and indeed the House. I want to publish the Book of Estimates this afternoon.

Mr. Noonan

(Limerick East): I welcome the Minister's full statement on the introduction of this Bill. We came down to hear the Minister proposing a necessary change of date for legislation which is already in position and he was quite informative about the further exchange controls he intends to remove on 1 January 1991 and in the course of the Finance Bill. It is unusual to get such full information in advance of the date. I thank the Minister for his full explanation of what he intends to do.

I have no problem with this Bill. It is clear that all exchange controls cannot be removed immediately. It is also clear that they must all be removed by the end of 1992. Consequently, the Minister must in prudence and on the advice of his officials in the Central Bank, move to remove the remaining controls on a piecemeal basis between now and 1992. It will not be easy. There are difficulties. Like any prudent Minister he will remove initially those controls which cause the least problem, and he is leaving the harder decisions until later.

At the beginning of his speech the Minister remarked that exchange controls were originally introduced as a wartime measure and applied to the sterling area. At that time we had not only monetary union with the United Kingdom but we had economic and monetary union with the United Kingdom. That was maintained up to 1979.

The effective decisions which governed exchange rate policy, interest rates and monetary policy were made by the Bank Of England and were not made domestically. The situation has changed dramatically since then. Since 1979 it was absolutely essential that we had local control over exchange rate policy. More recently the decisions of the EC have brought about a situation where they must be dismantled and progress has been made in a way that has caused very little disruption.

The few simple points I would like to make are not in relation to the Bill but what flows from it in 1992. Two decisions have to be made which will cause serious problems both for the Exchequer and the economy. First, at present, Irish nationals may not open a current account or a deposit account in a financial institution of a member state. That exchange control will have to go in the next two years. When that exchange control goes anybody who wants to put money on deposit is free to put it in Luxembourg, France, Newry or wherever. The movement of capital around Europe is a great freedom. That is part of the Single Market. The interest which arises from money put on deposit here attracts deposit interest retention tax of 30 per cent. It is reasonable to believe that Irish nationals if given the opportunity to put their money on deposit in countries which do not have a deposit interest retention tax, or who have a deposit interest retention tax at a substantially lower rate than operated in Ireland, will move their money out of the country. That will lead to certain pressure on the Irish pound if it is allowed to happen. More important, the loss of revenue to the Exchequer based on the 1990 Estimate will be £290 million.

It appears to me that the Minister, and his Government, have enormous difficulties already in seeking to harmonise VAT and excise duty over the next two or three years. The Estimate from the Minister's Department is that the loss to the Exchequer to bring VAT and excise down to UK rates is about £650 million. On top of that we have the clear statement from the Minister today that all exchange controls must go by 1992. He has two more budgets to either allow a massive inflow of money out of the country and into the deposit accounts of foreign banks or, alternatively, to remove DIRT or substantially reduce it. He simply cannot allow Irish savings to disappear into continental banks; therefore, he must reduce or abolish DIRT or there will be a very serious loss of revenue.

All Members of this House and, more aptly, people outside this House, who lecture Members on tax reform should begin to do their sums because we are facing very serious losses of revenue to the Exchequer in the process of harmonisation which now includes the elimination or the reduction of DIRT. I have not heard anybody putting forward proposals to replace the revenue lost.

My second point arises not from money going out of the country but from money coming into the country. The Minister, in his contribution, pointed out that one of the decisions he made at the beginning of 1989 allows Irish financial institutions to freely accept Irish pound deposits from non-residents as long as these deposits were for fixed terms and of at least three months duration. That is fair enough and we welcomed it at the time. However, over the next two years the Minister will be obliged to remove the fixed term element which is still in the control and he will have to remove the restriction which confines deposit taking to money of three months duration. Eventually, he will have to put it back to money on demand; 24-hour money, money arriving into an Irish bank at the tip of a keyboard in Frankfurt and going out at the tip of a key on a keyboard the following day.

By confining deposit taking by Irish institutions to money which would stay for three months, the Central Bank have maintained control over the three month interest rate but they still have strong control over the one month which is a significant rate here. An immediate step which the Minister has to take is to pull back the restriction and allow Irish institutions to take one month money. When they do that, as the Minister signalled in his contribution, and move to weekly and overnight money, domestic interest rates may be more volatile than we have been used to. That is the key phrase in the Minister's contribution but there is a lot behind it because domestic interest rates will be highly volatile at that stage. The Government, and the Central Bank, will have far less control over interest rates than they have at present. That is one of the major effects of the removal of exchange controls. There is nothing in the Bill which brings that about. There is nothing in the Minister's statement of intent as to what he will do on 1 January and in the Finance Bill but it must happen over the next two years. The bank, and the Government, will lose immediate control over interest rate policy and will have to rely on macroeconomic initiatives and monetary policy to keep it in place.

The winter report of the Central Bank points out that, because of uncertainty in the Gulf, £700 million came into Ireland from early August on to September. This money had been invested by Irish institutions abroad, in Government stocks abroad or in equities abroad and it was repatriated. If there is a peace settlement in the Gulf that money will go out of the country immediately. A sum of £700 million is a large amount of money. Up to the time of the publication of the last Central Bank report the trigger point for a rise in Irish interest rates was when the reserves fell below £2.5 billion. The reserves are now at £3.2 billion approximately and there is pressure on Irish interest rates. What is the reason? The explanation is given in the Central Bank's report. There is £700 million of hot money which came in to Ireland in August and could go immediately if the international political circumstances change. The real trigger point now is not £2.5 billion but £3.2 billion. When the Central Bank have to restate the position between reports on what are adequate reserves by a factor of £700 million one can see what the removal of exchange controls will mean in terms of volatility of flows of money in and out of the country and the pressure they can put on interest rates.

Our exchange rate policy and our monetary policy is not clear to me. The Central Bank have responsibility under statute both for the fixing of interest rates and for operating our monetary policy but it would be helpful, and in everybody's interest, if they made a clear statement on our policy.

Up until recently, I understood that we were going to operate a monetary policy within the exchange rate mechanism of the EMS which tied us into the Deutsche Mark, simply allowing for the 2.25 fluctuation. Since May the Central Bank have operated a policy which tied us absolutely to the Deutsche Mark at an exchange rate of 2.68 Deutsche Marks to the Punt. However, about a fortnight ago they changed their minds and softened. Why did they do that and why was no explanation given? Are we no longer as committed as we were to an absolute Irish Punt-Deutsche Mark exchange rate or was it because pressure came on Irish interest rates and they decided to make the Irish Punt slightly cheaper to resist that pressure? If that is what happened, I do not think it has worked. There is likely to be significant pressure on German interest rates between now and Christmas and it is difficult to see how Irish interest rates will not follow.

Obviously there will always be different players in any country in terms of economic decision-making, and the political factor is very important. In the recent German elections the Liberal Party said they would not accept tax increases to pay for the restructuring of East Germany. The Liberal Party gained votes in the election and they are now a stronger partner in the Government. The German Chancellor, Mr. Kohl, said less emphatically that there would be no tax increases. The Germany economy is streaming ahead. It is now the strongest economy in the world and has reached a capacity level of about 90 per cent. The pace of the Germany economy could be quite inflationary. Yet there will be no tax increases to restructure East Germany. How are they going to fund this? They will fund it by borrowing. The Bundesbank has already said that if there is borrowing and no tax increases they will raise interest rates. If they raise interest rates we will have to follow.

What does a combination of very strong economic activity and high interest rates in a country lead to? It seems clear that there will be pressure to revalue the Deutsche Mark. That will be the scene. Our Central Bank have not made it clear what our policy is on what might sound like esoteric comments on a Friday afternoon but which are going to be fundamental to the standard of living of everybody in this country in 1991 and beyond. The strength of the Irish Punt, the levels of interest rates and the level of borrowing in Germany are going to have as profound an effect on Irish living standards as any other factor we might mention in this House. The Central Bank need to issue a strong statement on exactly where we stand on our monetary policy and to explain why, after doing something which appeared logical and well thought out for six months, they changed policy without any notice to the institutions or anybody else. Where do the Central Bank stand now?

I appreciate the great difficulties the Minister and his successors will face in removing exchange controls. The easier decisions have been made but the very difficult decisions remain to be made. One of these decisions is connected with the loss of revenue if money is moved out and deposited abroad by Irish individuals and we lose the DIRT tax. The other very hard decision to be made — I am not making an exclusive list — concerns foreign individuals and institutions who would be allowed to deposit money here overnight, and remove it overnight, and the three month restriction is reduced. This will have major implications for this country and one can only wish the Minister, his successors, advisers and the Central Bank good fortune as they move us towards decisions which have to be taken. We are already committed to making these decisions. All that is left to our discretion is the timeframe, which is restricted by the ultimate date of 31 December 1992 by which time everything must be in place.

This is only part of the wider scene of the Single Market. We all know the theory of the Single Market. It has been explained to us several times and we have participated in debates on it in this House and elsewhere but some of the hard decisions are now upon us. Some of these decisions will be taken in 1991 and others in 1992. Decisions on exchange control and the harmonisation of taxes will have profound effects on our economy. I hope everything goes well in this regard.

It is not possible to have a single market or the benefits of a single market without free movement of capital. Restrictions must be removed so that we all prosper. Although we will gain in the long term, until things settle down there can be very rocky periods for a small economy like ours.

I welcome the Bill and I am very interested in hearing the Minister's reply.

Mr. Quinn

This is a short, two section, and, in a sense, technical Bill which will give effect to a major decision which has already been taken. In a very concise parliamentary sense, we have no option but to assent to the Second Reading and allow the Bill go through all stages, which presumably will be some time next week.

The issues the Bill raises are of fundamental importance. While the Minister has given a very concise and explicit indication of a series of additional measures of liberalisation which he proposes to bring into effect on 1 January 1991, he only alluded to short term and long term consequences of those measures. As Deputy Noonan said, the Minister referred only to a certain volatility in interest rates. It is the level of that volatility, the duration of it and the possible impact of speculation against the Irish punt which concern us because they in turn will affect the performance of the Irish economy.

For the first time since 1987 there is real international economic uncertainty. The present Coalition Government and to a lesser extent the minority Fianna Fáil Government, with the benefit of the Tallaght Strategy, happened to be very lucky because of the international economic climate. That international economic climate has now significantly changed — indeed it was changing before the invasion of Kuwait and Saddam Hussein — and the underlying factors both in the British and United States economies will remain irrespective of what happens in the Gulf. The Government are facing a very difficult international climate within which they will have to bring about substantial liberalisation in our capital markets and financial regime generally between now and the end of 1992, which is just over two Finance Acts away.

Despite repeated efforts by the Labour Party a clear and coherent analysis of the effect the Single Market will have on the Irish economy, what sectors will be vulnerable, what has happened to the EUROPEN campaign and what efforts have been made to identify industries within various sectors which are clearly vulnerable and resistant to change and how they can gear up for the possibilities of the Single Market as well as minimising their exposure to the real risks which the Single Market will bring about.

We do not know, for example, the final impact the Single Market will have, by virtue of the liberalisation of all exchange controls, on our own substantial financial services sector. There has been no published assessment by the Government of the likely effect on the banking system, the building societies and all the other finance and loan institutions and companies in that sector, which has provided protected employment. There is no equivalent to the CIO reports which were published in the late sixties analysing the impact of the Anglo-Irish Free Trade Agreement on Irish manufacturing industry. We know the consequences of that process of liberalisation. Unlike Deputy Noonan, I do not believe it is correct to say that we had full economic and monetary union with the United Kingdom economy when we had protective trade targets. We certainly did after 1967 and in some manufacturing sectors whole industries were effectively wiped out.

If the Government are carrying out studies, if the Department of Finance are overseeing with the Taoiseach's Department the EUROPEN campaign and the assessment of the impact of the Single Market specifically in the financial services sector, they should come clean and publish the conclusions of these studies. We have a right to know, as have the people working in those industries. They should know if the jobs they hold are being successfully protected by management decisions in anticipation of the impact of the Single Market. There is no evidence to suggest that the Government have analysed this problem, identified vulnerable sectors and approached the key decision-makers in those sectors to put them on notice that unless they take account of the future post-1992 they will suffer the same fate as protected manufacturing industry in the period 1967-72.

I share Deputy Noonan's view that as we go to the Rome Conference next week we do not know the Government's position in relation to economic and monetary union and in relation to European union. There are many other issues on which we do not know their position; perhaps they themselves do not know. Whatever about the domestic politics of the Fianna Fáil Party regarding whether we should have a White Paper on divorce or a White Paper on marital breakdown — the distinction between which has much internal significance for the party — such matters concern the Fianna Fáil Party. The impact of economic and monetary union and the position the Irish Government will be taking in the working parties following the Inter-Governmental Conference are of critical significance for the development of the Irish economy and its ability to create the wealth necessary to sustain jobs.

It is not that I am criticising Government policy; I simply do not know what it is. I wonder if they themselves know. Have they formulated a paper or a series of papers in response, for example, to the Italian paper on political union and have they a counter view to that expressed by Mr. Major in relation to the hard ECU? Their attitude in relation to economic and monetary union will have some impact on how we relate to the consequences of the liberalisation of financial markets and the elimination of exchange controls within two years.

I accept that it might be impossible for the Minister of State to respond to these questions in the course of this debate. It is clear we will not get a response of any significance or consequence from this Government on the December meeting in Rome. We will have to face these issues sooner rather than later. Criticism will be reserved until we see what position the Irish Government are taking in a deteriorating economic climate.

I now refer to the impact on tax revenue of the stability of Irish residents to open deposit or current accounts in other jurisdictions within the Community. The scale of DIRT revenue has been so significant that despite the vociferous opposition of Fianna Fáil while in Opposition they quickly did a U-turn and decided to retain it, not only because of the volume of revenue it generated but because of the extraordinary efficiency of collection. Unless there is some kind of harmonisation in advance of 1992, the reality of the market will forcibly harmonise deposit account interest rates within the EC. We have had some political experience of market-led harmonisation. Members will recall that in 1985-86 the Government of the day were effectively obliged to reduce VAT and excise rates on black electrical goods and on alcoholic beverages because of the haemorrhage caused by cross-Border trade. That reality cannot be forgotten. Unless note is taken of comparative net rates of interest on deposit accounts in secure jurisdictions, we will have a similar haemorrhage of deposits out of domestic accounts, with the consequent impact on DIRT revenue. The Minister for Finance will have to face up to this problem.

Perhaps the Estimates in the course of preparation will signal the realisation of just how difficult revenue-raising by way of taxation will be. It would be interesting to hear what assessment has been made by the Department of Finance, in conjunction with the Revenue Commissioners, of the likely dislodgement of deposits within this jurisdiction. Somebody in the Department of Finance should be conducting those kinds of studies instead of second-guessing decisions made by various Government Departments which are constantly interferred with by Finance officials. They would be far better employed looking after their own patch and doing serious economic analyses of the consequences of economic and monetary union.

The Labour Party will not oppose this Bill on Second Stage. It is necessary to comply with commitments already entered into. I put down a formal mark of concern, however, that this Government, heading into a very difficult economic climate, with all the indications that it is likely to get worse, do not appear to know what the impact of exchange control will be, other than the possible volatility of interest rates. We need information from the Government or else a clear indication that such information is not readily available but will be forthcoming.

Mr. Rabbitte

It is not so much what is contained in this Bill that ought to concern us as the wider implications raised by the prospect of further dismantling of exchange controls, with a view to their total elimination by 1992. Obviously, all of us in this House have a vested interest in exchange rate stability. We do not want to be pushed into a situation where we would have to start spending some of our reserves in order to defend the currency. We have avoided the circumstances of having to prop up the currency, partly by our membership of the EMS and partly through the mechanism of exchange controls.

Deputy Noonan and Deputy Quinn referred to the Minister's statement in which he set out what he sees as both the risks and opportunities associated with this further loosening of exchange controls. The Minister admitted frankly that as the prospect of monetary union looms ever closer and as we prepare for this, there are risks as well as opportunities. My colleagues made specific reference to the prospect of a sizeable increase in the volume of funds which can quickly move in and out of this jurisdiction and, of course, this is a major concern for all of us because already we have seen a volatility of capital flows and, consequently, a volatility in interest rates. Since the Taoiseach and Mr. Delors agreed a short time ago that some of the exchange controls in place ought to be dismantled, there has been evident volatility in capital flows and consequent volatility in interest rates.

The most recent ESRI report forecasts that net factor outflows in 1991 will be in the region of £2.9 billion. I think our gross national product is somewhere in the region of £24 billion which puts that figure in perspective. I acknowledge that much of this outflow is accounted for by the repatriated profits of multinational companies and as such is a function of industrial policy. However it also includes other elements, such as foreign investments by domestic Irish companies. Deputy Noonan has drawn attention to the fact that in a new more liberal climate the process of moving funds in and out of the country quickly will obviously increase and, as the Minister admitted, domestic interest rates may be more volatile than we have been used to. I do not think there is any doubt that that will prove to be the case.

All of us in this House are committed and have shown our willingness to support the concept of monetary union, but I am still not clear about what the Government's policy is as the prospect looms closer. Is there any quid pro quo, from our point of view, for our support of monetary union and the resultant loss of sovereignty for this Parliament over monetary policy? It seems that one of the most meaningful quid pro quos we could hope for is the initiation of the process towards the construction of some kind of common industrial policy to enable us take some effective measures to cause at least a significant proportion of the outflow to which I have referred to be reinvested in Ireland since they amount to profits generated at home.

The theory we have all been working on is that monetary union is expected to benefit Ireland and benefit it disproportionately since we have such a high trade dependency and a relatively minor currency and a fixed exchange rate will allow Irish business to plan ahead with certainty. We will also be saved the cost of exchange transactions, which are significant, and interest rates should fall as a result of a major common currency which I hope will lead in turn to business expansion at home. However, much of the evidence points to an escalation in trends towards economic peripherality for regions such as Ireland under economic monetary union. I am afraid we are still very unclear on Government policy in this critical area for Ireland.

There is no evidence I am aware of, that under EMU there will be a much larger federal or structural budget in Brussels. I ask the Minister for Finance to avail of the opportunity presented by this debate to say, for example, whether he has any concerns about the draft statutes for the European Central Bank, EUROFED. I do not think at this stage in 1990 it is too early to ask the Minister to come into the House to set out what his assessment of those draft statutes is. This is a major and inevitable development and we should have an opportunity to debate it since the Bill we are talking about is both minimalist and technical and there is general agreement in the House for the thrust of the Bill.

In the context of what Deputy Noonan said about the Central Bank and the necessity for the Central Bank to make a clear statement on their policy direction, there is a good deal of evidence — he instanced a major recent example — which suggests that this is necessary. For example, The Sunday Business Post seems to be running what is tantamount to a campaign to break this veil of secrecy on the part of the Central Bank. A recent report, dated 1 July 1990, entitled “The Central Bank's Secret Policy” refers to the international financial markets being abuzz with talk of a two speed monetary union and that the Central Bank alone stand silent. The article concluded that given the Central Bank's recent policy direction they have a great deal to be secret about. I ask the Minister to state if he envisages that a new Central Bank Act will be necessary as a result of the steps we are about to take, and have already embarked on.

I do not know whether the Minister is familiar with the recent National Economic and Social Council comment concerning the make-up and structure of the Central Bank itself, the need for wider representation and institutional reform. I would be anxious to know whether the Minister can tell us whether there are implications for people currently employed at the Central Bank in terms of our inexorable development towards EUROFED. I think there are 700 people currently employed at the Central Bank. Can the Minister give us a guarantee that their job security will not be put at risk in the aftermath of monetary union?

The Workers' Party support the concept of a European Central Bank on a federal basis but we are concerned that these questions of democratic accountability are not being adequately addressed, not least by the Irish Government. For example, the basic document of the European Commission for the Intergovernmental Conference virtually excludes any role for the European Parliament in controlling EUROFED. As I understand it, the board is likely to be comprised of Governors of the Twelve national central banks. I am quite uncertain as to where the element of democratic accountability comes in: to whom will the board of EUROFED be responsible? That document circulated by the European Commission for the Intergovernmental Conference, to which I have referred, states, in summary, that the European Parliament would be consulted on the nomination of the President of EUROFED in the definition of annual guidelines, the granting of special financial support and on the recommendations. In urgent cases it would give its position within a prespecified time limit. For example, it would regularly debate the Community's economic and monetary policy with a general debate held once a year during which it would give a discharge to the Commission in respect of its economic policy responsibilities. The president of EUROFED would regularly — and whenever exceptional circumstances rendered it necessary — report on monetary policy. Further, the president of the ECOFIN Council and the Commission would report regularly on the economic position within the Community and would associate the Parliament closely in the multilateral surveillance exercises.

It seems to me that that statement is characterised, at best, by a consultative role for the European Parliament, in other words, the European Parliament will be consulted; the European Parliament will be made debate, will request that the ECOFIN Council and the Commission would regularly report on the economic position in the Community and would associate the Parliament closely in multilateral surveillance exercises. It seems to me that this is a rather vague, consultative role envisaged for the European Parliament. The question of any democratic accountability, apart entirely from the nature of the row that has been and probably still is going on in Britain as between the Thatcher view of the role of the Bank of England and the Bundesbank raises fundamental questions to which the Minister ought to reply given the opportunity afforded him by this debate.

In that same document — paragraph 5 (1) (b) referring to the creation of EUROFED — it is declared that the Treaty should also define the tasks of EUROFED. The major ones would be the following: the formulation and implementation of the single monetary policy and the issue of ECU; exchange rate and reserve management in accordance with the guidelines defined by the Council of Ministers; participation in international monetary co-operation; participation in the co-ordination of banking supervision policies and guaranteeing the proper functioning of the payments system and of capital markets.

It seems to me there are major questions raised there for the future of this economy, for our economic state of health, which we will have to continue in free trade conditions. I, for one, and I think my two colleagues previously similarly asserted that they are not clear what is Government policy in this area. As we stand now, certainly I cannot appreciate how European monetary union can be expected to work unless substantial progress is made toward reducing existing regional disparities, including a substantial upward revision of structural and regional funding.

In passing I have referred to the fact that another major European institution is being created. Needless to remark, it will not be located in Ireland nor in Dublin but, in this case, again in the heart of Europe, in Germany. There is no gesture there towards reducing regional disparities in terms of the jobs that will undoubtedly be associated therewith. For example, I do not know whether the Government have given any consideration to whether our national mint at Sandyford could be converted into being the Euro mint, thereby providing additional manufacturing and other jobs for staff in Dublin. Only one of the difficulties of being a peripheral country on the outskirts of Europe is that we seem to miss out on the undoubted employment potential obtaining within many of these major institutions being located at the heart of Europe.

In summary, I do not see that we are called on to do anything but approve this Bill. As the prospect of monetary union looms closer it is incumbent on us to do so and, in any event, to eliminate remaining exchange controls by 1992. Nonetheless it affords us a suitable opportunity to raise some of these fundamental questions about the future direction of economic policy. None of us wants to see circumstances arise in which international gamblers, purely for speculative purposes, can continue to bet on a separate Irish currency, when hot money flows in today and out tomorrow; that is of no advantage at all to our economy. But, as the Minister conceded in his statement, we will face a whole new aspect of volatility in capital inflows and outflows as a result of exchange controls being removed. This is one of the main areas on which the Minister should concentrate when replying.

Deputy Noonan referred to two main changes for the average Irish resident. I do not think there is a great deal average about the Irish resident who will have money to open a bank account in another member state of the EC but the fact that we have some such Irish nationals is not to be doubted. They will now have the freedom to take that decision. It is better that they should do so than locate or invest their money in tax havens and not be subject to any law.

Mr. Noonan

(Limerick East): Old age pensioners will do so through their friendly bank managers.

Mr. Rabbitte

The point he raises about old age pensioners or others who may be provoked by the existence of DIRT to send money outside Ireland is one the Minister will have to address. It seems to me that DIRT was a concession to the rightful campaign on the part of PAYE workers that they were bearing the brunt of taxation, indeed still are and certainly have been in recent years in order to run Exchequer and State services here. It appears to me that DIRT was a concession to that fact of life. Therefore, dismantling DIRT would seem to be possible only in the context of a very fundamental restructure and reform of the taxation system. Otherwise, we are back to the PAYE sector being expected to carry the burden of running the State. I am happy to end my contribution on that note.

Mr. Garland

It seems we have no option but to accept this Bill because if it is not passed exchange controls of any kind will cease as from the end of the year and that would be even more disastrous than what is proposed in the Bill. I ask the Minister to accept that this country will not be ready for full exchange control liberalisation by 1992. By limiting the continuation of the 1954 legislation to the end of 1992 the Minister is by implication either saying he accepts that we are ready for full exchange control or, alternatively, that he has no confidence in his ability to negotiate a later date, 1993 or 1994 or the year 2020 if he can possibly get away with it. I would like him to answer that when he is replying to the debate. This is all about the implementation of the Single European Act, the Act which was very vigorously opposed by the Green Party, Comhaontas Glas. We have been proved right so often in the correctness of our opposition with the still very high rates of unemployment, and our unprecedented high rate of emigration, and this House has nothing to be proud of in its sheepish acceptance of the Single European Act.

The explanatory memoranda are very useful when one is studying a Bill but they are supposed to be, one would have thought, completely impartial and should limit themselves to merely describing what is in the Bills. There is nothing in this Bill. It is a very short Bill and all it is doing is simply extending the operation of the 1954 Act by two years. It says nothing about the scope of exchange control and it is very questionable that there should be any notes on the explanatory memorandum about the scope of exchange control. The only section of this memorandum which is totally germane to the Bill is the first paragraph and in my view it should have ceased there.

To give an example of the kind of slanted language in the explanatory memorandum I refer to paragraph 3 which states: "The main purposes of exchange control are to help protect the official external reserves and to reduce disruptive currency flows". I would accept that as reasons, but there are many other reasons. One of the main reasons for exchange control when it was introduced in 1954 was to protect Irish employment and that is not stated there. Therefore, that is a very loaded paragraph and I ask the Minister, and the House, to note that. We should be very careful in future to see that these memoranda stick strictly to the facts contained in the Bill.

The Minister said he proposes to extend DIRT to cover interest from deposits held by Irish citizens abroad. He did not say how he is going to do that. This, presumably, would require the co-operation of a huge number of foreign banks. How feasible is this? Is it just something the Minister dreamed up the day before he made his speech? I will be very interested to hear how the mechanics of this operation will work.

A matter on exchange control I should have mentioned is its effect on interests rates. We do not differ from any of the other parties in the House in our desire to get interest rates down and keep them down because only by a regime of low interest rates can jobs and wealth be created. We have had a very low rate of inflation for the last three or four years and, in fairness, some of the credit for this must go to the last two Governments. That is another function of exchange control and it can, and frequently does, help us to control and keep down our interest rates.

With regard to the temporary relaxations the Minister is proposing from 1 January 1991, he says that at the moment residents are not permitted to use IR£s for the purchase of short-dated foreign securities. He is proposing that this be eliminated and that purchases subject to a limit of £10,000 per individual and an overall limit of £50 million be allowed in 1991. I would oppose that. I see no necessity to bring forward the dates for exchange control. It may be said that this will be a gradual process and it is necessary to phase it in. I do not accept that. I see no necessity to bring in this relaxation until it is absolutely necessary. That money should be invested here for the benefit of employment and not sent out to provide jobs in foreign countries. The whole tenor of these relaxations is in the same vein. The Minister says he is going to remove restrictions to purchase UCITS, these foreign unit trusts. This is the thing. It is all going to create jobs in other countries and no jobs here except for a few people in stockbrokers' offices.

There is a reference to futures and options. Futures and options are in most cases just a very sophisticated form of gambling. Are we going to encourage gambling as well? Really, that is all a bit much.

The last relaxation is in the purchase of property for personal use abroad. That is permitted at the moment under certain circumstances and the provisions regarding it are quite reasonable. However, the Minister wishes to extend this to allow residents here to purchase property of unlimited value. I have not had the time to read all about this provision.

The regulations as they are are ample and I see no need to change them.

Minister of State at the Department of Foreign Affairs (Mr. Calleary)

First, I should like to thank all the Deputies for the manner in which they met this Bill. I will try to answer the various points made.

Deputy Noonan raised the question of interest rates particularly in the context of non-residents being able in the future to make one month deposits with Irish banks. As he will be aware, the level of interest rates is primarily a matter for the Central Bank, which seeks to keep rates as low as possible, consistent with maintaining a firm exchange rate policy within the EMS. The main role of Government in relation to interest rates is to provide an economic climate that is conducive to low interest rates.

Over the past few years, Irish interest rates and inflation rates have tended to converge with those of the stronger European economies. The Irish inflation rate is now on a par with the German rate and well below that of the UK. There is still some way to go on interest rates. Nevertheless, the differential between our interest rates and those of Germany has improved from nine percentage points in 1987 to less than two percentage points at present. This can only be regarded as an extremely creditable performance bringing with it considerable benefits for the competitiveness of Irish industry.

It is difficult to assess the impact the full liberalisation of exchange controls will have on the external reserves and hence on interest rates, but I am confident that with continued sound economic management by the Government that impact will be manageable.

Deputy Noonan also expressed concern at the potential for tax loss from the deposit interest retention tax when Irish residents can freely operate accounts in banks throughout the European Community. Obviously the question of DIRT is one that requires consideration in the light of the complete removal of exchange controls. DIRT yielded about £285 million in the current year, which is obviously a significant amount. I should point out that the Government's objective is to further reduce the standard rate of income tax, which of course applies to DIRT, to 25 per cent by 1993.

Even apart from this, tax is not the only factor that people consider when making investments. For example, levels of return and accessibility of funds also influence decisions. There is also the question of exchange rates. It would be naive to expect that abolition of exchange controls will have no impact. What I am saying is that the DIRT rate is not the only factor. Also, experience shows that one can retain a withholding tax in a liberalised regime — the UK has had a withholding tax on residents' interest despite having abolished exchange controls.

Deputy Noonan also raised the question of our exchange rate policy. Irish exchange rate policy is to have a strong currency within the European Monetary System and to implement whatever monetary and other measures are necessary to secure that position. This policy has yielded concrete benefits in terms of an inflation rate which is below the EC average, a reduction in Irish interest rates to levels which are significantly below those obtaining in the UK, and a convergence between Irish and German interest rates. These are all factors which have contributed to the positive perception of the Irish economy abroad. This strong exchange rate policy is a vital and continuing element in the Government's strategy to control inflation, to reduce interest rates as much as possible and to sustain the high level of investor confidence in Ireland.

In so far as the recent perceived deviation from the 2.68 rate against the Deutsche Mark is concerned, I would like to point out that day-to-day management of the financial market is the responsibility of the Central Bank. The Central Bank decides to intervene in the market in the light of the circumstances that prevail at any particular time. The ERM obligations require Central Banks to intervene only at the 2.25 per cent margin from the central rate. The Irish pound was and has remained well within that range. Movement outside the so-called narrower or 1 per cent band on occasions is necessary for technical reasons.

Deputy Quinn wondered about the Government's position on economic and monetary union. Liberalisation of capital movements is an essential element in the completion of the internal market. It is the desire to see that market functioning as efficiently as possible that has, in part, spurred on the current drive towards economic and monetary union within the Community. Beyond that practical consideration however, is the Community's aspiration to move towards a deeper level of integration, not just in the economic and monetary areas but in the social and political areas also.

The rapidity of progress in this area has, at times, being breathtaking. The Delors report, which proposed a three stage approach to EMU, was published a year and a half ago. Now, it is but a short time to the start of the Intergovernmental Conferences on EMU and political union. The results of the negotiations which will take place at those conferences will determine the framework within which the Community will operate for the foreseeable future.

On 1 July last the first stage of EMU began. Essentially, it involves a much closer co-ordination of economic and monetary policies than heretofore. A vital part of stage 1 is the complete removal of controls on capital movements. However, as I said in my introduction, along with some other member states, we have been allowed an extension of the deadline from 1 July 1990 to the end of 1992.

In Rome at the end of October the European Council agreed that stage 2 of EMU should, subject to certain conditions being fulfilled, begin on 1 January 1994. With that stage we will see the creation of a new monetary institution which will ultimately have full responsibility for the formulation of monetary policy within the Community.

Ireland has played an active role to date in the preparations for the conference on EMU. Indeed, it was during our Presidency earlier this year that the initial consensus on the broad parameters of union was first reached. While that consensus has been refined subsequently, its essential elements have not changed. This active role will be continued in the negotiations themselves, where we will be arguing strongly for balanced regional development in accordance with the fundamental principles which underly the Treaty of Rome. It is essential that no region is deprived of the benefits which union will confer on the Community as a whole. We will be concerned to see that progress in realising the objective of economic and social cohesion moves in tandem with the integration process itself.

Deputy Rabbitte referred to investment abroad by Irish institutions. Net portfolio investment abroad by Irish investment institutions is estimated to have been in the region of £550 million in 1989. While substantial, we must remember that this included a once-off adjustment of portfolios in response to the relaxation of controls on purchases of foreign securities at the beginning of that year. The position in the current year has been quite different, with net outflows totalling less than £200 million at the end of Septmeber. In fact, there was a net inflow in the third quarter as the institutions sold more foreign securities than they bought.

I would also point out that as 1992 approaches with its free competition from institutions in other members states, Irish financial institutions must be free to seek the best return on behalf of their Irish investors. Otherwise they will lose business to more competitive firms elsewhere in the EC. Moreover, there is no evidence of any shortage of funds for good projects in Ireland and the record level of inflows to the Irish gilt market in recent years shows the growing confidence that non-residents have in our economic management.

I would like to tell Deputy Garland, I am sorry he has left the House, that it was not the Government who accepted the Single European Act but the people in a referendum. I would again like to thank all the Deputies who contributed to the debate.

Question put and agreed to.

Bill put through Committee, reported without amendment and passed.

The Dáil adjourned at 3.30 p.m. until 12 noon on Tuesday, 11 December 1990.