Ceisteanna—Questions. Oral Answers (Resumed). - Deliberation of EU Finance Ministers.

Charlie McCreevy

Question:

9 Mr. McCreevy asked the Minister for Finance the nature and extent of the deliberations of the EU Finance Ministers at the recent meeting in Verona, Italy; and the conclusions reached. [8480/96]

The informal meeting in Verona earlier this month provided EU Finance Ministers with the opportunity for a general discussion on a number of topics, including economic and monetary union; taxation in the Union, the economic situation in the Union and employment.

The focus of our discussions at Verona was on European Monetary Union issues and, in particular, on the mandate from the Madrid European Council meeting last December which requested EU Finance Ministers to report on the range of issues which arise from the fact that not all member states will adopt the euro from the outset.

In accordance with the European Council's mandate and also with the existing provision in the Treaty which requires member states to treat their exchange rate policies as a matter of common interest, Ministers agreed at Verona that work needs to be progressed on a new arrangement to govern exchange rate relations between participating and non-participating member states. The new arrangement will provide continuity with the present ERM. Ministers were also agreed that, in framing the new arrangement, priority must be given to safeguarding monetary stability in the Single Market. Also, the new arrangement should be so designed as to encourage member states which seek to join European Monetary Union after its 1 January 1999 commencement to develop closer links with the euro area. There was wide agreement that currency stability requires a strong commitment all round to convergence and strengthened surveillance procedures.

Verona also provided political impetus for further study of another important policy issue raised by the Madrid European Council; that is, ways to ensure budgetary discipline in stage three of European Monetary Union, following German proposals for a stability pact among participating member states. The rationale behind the stability pact idea is that in favourable economic periods, member states should aim for budget deficits lower than the Treaty reference value of 3 per cent of GDP, in order to ensure that the 3 per cent figure is respected even in less favourable conditions. It is envisaged that work on the development of a new exchange rate arrangement and on the stability pact will be reviewed by EU Finance Ministers prior to the European Council in Florence in June. Finally, there was agreement among Ministers on cent as the appropriate name of the sub-unit of the Euro. We also gave authority for the holding of a competition to select an appropriate design for the new coinage.

We also considered a wideranging paper on taxation in the European Union, prepared by the EU Commission, which was circulated by Commissioner Monti just before Easter. The paper covered both direct tax and indirect tax issues and it focused on stabilisation of member state tax revenues, the smooth functioning of the Internal Market and the need for tax measures to play a role in promoting employment. It was decided that further work on these topics would be facilitated by the establishment of a high level working party, under Commission auspices. The Commission also promised to come forward with certain new proposals, notably in relation to the definitive VAT system.

As regards the economic situation in the Union, there was general agreement among Ministers that, even though the rate of growth towards the end of 1995 and in early 1996 was disappointing in certain member states, the conditions exist for an upturn in growth later in 1996. There was agreement that, while confidence has declined, the fundamentals remain positive. World trade is buoyant, inflation in Europe is exceptionally low, the financial situation of firms is broadly favourable, monetary conditions have improved markedly and exchange rate distortions have been partially corrected.

On unemployment, there was agreement that in order to combat the problem effectively, sound macro-economic policies must be complemented by practical and effective structural reforms. These reforms should be aimed at promoting a better functioning of goods and services markets and greater flexibility of the labour market. In addition, it was recognised that effective and appropriate training, and the reduction of non-wage labour costs at the lower end of the wage scale — as we have been doing in Ireland in recent budgets — can contribute to a reduction in long-term unemployment. Finance Ministers will, of course, be dealing with this issue at future meetings, and the whole subject of employment and unemployment will be a priority of the Irish Presidency starting in July.

It was decided at the Verona summit that a new ERM would be established to govern relations between those inside and outside the European Monetary Union. It was also decided to undertake studies into the problems involved in tightening multilateral supervision of countries' convergence programmes and in creating new sanctions for those who are insufficiently disciplined in that regard. What will be the terms of reference for those studies and who will conduct them? What sanctions will be put in place in those areas and will they be binding?

It is too early to answer definitively the questions posed by the Deputy. The studies will be undertaken by the Commission, either by the monetary committee on its own or with the assistance of the European Monetary Institute, which is, as the Deputy knows, the forerunner of the emerging European Central Bank. The type of sanction which might exist, the way it would be imposed and how it would be enforced are all matters for consideration. No definitive decisions have yet been made. I have made the point that any developments in this area should be within the framework of existing Treaty provisions. In other words, we would have the rule of law on our side and we would have access to the courts in the event of a dispute.

Notwithstanding the difficulties which the British Prime Minister faces in his party on this matter, which have been brought to light in the past 48 hours, the British Chancellor, before the meeting in Verona, forcefully expressed his opposition to any further mechanisms for multilateral surveillance of the economies of other member states. Given the problems which will face the Irish economy, particularly if the UK stays outside the European Monetary Union, how will these sanctions be put in place since the British Government does not want to participate in any future ERM or to take the road advocated by the other Finance Ministers at Verona?

The contribution made by the Chancellor, Mr. Clarke, at the Verona informal council is well known. He prefaced his remarks by stating they were not views which he shared but that, nevertheless, they were perceptions and views which were widely shared in the United Kingdom. He stated — I hope my summary does not do him an injustice — that there are many people in the United Kingdom who regard membership of the ERM as the cause of the major recession in the early 1990s. They saw the departure of the United Kingdom on black Wednesday in September 1992 as a heaven sent opportunity and there was rejoicing and celebration in those quarters. The subsequent upturn in the United Kingdom economy was attributed by these people to the fact that they had left the ERM. He restated this was not a view he shared or an analysis with which he agreed, but he said it was prevalent. For that reason, he said it was politically impossible for the present British Government or, he proffered the view, for any British Government to take Britain into any form of ERM.

He went further and said it was probable that Britain would be in the single currency before it would join the ERM. He concluded — I hope I am doing justice to the gentleman in question — by saying that notwithstanding this particular political problem, which he recognised was unique to the United Kingdom, the work should proceed. He did not attempt — nor did the British delegation — to prevent the furthering of the studies to which my formal reply referred. He recognised it was desirable, in the context of the function of the internal market, that there would be a stable relationship between currencies that decided, by choice or circumstances, not to become members at the outset of the Euro currency and currencies which qualify for membership.

Given the unusual position of our British counterpart in that both the Prime Minister and the Chancellor do not share the same views of a large segment of their own parliamentary party and the exigencies——

A situation with which the Deputy was familiar.

This is the reason I can speak ex cathedra on this subject. Given this unusual position will the Minister for Finance agree it is vitally important that the rules be cast in stone given Ireland's trading position vis-à-vis the United Kingdom and that we cannot allow a situation to develop or ensue post European Monetary Union, where the British can do what they like?

The Government, through the Department of Finance, commissioned a fairly comprehensive study in this general area by the ESRI and we are on course to have it completed by the end of June. As the House will be aware from replies to previous questions, it is my intention that the study will be published as it will help to inform debate on this important issue. The question of price stability is central to the efficient functioning of our economy and the assurance that that economy would perform in an effective and even manner and thereby avoid shocks. We can have price instability through currency fluctuations of an unforeseen kind and, therefore, any system that will minimise the possibility of unforeseen currency fluctuations is desirable. For that reason the monetary committee and the EMI have been asked to conduct studies based on the report which they gave at the ECOFIN meeting in Verona. It is anticipated that a more detailed report will be presented to the June meeting of ECOFIN prior to the June conference in Florence. I anticipate that detailed work will proceed and it is probable, as indicated at the Verona meeting, that the Dublin Summit will be presented with the definitive proposals for the new exchange rate arrangement or ERM Mark II.