Vol. 476 No. 6
3 Mr. O'Malley asked the Minister for Finance whether the Government proposes to issue any White Paper, Green Paper or discussion paper on the implications for Ireland of joining economic and monetary union if sterling remains outside it; and if he will make a statement on the matter. [7707/97]
5 Mr. Cullen asked the Minister for Finance his views on whether the Government's position in relation to economic and monetary union is that Ireland will proceed with the first round of monetary union if we qualify irrespective of whether the United Kingdom opt out; and if he will make a statement on the matter. [7738/97]
I propose to take Questions Nos. 3 and 5 together.
The position of the Irish Government on participation in economic and monetary union is clear. Ireland, unlike the UK, did not seek an opt-out from the provisions of the Maastricht Treaty related to economic and monetary union (EMU). Thus, the outcome of the 1992 referendum, when just under 70 per cent voted in favour of the Maastricht Treaty, was an endorsement of participation in EMU, regardless of whether the UK takes part at the outset. Therefore, if we are judged to qualify, we have an obligation under the Treaty to join EMU at the outset.
We are determined to qualify for EMU by fulfilling the Maastricht convergence criteria. The track record of the Irish economy against the Maastricht criteria has been excellent. We have been judged to have fulfilled the budgetary criteria in each of the years that the excessive deficit procedure has operated, our inflation and interest rates have remained within the parameters set down in the treaty and our currency continues to trade within the exchange rate mechanism. The decision on EMU participation will be taken early next year in accordance with a procedure set out in the Treaty.
First, the European Commission and the European Monetary Institute will report on the achievement of a high degree of convergence by reference to the fulfilment by member states of the convergence criteria specified in the treaty. These reports will also take account of the compatibility of member states' legislation with the treaty requirement for Central Bank independence, the development of the ECU, the results of integration of the markets, the situation and development of the balance of payments on current account and an examination of the development of unit labour costs.
Second, the Council, meeting in the composition of the Heads of State or Government will decide, on the basis of ECOFIN recommendations, and taking due account of these reports, and the opinion of the European Parliament, which member states fulfil the necessary conditions for the adoption of a single currency. The decision will be based on the most recent and reliable data for 1997.
Of course, the question of whether the UK joins EMU at the outset is an important one for Ireland. The UK Government has indicated that the question of whether the UK will participate in EMU from 1 January 1999 will not be decided until closer to that date. It has not indicated that the UK will never enter economic and monetary union, nor even that it will not enter in 1999.
To understand better the overall economic implications for Ireland of EMU, including the implications if the UK decides not to enter. I commissioned the ESRI last year, on the basis of a tender process, to conduct a study on the implications of economic and monetary union for Ireland. The resulting report, The Implications for Ireland of Economic and Monetary Union, is a comprehensive analysis of the impact of EMU on the Irish economy. This report has been published and has received a considerable amount of attention in the media, and generated a great deal of discussion of the implications for Ireland of economic and monetary union, even if the UK remained out. A copy of the report was sent to every Member of the Oireachtas.
The main conclusion of the ESRI report was that membership of EMU for Ireland would, on balance, be economically advantageous even if the UK remain out and with allowance made for possible sterling-euro exchange rate turbulence. This conclusion was reinforced by the ESRI's view that the unquantifiable implications of EMU membership for Ireland — including the convenience of a common currency, the positive effect of Ireland's commitment to Europe on business confidence and investment, as well as wider intangible political factors — were also likely to be positive.
However, the ESRI report makes clear that, while the overall impact of economic and monetary union membership would be positive for Ireland even if the UK remained outside, a sharp fall in sterling against the euro would give rise to significantly greater problems in some sectors of the economy than in others. The challenge to all concerned, including the Government, is to continue working to minimise the exposure of the sectors concerned. The ESRI report provides an excellent framework within which the challenge of EMU can be discussed. Its publication reflects the importance which the Government attaches to stimulating and informing debate on the implications of EMU and the necessity for preparing for it.
There is a considerable amount of information available in respect of economic and monetary union. In addition to the ESRI report, there is the national information programme which I launched last December, with the Minister for Employment and Enterprise and the Minister for Tourism and Trade. The business information programme run by Forfás is part of this programme. The programme information documents have been circulated widely among businesses, and copies sent to every Member of the Oireachtas. On a day to day basis, members of the Government have spoken in depth about the implications of EMU within their areas of responsibility. The National Economic and Social Council has also undertaken work in this area, and will publish a study covering EU issues, including EMU, in the near future.
I assure the House that the Government will continue to give priority to communicating information on economic and monetary union and to stimulating a wide discussion on it and the preparations required for its 1 January 1999 start date.
The Minister makes the point that Ireland voted to approve the Maastricht Treaty, which included a commitment to join economic and monetary union. When that vote took place, there did not seem to be a prospect of Britain not joining EMU. The attitude in Britain to this has changed dramatically. Is the Minister aware that a general election campaign is beginning in Britain and that the two major parties are using their lack of willingness to join EMU as a major part of their campaigns? The Minister said the British Government has not stated it will not join EMU in 1999; how can he say that in the light of repeated statements by senior members of the British Cabinet who are trying to convey clearly to the public that they have no wish to do so?
Given those circumstances and particularly the vulnerable nature of much of our trade with Britain, does the Minister not realise the serious risks involved and keep an open mind on this matter, as the British say? That might be preferable to committing us to a situation which could conceivably have catastrophic consequences if we lose our right to devalue and the British devalue significantly.
The Deputy was a member of the Cabinet at the time of the referendum in 1992. The Irish Government did not seek an opt-out at the time and it was clear from the outset that the British Conservative Party had a "Eurosceptic" position. Mrs Thatcher's views on all things European are well known. Mr. Major's difficulties are a matter of public record and those have intensified but it was clear at the time that the British Government was looking for an opt-out. The Deputy's comments were interesting but would have been more effective if he had voiced them in the Cabinet in 1992, when negotiations were taking place and the opt-out could have been achieved.
That said, the British Government position on all things European, from the Coal and Steel Treaty to the present, has been one of initial reluctance followed by an appraisal of the realpolitik of the situation, including a cost-benefit analysis of the benefits of such European matters to Britain. At every point when it had to choose between further participation in Europe, it decided to participate, as happened recently with ERM. We know what happened on 16 September 1992, when Britain was ejected from the ERM, because, many would argue, of an unrealistic exchange rate it sought with the Deutschmark.
In relation to Deputy O'Malley's description of catastrophic effects for the economy if we joined and Britain stayed out, I understand the Deputy's concern and do not deny many people share it. However, I draw his attention to the studies done on this matter, specifically that done by the ESRI. That report constructed a scenario where we joined, as we intend to do, Britain stayed out, and consequently sterling did not maintain a static value relationship with the euro but plunged rapidly in value by an unprecedented 20 per cent — sterling devalued by 10 per cent after Black Wednesday. Against that background, the ESRI concluded that 28,000 jobs in the Irish economy would be lost. No professional economist has denigrated the study's methodology.
There are currently 1.3 million people at work, approximately 1,000 jobs per week are being created and redundancy figures are at an all-time low. Because of work done between September 1992 and late spring and summer 1993, we have a database through the Market Development Fund of just under 1,000 companies who fall into that vulnerable category. We have a profile of their areas of vulnerability if there were such a massive shift in sterling's value. Since then, a series of budgetary measures, variations in PRSI rates, reductions in corporation tax for small companies and an effective corporation tax rate of 28 per cent of the first £50,000 in profits have been among the steps we have taken to reduce their exposure.
The ESRI postulated a fall of 20 per cent in sterling against the euro. We are in the course of trying to construct a new study because what has happened is that sterling has risen in value against the basket of currencies. If it were in the ERM at present it would be at a point close to 6.7 per cent in the ERM grid on the positive side. Rather than postulate that sterling will fall, its perceived market link to the dollar has meant that it has risen in value. I repudiate the Deputy's assertion that there will be "catastrophic" economic consequences if Ireland joins and Britain stays out.
I am sure the Deputy would agree that 20 per cent would represent the limit of a large range. If the methodology of the study was wrong I would be the first to correct it but nobody has questioned the methodology. In a range of constructed scenarios with a 20 per cent fall at one end, our exposure is 28,000 against an employment figure of 1.3 million. With information we have to date we know that many of those jobs are in industries that are of low profitability, a mature age profile and possibly vulnerable in any circumstances.
If the UK were to join economic and monetary union in the first round there would be no question of Ireland staying out. There is flexibility with regard to the stage two convergence criteria — I agree with the Minister's interpretation. The more countries that can join in the first round the better from an Irish point of view. If the UK and a larger group of countries remained outside — Italy and Spain, in particular — that would create a sizeable rump which might encourage others to remain outside. Would the Minister agree that from an Irish perspective at ECOFIN discussions the convergence criteria should be met but should be interpreted for what they are to ensure that as many countries as possible would meet the first round criteria? If the UK remains outside it is likely that it will join sooner rather than later in that scenario.
I broadly agree with the Deputy's proposition. The qualification for participation in economic and monetary union on 1 January 1999 as determined in spring 1998 should not be seen as a beauty contest. It is important that the countries which qualify remain qualified. The five criteria in the Maastricht Treaty are an attempt to quantify sustained and sustainable convergence for the participating member states. It is more important that having qualified countries remain qualified. This is the basis of the fears in some quarters about some of the Mediterranean countries which are attempting to qualify in a last dash. Time will tell and the decision will be made in the late spring of 1998.
It would be preferable if the UK were to join in the first round. I concur with Deputy O'Malley's observation that it is most unlikely, whatever the outcome of the British general election — my preferences in that regard would be well known. I do not think it would be the decision of a new British Labour Party Government to join the first wave. The British have not yet firmly indicated one way or the other and I do not think we can expect a firm declaration of any kind between now and polling day. The debate in Britain is not so much about the merits of a single currency as the merits of residual British sovereignty. That is an issue Britain must address. As a neighbour and a fellow EU member state we must respect the manner in which they conduct that debate.
It is preferable that the maximum number of countries should qualify initially because the larger the euro zone the more dominant and stable the currency will become and the more probable it will be that sterling outside the euro zone in the short-term will track the euro and remain in a stable relationship. If it stays in a stable relationship to the punt, which would at that point be an integral part of the euro, the fears Deputy O'Malley has articulated would be considerably minimised.
I am grateful to the Minister for his detailed reply. No other issue has a greater bearing on the economic welfare of the country. The Minister misquotes me as saying that it would be catastrophic if we joined EMU and Britain did not. It would be catastrophic if we joined and Britain devalued not having joined. One of the findings of the ESRI study, by which the Minister puts much store, is that on the best case scenario joining EMU would increase the numbers employed in the Irish economy by approximately 25,000 within the first five years. Given that the numbers at work have increased by 150,000 between 1991 and 1996, a time of great exchange rate turbulence, it does not seem that the certainty of economic and monetary union will provide a great bonanza.
The 1,000 or more vulnerable firms, on which the Minister says we have a profile as a result of the events of late 1992 and early 1993, in particular from the market development fund which I set up, were not saved by the market development fund but by the devaluation of 10 per cent at the end of January 1993. The advice received by the Government from all quarters in the four months leading up to that was wrong. Similar sources are giving advice on this issue now. It was the devaluation which saved our economy in the period since early 1993.
Is the Minister aware that the volume of our trade with the UK is greater than the combined volume of our trade with the prospective first wave members of EMU, namely France, Germany, Belgium, Luxembourg, the Netherlands and Austria? Can the Minister not take account of the risks we will take and the vulnerability of the industries referred to?
I welcome the Deputy's supplementary questions. I also welcome this debate and I notice the Chairman of the Select Committee on Finance and General Affairs is in the Chamber. We will publish an updated document shortly which will advance the debate further. I hope it will facilitate discussion such as this in a mannered and measured way.
The ESRI was rather sanguine about the net benefits in employment creation on the factor of the single currency qua the single currency. I welcomed its modesty with the figures because it did not hype the matter one way or another. There are some intangibles which are hard to quantify into net job additions. The ESRI has addressed them without having put any quantitative figures on them. There is no doubt that, particularly for small and medium sized enterprises, the benefits of a single currency will be considerable in terms of the savings on bank charges. I had breakfast with a number of business people this morning and they indicated a related operating cost of between 2 and 3 per cent from transactions in various currencies. These were businesses employing 50 to 150 people and exporting between 75 and 90 per cent of what they produce, to European markets mainly. A 3 per cent margin on the bottom line is considerable. There are benefits purely from an operational point of view.
I am sorry if I misquoted the Deputy who referred to the catastrophic consequences subsequent to Britain choosing to devalue sterling in an opportune way. We are not in a fixed exchange rate position any more and any attempt to devalue sterling, which is not in the ERM but is a floating currency, below what the markets pertain to be its realistic value would be a futile exercise as the markets would simply drive up its value again to an appropriate level. This has happened in recent times.
The increase in interest rates.
There was concern among British exporters who saw their market share beginning to disappear because of the rise in the value of sterling. I am not an economist and am open to correction but my understanding is that sterling does not have the possibility for a strategic devaluation of the kind we saw on previous occasions. If an attempt is made to devalue sterling it will have an impact on interest rates in the first instance and a consequent impact on inflation rates.
The Deputy's last point is valid. The advice he received when in Government, and which I subsequently received when I took up office, was that devaluation would bring about a very rapid increase in inflation in the short-term. This was the fear which informed the professional economists inside and outside the Government. The shared body of orthodox economic analysis said that devaluation would lead in the short-term to inflation. However, this was not the experience in the United Kingdom or here.
Economists are beginning to revisit this whole area and to ask why devaluation did not lead to the levels of inflation brought about by previous devaluations. Having posed the same question as the Deputy the explanation given to me — I am not professionally competent to stand over it and give it for what it is worth — is that international global competition is much stronger now than it was five, seven or ten years ago. The existence of the social partnership and the various pay agreements ensured there was no labour cost inflation in the short-term and the external inflationary pressures which one would have assumed would have come into the Irish economy from outside as a result of devaluation did not materialise. This went against all the orthodox analysis by conventional economists. We still have not got an authoritative reason for this being the case but the sincere advice given to the Government of which Deputy McCreevy and I became members was well intentioned and well informed on the basis of what was available at the time. However, this did not accord with the outcome.
Before I call Deputy Cullen, while Questions Nos. 1, 2 and 3 should be taken within a strict time in accordance with priority regulations, Questions Nos. 4 and 5 may be taken in ordinary time. We are dealing with Questions Nos. 3 and 5. I propose to be even-handed in the matter and to hear questions from other Deputies in respect of Question No. 5.
No one would deny the fundamental importance of this matter to the economy. When talking about the United Kingdom one must take into account the huge advantage we should gain from lower interest rates within the EMU. This must be factored in in terms of the effect. When difficulties arose previously we used the marketing fund, but I think we are disallowed from again going down that road. The two problems in regard to the United Kingdom is that it is mainly indigenous Irish companies which deal with this market and they account for a higher proportion of employment than other companies. It may be possible for a few large companies to engage in financial currency planning but this may prove difficult for smaller companies. Has the Department had discussions on the possibility of setting up a group which would be representative of companies which would be directly affected as a result of the UK not joining economic and monetary union? Such a group could plan ahead for currency fluctuations and the prospect of devaluation, thereby ensuring they did not have the same enormous impact. I agree with the Minister that it is not as easy for the UK to devalue its currency as its employment costs could increase considerably as a result. The Government may not be able to participate fully in this area but it could act as a driving force in setting up such a group.
I agree that membership of EMU will give us lower interest rates. One presumes that our interest rates will converage closer to the present German and French rates, thereby giving a reduction of 2 per cent plus in the SDF. The prospect is that this would be a medium term gain, by which I mean four, five or six years and beyond.
On the question of hedging or forward planning, this is expensive and the smaller the company the less prospect there is of doing this. We do not have any proposals in this area at present. However, we are looking at all the implications, of which this is one. One of the four associated banks — not one of the two larger ones — carried out a study two years ago on the number of companies in this sector which had made provision for currency hedging and forward planning. I think approximately 30 per cent of these companies had made such provision. Perhaps the Central Bank and the associated banks should consider offering this service to companies — they know their customers better than any Government could possibly know them — and, if appropriate, group companies together.
The market development fund was indulged by the Commission in 1992-3 because of the extraordinary circumstances at that time. However, this was clearly seen as being in breach of the text of the treaty, if not its spirit. Nevertheless it was provided for because of the circumstances which pertained at that time. This would not be allowed now as it would be seen as a State aid and anti-competitive. As I outlined in my reply to Deputy O'Malley, since 1992 we have addressed many of the cost structures which made some of those 1,000 companies vulnerable but there is still much to be done. The rate of corporation tax paid on profits has been reduced, while labour costs have been reduced through exempting the first £80 from PRSI. Many of the companies trading into the UK have high labour costs and are vulnerable on that front. More needs to be done in this area.
Does the Minister agree that the debate about entry to EMU has been obscured to some extent by our relationship with sterling? It has certainly obscured other concerns about this very fundamental matter. Most of us were Members of the House in 1979 when we broke with sterling. Almost every prediction made at that time about our future relationship with sterling following that break did not come true. For example, we did not revalue and the value of the punt decreased by approximately 22 per cent at one stage.
My concern relates not to sterling but rather to a possible conflict between the criteria and the timetable. Today's newspapers predict that the German GDP-debt ratio will be as much as 2 or 3 per cent greater than 60 per cent. If we do not meet this criterion will we simply fudge it and, if so, will this weaken the new currency? What provision has been made for a future possible asymmetric shock throughout the zone or in one of its larger countries? What steps are being taken to enhance parliamentary accountability in this jurisdiction to ensure that we live comfortably and perform well within the fiscal constraints which are part and parcel of this proposal? What are the implications for labour costs and rigidities? These are issues we must address and cannot push under the carpet.
The Deputy posed four questions. In respect of the German debt to GDP ratio, which is rising rather than falling as is the case in most other countries, the point was made last Monday at the ECOFIN Council, with considerable validity, that in its absorption of the former German Democratic Republic and the debts associated with companies in that country, Germany added approximately 13 percentage points to its debt to GDP ratio in a single transaction. That was a once off absorption. Germany is continuing to add to its overall national debt because of the extraordinary cost of the absorption of the former East German lander. One could argue in retrospect that the one for one policy enunciated by Chancellor Kohl was economically unsound, whatever about its political motivation, but the Germans have said as recently as last Monday that in respect of that particular criteria, there are unique, historical once off factors that must be taken into account. The debt to GDP ratio would have posed a problem anyway because Belgium's debt is 120 plus percentage points relative to GDP, but since that debt is denominated virtually entirely in Belgian francs and owned by Belgian citizens, it does not have the same degree of exposure as the composition of national debt in other countries. In respect of that particular criterion——
There will be fudging.
——a formula will be found because it would be inconceivable to have a euro currency which could not be used in Brussels. The Belgian current budget deficit is being brought under control, but it will take some time to bring its national debt to GDP ratio under control.
With regard to when the asymmetrical shock to the European Union as a whole will occur, the biggest asymmetrical shocks we have absorbed in this country were self-imposed. They include the equal treatment payments; the Army deafness compensation claims will have to be dealt with; and the total cost of the hepatitis C compensation payments over a three year period, which nobody is suggesting should not be paid — I do not want to convey that impression — will be approximately £180 million, if not more. The biggest asymmetrical shocks this economy has experienced in recent times, with the exception of BSE which was far less than originally anticipated, were generated from within.
I agree with the Deputy there should be more parliamentary accountability, in this House and between the institutions of the European Union and the Parliament and the European Central Bank, when it is established, and the Council of Ministers. I am among those who argue for a greater degree of accountability between the ECOFIN Council and the Parliament on the one hand, and the ECOFIN Council and national parliaments on the other, but that is a matter for another debate.
With regard to labour costs, the Irish economy, as a result of Partnership 2000, is probably better placed than any other in the European Union to address this issue. I refer the Deputy to paragraph 2.1 of the programme which specifically states that all the undertakings with regard to the reduction in tax on the one hand and pay increases on the other are conditional on us continuing to meet the criteria for participation in Maastricht. In the event of a crisis those commitments would have to be revisited. We have anticipated the question posed by the Deputy. In relation to Irish labour costs, we have sought a formal mechanism, which hopefully we will never have to use, that could be invoked in the event of such a cirsis. It would be subject to negotiation, but it has been anticipated and written into the programme.
We have dwelt over long on priority questions today and I am anxious to dispose of the remaining priority questions, No. 4, in the name of Deputy McCreevy.
