European monetary union is probably the single most important economic development in this country since the end of protectionism in the l950s and early l960s. It is probably the single most important political development in this country since the establishment of the State and certainly since our accession to the then EEC in l972.
The process of EMU is replete with opportunities and challenges, threats and dangers. It could and should provide the foundation for economic and political stability and growth but it carries within itself the seeds of potential disharmony and inequality. EMU is an economic challenge but, above all, it is a political imperative.
Europe has been the centre of much that was both good and bad in the 20th century. We have provided an unprecedented standard of living for most of our people. We have developed social provision — health, education, housing and employment — to a level not known before in recorded history. Yet at the same time we have twice sown the seeds of our own destruction in wars which saw the deaths or dislocation of a huge number of Europeans. That capacity for good and evil still exists and we need look no further than Yugoslavia today to see just how fragile democracy and indeed civilisation can be.
It is worth remembering and repeating that the political imperative behind the establishment of the then Coal and Steel Community in the l950s was to prevent the recurrence of war. It is important, even in the l990s, that we in Ireland who have never directly experienced war should acknowledge the centrality and the relevance of that guiding principle. It is important also that those of us of my age group and younger, who never lived through the war much less experienced it directly, should acknowledge that we too have learned the lessons of European war and are determined to do what little we can to ensure it never happens again.
I visited Auschwitz concentration camp as a student in the late l970s. I worked in Munich at the time, one of the first beneficiaries of the first generation of Irish students to benefit from the free labour market in the European Community. I remember seeing the two stark words on the monument to the dead in that camp which are "Nie Wieder"— never again. Those two words are the overwhelming and powerful imperative for the further and deeper political integration of the European Union. That integration must not be based just on a desire to prevent war but on a desire to create a safer, more stable, democratic, tolerant and prosperous Europe where all our citizens can rejoice in their cultural diversity and prosper in an economic interdependence.
There is always a risk of getting carried away with the ideals of politics, but I wanted to state that stark political commitment because some of what I say later may sound a little sceptical. Let me then make it clear and even starker that I and my party are committed to greater political integration of the European Union. I and the Labour Party are committed to economic and monetary union. However, there is also an obligation on those of us in this House, and in particular those of us in Opposition, to highlight some of the difficulties ahead. We cannot enter into this great economic challenge with our eyes closed to the dangers. Inasmuch as we can identify those dangers in advance, we may be able to avoid the worst at a later stage.
The economic argument for EMU is powerful and persuasive. In the words of the Commission report, EMU will "revitalise the European economy and the single market, foster investment, boost business competitiveness, benefit consumers and savers and make life easier for citizens where both work and travel are concerned". If all, or even most, of this were true, the case for EMU would be unanswerable. The truth is that some of it at least is wishful thinking and some of it is based on the unambivalent hope that the mere repetition of such extravagant aims will become a self-fulfilling prophesy. This latter point is not unimportant. If we have learned anything from the last three to four years, we have learned the importance of confidence in the business of currency exchange. When I first learned economics I was told the demand for currency depended on the demand for goods and services. In recent years we have seen the greater importance of capital movement in determining the exchange rate. These movements and speculation generally have in large part, but by no means always, reflected the economic fundamentals of a particular country at a particular time. However, in the run-in to EMU we have seen an increasing amount of speculation for the sake of it. We have even seen a measure of speculation which is clearly intended to disrupt the whole process of monetary union. What is remarkable about the experience is that so far this year there has been none of the speculative turbulence which many people had envisaged. At this stage it seems quite probable that we will get through to the end of April, and perhaps even to the end of this year, without any significant degree of turbulence in the financial markets. The reason is clear. The markets now accept that EMU will happen. Confidence has been boosted by the political determination of member states and the Commission to complete the project. The individual currencies are retaining their value because the markets are convinced that they will ultimately enter the single currency at about the central rate.
Confidence is also paramount for the future of monetary union. If Governments are confident, if the markets are confident, the currency will work and will be a hard currency, and the chances of success will be immeasurably improved for that. Clearly the Commission is conscious of this factor in drawing up the report. Both reports, the Commission report and the EMI report, read like propaganda documents. While neither is entirely uncritical, it is quite clear that both institutions see it as their primary role to bolster confidence in the new currency. This is hardly surprising, but it does mean that we have to read the documents very carefully in order to identify the sceptical notes. For what it is worth, I believe there is every chance that the euro will develop the dynamic and the dynamism which is required to produce the level of investment and growth which we want. In a sense, this is a major point that the sceptics missed. They assumed that all decision-making would continue as heretofore. They assumed that everybody would continue to behave as heretofore in making their decisions. There is every reason to believe that the new paradigm which monetary union represents will develop its own dynamic in a way which is likely to be positive for most if not all in the Union.
Of course, monetary union will only work if the prerequisites are in place. In identifying the prerequisites, the Maastricht Treaty set out five primary criteria — price stability, interest rate convergence, debt to GDP ratio levels, current budget requirements and ERM membership. In principle, adherence to these convergence criteria was meant to signal the convergence of European economies. It was also meant to indicate whether a particular economy was suitable for inclusion in the euro zone. The criteria were developed with a large input from Germany and, in particular, from the Bundesbank. The criteria chosen were the economic fundamentals most easily influenced by Government action. They were and are all essentially monetary criteria. If one wanted to be cynical, or perhaps just honest, one could also say that the criteria were developed so as to exclude some countries in particular.
In one way I am happy that the Germans effectively got it wrong. I believe monetary union will be more solidly based if it is broadly based. Given the extraordinary efforts made by the governments of the Mediterranean countries, it would be inconceivable at this stage that they could be excluded from monetary union. However, there is a very real problem relating to the criteria which are of particular relevance to Ireland. The criteria do not cover growth rates and they do not cover employment or unemployment rates. Ireland's growth rate is way out of line with that of almost all of the other member states. In addition, our rate of long-term unemployment is way above average. These two indicators, and in particular our growth rate, put us at a point of the economic cycle which is radically different from that of most of the other member states. In that important sense our economy is not currently convergent with that of the core states, notably, Germany, France and the Benelux countries. Most of the other countries are only now developing real growth rates, having gone through a period of little or no growth since the mid-1990s. By contrast we experienced GDP growth of near to 10 per cent last year following an average of 7 per cent over the previous three years. The lack of convergence represents a real problem for Ireland. Our interest rates are currently 2.5 per cent above German rates. As a result of the Asian crisis it now seems unlikely that German rates will rise any further between now and the end of the year. As a result, Irish rates will have to come down at a time when lower rates are at best appropriate and at worst dangerous. This is only a portent of things to come. It is likely that interest rates in the future will be decided to suit the core economy. Even if the rates are set based on a weighted assessment of the periphery and the core it is still possible, if not likely, that Ireland will end up with rates of interest that are simply inappropriate to our state of economic development and in particular to our rate of economic growth. It is vitally important that we put in place mechanisms to ensure that the needs of the economy are respected and understood when it comes to making these important decisions. It is important that the channel of communications between ECOFIN and the European Central Bank should be as strong as possible. It is important that the Euroex Committee should develop in a way which makes it possible to develop a coherent European policy on matters within the competence of the Union. It is also important, in so far as it is possible, that Ireland should be represented directly or indirectly on the governing board of the European Central Bank.
An obvious problem for Ireland arises from the decision of the UK Government not to proceed to the third stage of monetary union. A great deal has been written about this in recent months, not least in the ESRI assessment and some commentaries written on foot of that assessment. It is strange in a sense that the greatest cause of concern is not the current weakness of the Irish pound against the pound sterling but rather what may happen when sterling inevitably begins to fall. It is almost inevitable that the UK will eventually join the euro zone. It is likely that business in Britain will choose to do much of its business with the rest of Europe in euros, if not immediately then certainly over time. It is also likely, for example, that the euro will begin to circulate in the peripheral regions, such as in Northern Ireland, perhaps at a very early stage. All of the pressure from business, finance houses and, ultimately, the general population will be in one direction.
If all goes well, I would be very surprised if the pound sterling were not brought within the euro zone before the year 2005, certainly within a ten year period. The accession of Britain will make life much easier for Ireland, but a great deal depends on the rate at which the pound sterling accedes. Given the experience of Nigel Lawson in the late 1980s, it seems highly unlikely that any British chancellor would not guard against the danger of entering at too high a rate. In many ways this decision is in the lap of the gods, and it is well beyond our sphere of influence. All we can do now is position ourselves as best we can and hope for the best. In that context I support the decision of the Government to increase the central rate by 3 per cent against all other currencies. The only surprise is that that decision was not taken earlier. We all know the decision was taken to send a message and to strike a balance between taking competitive advantage and signalling our intention to fight inflation. It was also taken with an eye to future reduction in the value of sterling. The Minister will know I made this argument at the Joint Committee on Finance and the Public Service weeks before he went to Brussels to seek permission for this from the Commission. It is self-evident that I endorse the Government's decision on 14 March.
We will feel the loss of important instruments almost immediately. There is some argument about how important instruments such as the power to set the exchange rate, to revalue or devalue and the power to set interest rates have been. Some argue we did not make best or much use of those instruments in the past, but it is clear that they will not be available in future. This means that we will have to develop other instruments, the most obvious being fiscal policy.
I was interested in Deputy Jim O'Keeffe's contribution. It was clear that signals were sent from Brussels that the December budget was regarded as excessively proactive and inflationary. I would be interested in the Minister's response to this. Were we effectively told by Brussels that he had given away too much money and stoked the economy to the point where there was a risk of overheating and the brakes should be applied? If so, the Minister should admit it clearly.
We must develop other mechanisms also, and in doing so we must look to the social partners. Partnership has been an extraordinarily important part of the success of the economy in the last ten years. The Commission report states that unit labour costs in Ireland have reduced in the past four years. A fair amount of that relates to improved productivity, but it is also clear that workers have given away a great deal and contributed in no small way to the economy's success. It is also clear that the willingness of workers in particular sectors to continue to endorse the Partnership agreements is wearing thin. At least one of the reasons is that they do not see the benefits of the agreements reached in Government Buildings on the workfloor. It will be necessary to have a flexibility in the Partnership arrangements in future which has not been there heretofore. For example, if particular sectors experience difficulties with competitiveness, there will be a need for a mechanism to address that at the level of the individual firm and nationally. On the level of the individual firm we must look at alternative ways of remunerating workers. It will be impossible to convince workers to take real cuts in wages and we will have to look at other means by which they can be remunerated. I refer to employee shareholding schemes and profit sharing schemes. Congress has been to the fore recently in proposing that these schemes should be elaborated and extended into far more sectors of the economy. Individual workers and work-forces must have a stake in their company and a say in how it is run.
In this context we could benefit from looking at how the Nordic countries organise their industrial relations. In pre-Partnership times we took too much from the adversarial industrial relations of the United Kingdom, which would be largely our tradition. However, we would benefit greatly from looking at German and Nordic methods. It is normal for particular industries and firms there to have works councils and, in private industry, worker directors. Channels of information exist between workers and employers there that do not exist here.
There are also significant implications for the banks and capital markets. There is no reason in principle why one should not be able to write a cheque on the Bank of Ireland, Allied Irish Bank or even National Irish Bank and get it cashed in a German bank. I hope a clearing mechanism to enable that to happen will be put in place rapidly. It would make EMU far more meaningful not just to the average business customer but to the average tourist. There is also no reason in principle why capital markets should not be unified, which will be greatly facilitated by the advent of new technology. There should be no reason why one cannot buy or dispose of shares on the Irish Stock Exchange which were hitherto available only in Frankfurt, Paris or London.
I was interested by a reference in the Commission report to the further economic integration which is clearly envisaged by the Commission. It mentions the possibility of further development on employment and tax. The reference to tax is interesting and the Minister should expand on it. There are dangers to Ireland in greater harmonisation of the tax regimes between individual countries. There is already some harmonisation of VAT and we are told that there will have to be some harmonisation of corporate taxes. The Commission seems to envisage future harmonisation of income taxes. We must approach this area with great care. We have little control over our economy as things stand and after 1 January 1999 we will have less. However, if we give up control of fiscal policy we might as well give up sovereignty over our economy altogether.
Employment is the single economic criterion which is most important to individual citizens of the EU. Whether they have a job, how they are remunerated, etc., are the most important things to a citizen. One would be forgiven, however, for looking at EMU and thinking that employment was an adjunct or postscript to it. The monetary criteria are central to it and employment seems to be a factor which comes in at the end. The Amsterdam Treaty was an effort to redress the balance. It puts employment at the centre of the economic criteria of the Union. At the Luxembourg summit targets for employment and training were set out by the Ministers for Finance and heads of Government. I am interested in hearing how the Minister for Finance sees those criteria and targets applying to Ireland. It is important that those criteria and targets be given real teeth and do not remain mild aspirations we can disregard if we do not need them. If EMU is to have a real impact on ordinary citizens, they are extremely important.
Employment plays no part in the Stability Pact, which was negotiated by Deputy Ruairi Quinn while Minister for Finance in December 1996. It was a feat of negotiation, but there are inherent dangers in it for Ireland. No account is taken of our infrastructure, which is relatively underdeveloped by European standards. No allowance is made for capital spending in assessing whether a country has exceeded the allowed deficit. It would have been useful to make such a provision, as the lack of a provision which allows us to spend money on infrastructure, irrespective of our current budget situation, is a problem. Combined with the withdrawal of Structural Funds over the next seven years, this means that we must look to alternative means of funding infrastructural development in years to come.
The Minister was right when he said that we would have to look at alternative ways of doing this. My party has no problem with looking at public-private partnerships to fund infrastructural development in the future. The time is ripe to consider these possibilities, as we are no more than six or seven years away from having to implement them.
The central prerequisite for the implementation of EMU is the completion of the Single Market. In principle this is 80 per cent complete; the Commission report states that only 20 per cent of the legal instruments required for completion need to implemented by individual countries. However, this does not tell the full story. For example, in the construction of motorways here, it is not uncommon for such projects to be offered in pieces to allow local contractors to apply and to have a reasonable chance of being successful. However, if the construction of an entire motor-way was open to public tender a competitor from abroad would be more likely to be successful. There are ways and means to subvert the Single Market and we have not been shy in that regard.
It is in the interests of consumers that the Single Market is completed and that the additional impetus of EMU comes into play as soon as possible. However, while acknowledging the potential advantages for consumers, there are real threats to the competitiveness of producers, manufacturers and service providers. In two or three years' time, if not sooner, producers and service providers will experience competition from other sources. Much larger foreign companies will be competing in the same market and be in a position to offer goods and services at more competitive prices. We are well positioned to cater for such a shock, but we must be prepared for it. IBEC should make its members aware that such a shock is imminent.
It will be difficult to create a single labour market in Europe. We speak different languages and skills are transmitted in different ways in different countries. Another difficulty has arisen in recent times. Most of the European Union is cover by the Schengen Agreement, but Ireland has not signed up to it. On my return from New York after Saint Patrick's Day I noted that the passport control system is much more diligent than it used to be. I can only assume this renewed vigour of passport control is because we want to exclude people of particular racial origins and reduce the number of people applying for asylum status here. If that is the case, it is deplorable. While acknowledging the constraints that exist in terms of a common travel zone with Great Britain, we should seek to adhere as far as possible to the Schengen Agreement.
EMU is an enormous project and the dice have been effectively cast. While there will be significant challenges which we are well positioned to meet, we must be aware of the potential difficulties.
