John Perry
Question:59 Mr. Perry asked the Minister for Finance the arrangement, if any, he has made to monitor the euro and sterling exchange rate and the effect on Irish industry; and if he will make a statement on the matter. [9611/98]
Written Answers - Economic and Monetary Union.
Economic and monetary union, EMU, commences on 1 January 1999 when the exchange rate of the Irish pound against other currencies participating in the euro area and against the euro itself will become irrevocably linked.
Exchange rates are significantly influenced by the markets' view of countries' current and prospective economic and fiscal performance, and naturally these views change frequently. In EMU, the exchange rate of the euro, in terms of other currencies, will vary in line with developments on the foreign exchange markets.
After EMU begins, my Department will, in association with the Central Bank, monitor the euro-sterling exchange rate in much the same way as the Irish pound-sterling exchange rate is currently monitored. While the performance of sterling is important to us, with the UK being our main trading partner, this concern should not be over-stated in that sterling is unlikely to fall so far from its current high level to cause us major problems. Furthermore, our trade with the UK, as a percentage of total trade, has continued to decline in recent years.
Membership of EMU, irrespective of what the UK does, will be of benefit to Ireland — a conclusion which has been reached by the Economic and Social Research Institute and the National Economic and Social Council in independent reports. EMU will bring the elimination of some transaction costs, the elimination of exchange rate risk across the euro area, lower and uniform interest rates and generally easier access to a huge market. Ireland as a small open economy, is dependent on trade and so the moves towards a single market in the EU is greatly to our benefit. However, while EMU will open up huge opportunities, it will also bring increased levels of competition. I stress the importance to companies of focusing on the opportunities while at the same time addressing any weaknesses which might make them vulnerable.
Preparation for EMU is, like all issues of competitiveness, primarily a matter for individual companies. Forfás is co-ordinating the Governments's EMU business awareness campaign and substantial progress is now being made in making companies aware of the issues which deserve attention in the context of their individual operations. Consultants were appointed by Forfás, under the auspices of the EMU business awareness campaign, to examine the direct implications for Irish industry of the UK remaining outside EMU, and I understand that their findings will be incorporated into a series of leaflets focusing on the main action requirements on the part of firms. These leaflets will be distributed as part of the overall business awareness campaign.
Proinsias De Rossa
Question:60 Proinsias De Rossa asked the Minister for Finance if he will make a statement on the state of preparations for EMU. [9873/98]
Preparations are well advanced at both national and EU level for the adoption of the single currency, the euro, and the beginning of the third stage of EMU on 1 January 1999.
On 25 March last, the European Commission and the European Monetary Institute published their reports on member states' convergence. The Commission also made a recommendation to the Council of Economic and Finance Minister's, ECOFIN, that the following 11 member states fulfil the necessary conditions for adoption of the euro on 1 January 1999; Belgium, Germany, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland and, of course, Ireland. The Central Bank of Ireland, at my request, also produced an assessment of Ireland's convergence. This report was published on 31 March and also concludes that Ireland meets the four convergence criteria concerning price stability, Government budgetary position, exchange rates and interest rates. The bank states that membership of EMU offers Ireland the prospect of stable economic conditions, based on price stability.
The decision on which member states will participate in the third stage of EMU from the start will be made next weekend in Brussels. On Friday 1 May, ECOFIN Ministers will recommend which member states should participate in EMU. In doing so they will act on the recommendation of the Commission and on the basis of the convergence reports of the Commission and the European Monetary Institute. The European Parliament will give its formal Opinion early on Saturday 2 May, and the Council, Heads of State or Government, will confirm the participants later that day.
The pre-announcement of the bilateral exchange rates to apply from 1 January 1999 between the currencies of the member states selected to participate in EMU will also be made next weekend. It is now widely expected that these will be based on their central rates in the Exchange Rate Mechanism. As the Deputy will recall, following a request from Ireland, the central rate of the Irish pound was revalued by 3 per cent to DM 2.48338, broadly in line with the market rate prevailing at the time, with effect from 16 March last. The decision to revalue the central rate of the Irish pound represented a balance between competitiveness and inflation concerns.
To provide the Oireachtas with the opportunity to discuss Ireland's prospective participation in EMU at the outset on 1 January 1999, I requested the Dáil and Seanad to take note of the recommendation from the European Commission concerning the fulfilment by Ireland of the necessary conditions for the adoption of the single currency. On 1 April, the Dáil duly noted the recommendation; the Seanad did so on 7 April. In the context of the decisions to be taken next weekend, it is the Government's intention to support the Commission's recommendation that 11 member states fulfil the necessary conditions for the adoption of the euro.
The Government, in conjunction with the social partners, has in recent months established arrangements to accelerate preparation for the competitive impact of EMU. The Partnership 2000 agreement also provides an explicit review mechanism in the case of disturbance to Ireland's international competitiveness in EMU.
A key concern of many Irish firms is the performance of sterling. Clearly, the sterling issue is important but its importance should not be overstated. When we talk about a "Sterling shock", we are talking about a sharp fall from its equilibrium level. Sterling is currently well above what most commentators, including the Governor of the Bank of England, consider to be its equilibrium level. Therefore, at present, sterling would have to fall a very long way before its level could be considered to present an economic shock.
The Government is conscious of the need to prepare for the possibility, no matter how remote, of problems for Irish industry as a consequence of sterling falling significantly below its equilibrium level. Consultants were appointed by Forfás, under the auspices of its EMU business awareness campaign, to examine the implications for Irish industry of the UK remaining outside of EMU. I understand the study is now complete and that it has identified a range of actions in the fields of finance, marketing, distribution etc. that firms could consider as part of their planning for such a contingency. These actions will be summarised in a document which will be widely distributed in the next few weeks for inclusion in the information pack prepared by Forfás as part of its EMU business awareness campaign. Ultimately, private sector preparation for possible shocks in EMU is, like all issues of competitiveness in the market place, primarily a matter for companies themselves.
As regards practical preparations for EMU and the changeover to the euro, my Department has responsibility for co-ordinating the preparations of the Irish public administration and has a key role in helping the rest of the economy to prepare itself for the changeover.
On 14 January, with the approval of the Government, I published the second edition of EMU and the euro: Ireland's National Changeover Plan. The plan outlines the timetable for the changeover to the euro. Briefly, on 1 January 1999, EMU will begin and the euro will come into being as the currency of the participating member states. It will be useable for cashless transactions, e.g. cheques and credit transfers, from that date. However, euro notes and coins will not be available for a further three years, so Irish pound notes and coins will continue in use and all banking facilities currently available in Irish pounds will continue to be available. On 1 January 2002, euro notes and coins will be put into circulation and by 1 July 2002 at the latest, probably a good deal earlier, Irish pound notes and coins will cease to be legal tender and the changeover to the euro will be complete.
The plan also sets out the changeover arrangements that will be made by the public sector, including, specifically, the Central Bank, the National Treasury Management Agency, the Revenue Commissioners, the Department of Social, Community and Family Affairs and my own Department, the banks and building societies and the Irish Stock Exchange. It also outlines the initiatives which have been put in place by my Department in connection with the changeover. Briefly in 1995 a single currency officers team, SCOT was set up: this includes a representative from each Government Department and its remit is to co-ordinate preparations for the changeover to the euro in the public sector; in 1996 the euro changeover group was set up: this includes representatives from the ICTU, IBEC and a wide range of private sector bodies and its remit is to help co-ordinate the changeover across the economy; in 1996 the Forfás EMU business awareness campaign was established, to provide businesses with the information they need to prepare themselves for the changeover; in 1997 the euro changeover team in my Department was set up, to carry out my Department's tasks in relation to the changeover in the public administration and in the rest of the economy.
An appendix to the national changeover plan outlines the changeover work being done by various public and private sector bodies and lists contact points for further information.
As regards further initiatives in 1998, the plan makes it clear that the focus of the information programme on the changeover will be broadened to include information for the general public. This will include an advertising campaign which will commence following next month's referendum with a leaflet which will be distributed to every household. A poster on the euro has been prepared for schools and is being circulated at present. Also, assuming that the Council confirms next weekend that Ireland fulfils the necessary conditions for adoption of the euro, a euro changeover board will be established in order to oversee the detailed implementation of the changeover, including the areas of public and consumer information.
A copy of the plan was circulated to all Members of the Oireachtas and further copies are available from my Department and Forfás.
As regards preparations by business, as the Deputy will be aware, Forfás has been running an excellent EMU business awareness campaign. The campaign has produced an information pack for business which has been widely circulated. It has also circulated a summary leaflet in conjunction with the Revenue Commissioners: over 140,000 copies of the leaflet have been distributed. Over 60,000 copies of a leaflet designed for small and medium-sized enterprises have also been distributed. Forfás will continue its activities for 1998 and plans to issue further documents on issues such as information technology and a guide for retailers. The Forfás information pack, which includes the national changeover plan, is available on the Internet.
On the legislative front, the Central Bank Act, 1998, made sure that our Central Bank legislation is compatible with the requirements of the Maastricht Treaty, while the Finance Act, 1998, provides for the taxation changes required by the introduction of the euro on 1 January 1999. Finally, the Government recently approved the drafting of the Economic and Monetary Union (EMU) Bill, 1998 to cater for other legislative changes necessary for the introduction of the euro from 1 January 1999. The purpose of the Bill is to ensure a clear and comprehensible framework in Irish monetary law following the introduction of the euro; to remove incompatibilities between Irish monetary law and the legal framework for the use of the euro; and to give effect to enabling provisions within the legal framework, for example in relation to the redenomination of outstanding debt. The Bill is also designed to facilitate companies which wish to redenominate and renominalise their capital structure in euro even before the final changeover to the euro on 1 January 20002. It is intended to have the Bill enacted by summer 1998. In preparing it, my Department has been consultating the European Monetary Institute and the European Commission and with interested parties in Ireland.
Brian O'Shea
Question:63 Mr. O'Shea asked the Minister for Finance his views on the mechanisms that will be available to deal with economic shocks following Ireland's entry into European monetary union. [9536/98]
As we prepare to join EMU from January 1999 one of the questions most frequently raised is what policy responses will be most effective for Ireland in the event of an economic shock within EMU.
At the outset it should be noted that in the case of an economic shock affecting the euro area as a whole, this will be dealt with jointly by the member states and the relevant Community institutions, including the ECB. Furthermore, the risk of an external shock to the competitiveness of the Irish economy, caused by the depreciation of currencies from within the euro zone, will be abolished once we enter EMU. There has, since Ireland first joined the EEC in 1973, been a marked shift in the pattern of trade, economic integration and adjustment of the Irish economy in line with changes in the European union. With the elimination of multiple European currencies under EMU final completion of the single market will, in turn, influence the degree of openness, extent of labour mobility and correlation of economic shocks across participating member states, accelerating the convergence and economic performance across participating economies.
In relation to the likelihood of an asymmetric shock affecting the Irish economy only, it is worth noting that the overall economic impact of such a shock was examined in detail in the ESRI study The Economic Implications of EMU for Ireland, published in 1996. The report concluded that EMU participation by Ireland, taking account of the likelihood and the scale of an economic shock, would yield a positive net benefit to the economy. In a more recent assessment, Terry Baker of the ESRI confirmed that the potential risks associated with sterling staying outside EMU have diminished considerably. He attributed this to the significant appreciation of sterling and a fundamental policy shift by the UK Government in favour of possible eventual entry into EMU; he also sees the handing of responsibility for setting interest rates to the Bank of England as an important step in reducing the likelihood of a severe sterling depreciation. In any case, even if sterling were to depreciate to what some might regard as its long-term equilibrium rate, this should not present insurmountable difficulties for our economy. The Government is not, however, ignoring the need to prepare for the possibility, no matter how remote of problems for Irish industry as a consequence of sterling falling significantly below its equilibrium level.
In the unlikely event of an asymmetric shock occurring, flexibility of response will have a crucial role in ensuring that Ireland's economy has the capacity to successfully accommodate economic shocks. By continuing to support the social partnership approach to economic and social policy the Government remains focused on the intensification of an internationally competitive environment for Irish enterprise in EMU.
Recent rapid economic growth in Ireland has left us in a position of economic strength which should enable us to cope with any shocks within EMU. The Government can through its management of the economy help to ensure Ireland's international competitiveness in the face of an external shock. Fiscal policy will have an important role in stabilising the economy following an economic shock by maintaining the Government's budget in broad balance over the economic cycle in line with the provisions of the Stability and Growth Pack. To be able to do this we must run budget surpluses when times are good, as they are now.