Vol. 503 No. 3
63 Mr. Durkan asked the Minister for Finance the degree to which Ireland's economic situation will be effected by fluctuations in international currencies with particular reference to the pound sterling, the euro and the US dollar; and if he will make a statement on the matter. [8673/99]
As Ireland is a small open economy, movements in exchange rates are particularly important. The main economic effects of changes in the value of the euro would be on Ireland's international competitiveness and inflation performance. The effects would depend on a number of factors including the size and direction of any change.
For example, a fall in the value of the euro against a particular currency, other things being equal, would be expected to improve the competitiveness of Irish companies exporting to that country. This could lead to an increase in exports and employment. A lower value for the euro would also increase Irish import prices. This increase would in turn put upward pressures on inflation and offset the potential competitiveness gains accruing to exporters. On the other hand, a rise in the value of the euro would be expected to lead to a reduction in competitiveness and downward pressure on inflation.
As Minister for Finance, I have not commented in the past on either the Irish pound exchange rate or the euro exchange rate and I do not now propose to make a specific comment on the euro exchange rate.
Does the European Central Bank keep in contact with ECOFIN and the euro 11 and has it informed them of the exchange rate policy it is pursuing or is that policy as big a surprise to ECOFIN as it is to many other people?
Since June last year, there has been at least one euro 11 meeting per month, excluding holiday periods. These meetings usually take place before the normal ECOFIN Council meetings. The president of the European Central Bank, Mr. Duisenberg, attended most of the meetings. He makes general comments on a wide a variety of issues and brings the members up to date.
There are clear guidelines as to the role of the ECB vis-à-vis the members of the euro 11. Setting the exchange rate policy is a matter for the European Central Bank but the euro 11 group and the ECOFIN Council can make what is termed “general orientations” in referring to exchange rate matters. We live in a free Europe and Ministers make comments in the presence of the president of the European Central Bank as to how they think policy should proceed. However, the independence of the ECB is enshrined in legislation. It is a matter for the European Central Bank to decide exchange rate policy.
I thank the Minister for his reply. He has confirmed that the ECB informs ECOFIN or at least the euro 11 group on what exchange rate policy it is following.
I am sorry to interrupt the Deputy but the exchange rate policy it follows is set down in a statute. It is to keep inflation down. That is the remit of the European Central Bank – it was a matter of debate not only before the bank was established but since its establishment – much like the former remit of the Irish Central Bank.
With respect, that is the bank's remit or mission statement, but it is not its exchange rate policy, which is the issue I wish to pursue.
Its policy appears to be to allow the market to decide. It seems to be prepared to allow the euro to drift down to a par with the dollar, if not below it. Can the Minister confirm this? To put it more succinctly, will the ECB follow an interventionist policy in the international money market to protect a particular level of value for the euro or is it prepared to allow the market to decide that appropriate value?
I can only repeat what the president of the ECB said on this. He said in an interview that the policy would not be one of benign neglect, which is often how the United States refers to its policy. However, deciding exchange rate policy is not a matter for the euro 11 or the ECOFIN Council. The only crossover point is that general orientations can be referred to by the Council. It is a matter solely for the president of the European Central Bank and I can only refer to his remarks in public statements. He does not consult with the euro 11 or ECOFIN as to what policy he will follow. There is a clear dividing line, as there was in this country between the actions of the central bank and the actions of the Council or the Irish Minister for Finance. They are, more or less, the same rules which applied in Ireland in the past.
The Minister gave in his reply a recitation of conventional economic wisdom with regard to issues such as competitiveness and inflation. I am sure he will agree that the Irish economy for much of the last three or four years has defied conventional economic wisdom—
Agreed.
—and it would be helpful if those who assist the Minister in penning these responses would take that into account.
What effect does the Minister expect the reduction by 0.5 per cent in the interest rate by the ECB to have on the Irish economy?
The Irish economy has been going through a boom period in recent years. That is reflected in low interest rates, high local demand at home and an exchange rate that is positive for Irish exporters.
Since Ireland joined EMU on 1 January, it is not subject to exchange rate fluctuations with regard to the states with which it does business which joined EMU. That makes up a large segment of our trade. Irish exporters have been enjoying a great bonanza in recent years because the Irish pound has effectively depreciated against currencies due to the strength of the dollar and sterling. It is as well to point this out at this stage because in future months or years it might go in the other direction.
We should remind people who are exporting to those markets that they have been having an excellent time for a good few years. In the lead up to monetary union, much fear was expressed that the Irish pound would go in the other direction and that it might eventually have an exchange rate against sterling of, for example, £1.09 or £1.10. It is important to point out these aspects now.
What about interest rates?
I do not expect the recent change in the interest rate from 3 per cent to 2.5 per cent by the European Central Bank to have a further major effect on the Irish economy. As the Deputy said, the Irish economy has defied all the laws of economics in recent years in a wide variety of areas. I do not expect the latest change in the interest rate to have a significant effect.
I disagree that the Irish economy is running contrary to conventional economic wisdom. This boom was predicted by Dr. John Fitzgerald of the ESRI in 1992. However, conventional economists frequently would not believe the evidence before their eyes, in the same way as they do not believe the evidence now about the housing market, traffic chaos and other matters. This boom was entirely predictable and the economy is operating conventionally as an economic region would in a wider economic zone.
The Minister said, and I agree, that exchange rate policy is entirely a matter for the European Central Bank in the same way as it previously was a matter for the Irish Central Bank when the statutory basis was different. He also said that at euro 11 meetings and ECOFIN meetings, general discussions on the orientation of policy may take place. At future Question Times will the Minister be prepared to answer questions on the discussions about the orientation of policy which take place between the Minister and his colleagues in ECOFIN?
The treaty states that the Council may formulate general orientations for exchange rate policy in relation to the euro. Since the euro came into operation on 1 January, the Council has not formulated general orientations for the exchange rate value of the euro. There has been considerable debate in recent months on the role of Finance Ministers vis-à-vis the European Central Bank. The treaty laid down rules on this matter quite clearly. The President of the ECB does not come to the Council and outline a particular exchange rate policy he intends to follow for a six month period; he speaks generally about the economic situation in Europe and throughout the world. That does not prevent ECOFIN or euro 11 Ministers outlining their views on general economic policy in the euro region and the rest of the world or making those views known stridently both within the Council and outside of it. The former German Minister for Finance, Mr. Lafontaine, was not behind the door in outlining his views on interest rates in Europe and we know what happened to him.
So the Minister will answer questions?
There is nothing about which to answer questions. I am very forthcoming to the press and to this House on the discussions which take place at ECOFIN and euro 11 meetings. I want to make it clear that the President of the ECB does not come along and tell us what policy he is pursuing.
