I am happy to have this opportunity to brief the House on the European Council and the euro summit meeting, which took place in Brussels on Sunday last, 23 October. As the House will be aware, we are in the unusual situation that further meetings of the European Council and eurozone leaders will take place this evening in Brussels. I was anxious, therefore, to use the opportunity also to brief the House to the fullest extent possible on the state of play concerning the various elements of the comprehensive package that continues to be the subject of negotiations among EU partners.
The situation is fast-evolving — elements are being hammered out as we meet — and it would not be appropriate to enter into the exact detail of what is currently on the table. While we have made considerable progress, there are a number of difficult issues that remain to be resolved at this evening's meeting. I remain hopeful that it will prove possible to move forward tonight. Europe needs a convincing and comprehensive outcome that will help to restore confidence in the markets and stability in our economies. That is what I will be working to achieve.
A number of important decisions were taken at Sunday's meeting. While the focus was naturally on economic policy, especially the situation within the euro area, we also agreed the EU's position going into two very important international meetings, the G20 Summit in Cannes next month and the Durban climate change conference later this year. Furthermore, the European Council agreed a set of conclusions on foreign policy issues, covering developments in Libya, Egypt, Tunisia, Syria and Iran as well as last month's eastern partnership summit. The European Council also issued a statement welcoming the announcement of the cessation of ETA's terrorist activities.
There were three elements to our work. We began with a meeting of the European Council at 27. Our discussions in this format continued over a working lunch. We then met as the euro summit at 17. In our morning session and over lunch, the focus was on economic matters and, in particular, how to prioritise measures with the greatest potential to generate growth and jobs. We first heard from the President of the European Parliament, Mr Jerzy Buzek, and were briefed by President Barroso on the Commission's proposals as set out in its recent communication, "A Roadmap to Stability and Growth".
In my contribution, I stressed the particular importance of realising the potential of the Single Market, including in the digital area. I also highlighted competitiveness issues and measures to support small and medium-sized enterprises, SMEs, including reducing administrative burdens and securing access to finance. We have to make it easier for businesses across Europe to get on with running their enterprises and employing people. This means reducing red tape, especially for our smallest businesses, and providing as enabling an environment as possible. The Commission has been asked to fast-track work in this area. We all know from our contacts with business people here that SMEs have been particularly affected by the credit crunch. Access to funding is a vital concern for them. This will now be taken up as one of the priority actions under the Single Market Act.
I also set out the particular difficulties of those member states currently in an EU-IMF programme and I urged that all of the Union's resources be mobilised to support them in their efforts to return to the markets. A commitment to this is included in the conclusions. We also called for the adoption of proposals to increase co-financing rates for EU funds by the end of the year. This will have a direct benefit for Ireland.
At my suggestion, specific reference was made to the situation in programme countries in requesting the European Investment Bank to examine how it can further contribute to boosting investment in Europe. My officials and I will now engage closely to ensure we utilise the potential of this opportunity to the maximum. It is important that the issues of growth, stability, jobs and employment be central to any of the European discussions. In a more perfect situation, leaders would be able to go back to their own countries and explain to their citizens the decisions taken by the European leaders as to how Europe can actually encourage, develop and provide an environment for further growth in opportunities and jobs, which is the central issue for people in whichever country they live.
The European Council also called for a stronger focus to be given to the growth-enhancing aspects of the Union's external policies so as to maximise their contribution to growth in Europe and to create the right conditions to attract inward investment. In the absence of progress in the WTO Doha Round of trade negotiations, we called for renewed emphasis on concluding bilateral and regional agreements, for capitalising on our relations with neighbouring regions, and for developing a comprehensive investment policy that aims at two-way liberalisation and protection as part of the Union's common commercial policy. Work will be taken forward on this as a priority.
Importantly, the European Council agreed the Union's position for next month's G20 summit in Cannes. At that meeting the EU will seek to make progress on reforming the international monetary system, strengthening the regulation and supervision of the financial sector, tackling the excessive volatility of commodity prices, and promoting global recovery and sustainable and inclusive growth.
We also endorsed the EU position to be pursued at the Durban climate change conference later this year. The EU will work towards an ambitious and balanced outcome at Durban, stressing the need to take ambitious steps towards a global and comprehensive legally-binding framework for the post-2012 period.
As I already set out, the main discussion of economic matters took place over lunch with 27 countries and then at a meeting of the leaders of 17 countries in the eurozone. Discussions focused on what has been achieved and what remains to be done. While it was not possible to reach final agreement, good progress was made on the comprehensive package aimed at moving beyond the current crisis and restoring stability. There were five elements to this which we hope to be in a position to adopt later today, but obviously I cannot give the House an absolute guarantee on that.
We need to ensure an outcome for Greece that puts its debt on a sustainable path and that allows its economy to recover. The nature of the role of the private sector in that regard is a key and fundamental consideration.
We need to construct credible and robust firewalls to prevent contagion spreading to other member states, especially those already in a vulnerable position. This means maximising the resources available to the European Financial Stability Facility and providing the EFSF with greater flexibility. Several options for this are being explored and we hope to agree on the best approach when we meet later today. The House will be aware of two facilities there — a special purpose vehicle and the insurance method of leveraging greater facility under the EFSF.
This is a vital issue for Ireland. We do not want to see the hard-won progress we have made undermined by events beyond our control. The extent to which our efforts are recognised by partners is gratifying and I sought to stress the fact that we remain vulnerable to negative developments and that there is a shared interest in ensuring that we are adequately protected. The same applies in a number of other countries.
Even as Greece's sovereign debts are restructured and put on a more sustainable footing, the question may arise from Members of the House as to why Ireland remains absolutely committed to sticking to the programme and honouring all of our sovereign debts in full and on time. My answer to that question is simple — this is the course of action that is best for Ireland's economic recovery, growth, employment and creation of jobs for our people in this country. This is a crucial issue and the logic of sticking to our plans is worth debating. The choice for us is between working to improve the programme or completely repudiating it. Importantly, working the deal does not mean passively submitting to its terms. It means attempting to make the deal serve us better by renegotiating its terms on an ongoing basis. Critically, this strategy is working for Ireland.
The economy has started to grow again. GDP increased in both the first and second quarters of this year. This was thanks to strong export growth which was due in turn to improvements in the competitiveness of Irish producers and to Ireland's enduring attractiveness as a destination for foreign direct investment. The public finances have stabilised and the budget deficit has started to decline. This year the deficit is expected to be just over 10% of GDP. Last year the underlying deficit was 11.5% of GDP. The 2012 budget will target a deficit of 8.6% of GDP.
Investors' confidence in our ability to tackle successfully our economic and budgetary problems has greatly improved in recent months. For example, the yield on ten-year Irish bonds, which is the notional cost of borrowing for the Government, has fallen from 14.5% to 8.5% since mid-July. This has occurred at the same time as yields on Greek Government bonds have risen to new record levels and is a reflection of the fact that Ireland has met all its programme performance targets to date and is expected to continue to do so.
We have secured better terms under the deal. The most easily quantifiable example is the substantial reduction in funding costs relating to the EU element of the financing package, the savings from which will be about €900 million in 2012 and will rise to almost €1.2 billion in 2014. However, there are other ways in which the terms of the deal have been improved including by setting and achieving ambitious targets for private sector contributions to the cost of recapitalising our going concern banks; the acceptance by the troika of the measures contained in the jobs initiative such as the cut in VAT and employers' PRSI; and in securing the troika's agreement to the replacement of deficit reduction measures incorporated in the original agreement for the 2012-14 period by measures that the Government considers to be more growth and jobs friendly and orientated.
Working the deal represents the best way forward for Ireland. The deal is working for Ireland, but it can be made to work better. The challenge of ensuring that the burden of debt taken on by the Government can be sustained is being surmounted, but surmounting it can be made easier by negotiating further improvements in the terms of the deal. This, the Government is fully committed to doing.
We will continue to seek improvements in the legacy costs that have been incurred by the State in rescuing the banking system, all the more so since these costs reflect in part the cost of protecting the broader European banking system. The increased flexibility for the EFSF that emerged from the European Council meeting of 21 July offers Ireland the opportunity to seek assistance in this regard. The deal to boost the capacity of the EFSF, which we hope to reach in today's discussions, may also offer further opportunities from which we can benefit. More broadly, building on our status as a country that is meeting its commitments, we will push our European partners to pursue policies that stimulate economic growth in Europe and hence create stronger market conditions for our exporters. This is another way of working that deal.
The alternative is to repudiate it. This would be enormously costly for Irish citizens. It would mean walking away from a set of international commitments solemnly entered into. It would mean rejecting the path of reasoned discussion and negotiation with our international partners. The costs of choosing this route would be enormous.
In the first instance, since it would almost certainly bring about a sudden stop to international funding of the Government's borrowing requirement, it would mean that that borrowing requirement would have to be eliminated by abruptly closing the gap between Government revenue and non-interest spending. This would require measures many times harsher than those that will be necessary in budget 2012, and would certainly plunge this economy back into recession.
Since the deal is seen to be working for Ireland and since Ireland is seen to be on the path to debt sustainability, repudiation would be viewed by investors as a situation of "won't pay" rather than "can't pay". The result would be a large and enduring premium on the Government's borrowing costs that would undermine living standards in Ireland for a generation. The reputational damage inflicted on Ireland by repudiation would likely have serious negative consequences for our international trade and our attractiveness to foreign direct investors. Therefore, a Greek haircut is not a panacea for Ireland's challenge.
There is a perception that imposing big haircuts on bondholders will somehow provide Greece with a passport to painless adjustment. Nothing could be further from the truth. Even after the haircut, it is likely that the Greek debt ratio will be higher than Ireland's. Moreover, extremely harsh austerity measures, much harsher than anything that has been implemented, or is ever likely to be implemented here, will remain the order of the day in Greece for a long time, including the following: the tax-free threshold for income tax is to be lowered from €12,000 to €5,000, the VAT rate applicable to restaurants and bars is to rise to 23% from 13%, monthly pensions above €1,000 are to be cut by 20% and 30,000 civil servants are to be suspended on partial pay. Who could possibly want a similar situation in this country?
The Government is determined that our fate should be a better one. What is being done for Greece, including the steps that will need to be taken to make its debt sustainable, reflects a uniquely difficult situation. I cannot say it often enough or strongly enough; we will not be going down the same road.
