JOINT COMMITTEE ON EUROPEAN AFFAIRS debate -
Wednesday, 10 Mar 2004

Lisbon Agenda-Module 3: Economic Policies.

Chairman

This is the third in a series of meetings planned on the Lisbon strategy. Today's meeting will focus on promoting growth-oriented economic policies. The remaining module, which we will look at in the coming weeks, will be on ensuring sustainable growth.

We are grateful today to the participants who have agreed to come to discuss these issues and for the briefing material they have kindly made available. I welcome Mr. Derek Moran, assistant secretary, budget and economic division of the Department of Finance, Mr. Stephen O'Sullivan, assistant secretary, banking, finance and international division, Department of Finance, Dr. Michael Casey, assistant director general of the Central Bank, Mr. John O'Leary, head of international relations at the Central Bank, Mr. John Bradley of the ESRI and Ms Campbell of the Department of Finance.

The Lisbon strategy has been identified as one of the Government's priorities for the Irish Presidency, during which this committee is chairing the COSAC conference of European affairs committees of the member states, the applicant countries and the European Parliament. It has been agreed by the COSAC chairman that the plenary meeting of COSAC in May will discuss the issue and therefore we will bring forward a discussion document to the meeting to facilitate this.

We have already held two meetings on the Lisbon strategy and it is our intention to make a report to the Houses of the Oireachtas when we have concluded our deliberations. Perhaps Mr. Moran might like to commence and then we might have a brief presentation by Mr. O'Sullivan, Dr. Casey, Mr. O'Leary and Mr. Bradley, in that order.

Mr. Derek Moran

We have been asked to brief the committee on three of the work items on the programme for the Presidency of the ECOFIN Council. These are: the examination, stability and convergence programme; the integration of the new member states - the accession states - into the economic policy co-ordination process; and preliminary consideration of the 2006 financial perspectives. I will brief the committee on the first two of these items and Mr. O' Sullivan will deal with the financial perspectives element.

Given the timing of our Presidency, the examination of the stability programmes falls across the first three ECOFIN meetings. All 15 of the convergence and stability programmes have been considered at the January and February ECOFIN meetings and the final batch was considered yesterday. It is a major element of the Presidency work programme over the first six months of 2004. Regarding process, there is a significant involvement of expertise across the European Union. Four broad steps are involved. The first part is the preparation by each of the member states of their stability programmes if they are in the EMU, and their convergence programmes if they are not. These states must meet quite rigorous standards in terms of the data and analysis provided, and there is a consistency across all 15 programmes.

The second stage is a detailed technical examination of those programmes to assess the economic and budgetary projects. This is done by the Commission which, in the interests of transparency, makes its assessment public. It also drafts an opinion for the European Council, which it sends forward.

The third element in the examination of each of the programmes is something of a pure review by the economic and financial committee. There is a close examination which involves all the member states, the ECB and the Commission itself. At this stage there may be amendments to the draft opinion prepared by the Commission.

The final or public phase of this element, which was completed at the ECOFIN meeting yesterday, is the consideration by the European Council. At that stage the opinions are adopted in respect of each of the member states' convergence or stability programmes. I am pleased to say that in terms of the Presidency agenda, all 15 opinions have now been adopted. The consideration and examination of the stability and convergence programmes has run quite smoothly over the three months. To a certain extent it brings to an end a particular phase of the Irish Presidency. There is just one qualification, namely, that the accession states will be obliged to prepare convergence programmes on accession, and these may fall to be considered during the Irish Presidency, or at least during June.

Regarding the outcomes of those examinations, there has been a good deal of variability and difference in budgetary performance across the 15 countries. Without getting into the details of numbers, I would say that of the 15, seven meet the medium-term objective of close to balance or surplus on budgetary terms, and one of those countries is Ireland. Four member states, while running fairly sizeable deficits, are, in the opinion of the European Council, not at risk of breaching the 3% ceiling. There is a final group of about four states which are either in an excessive deficit position or at risk of being so. They are the fairly high profile examples - France, Germany, Portugal and the Netherlands.

In general, the programmes adopted by the various countries contain within them a commitment to return close to balance over a relatively short space of time. Even in those cases where an excessive deficit situation exists, the countries involved are committed to getting down below the 3% figure in the first instance, and towards the benchmark of close to balance over a longer period.

The Irish stability programme was well received at ECOFIN, and as I have indicated, it would be in the category of those adhering close to balance. The Council opinion was that we should achieve the close to balance criteria, that we have a good safety margin, and below the 3% deficit limit, and that within existing policies we seem to be on a sustainable budgetary path.

The second item is the integration of the accession states into the economic policy co-ordination process. Essentially there are four processes involved - the excessive deficits procedure, the CARDA process, the broad economic policy guidelines and across all of that, the Lisbon strategy itself. In terms of the excessive deficits procedure, which is essentially the Stability and Growth Pact, on which I have spoken up to now, new member states will be subject to the fiscal rules immediately from accession. They will be obliged during May to produce convergence programmes which, depending on how quickly the assessment is turned around, may fall to be examined in June while Ireland still holds the Presidency. By way of preparation, they have been obliged to submit their fiscal notifications on 1 March. These are the returns on their current debt and deficit positions which will be used in the assessment. The CARDA process deals with structural reforms, particularly of product and capital markets. The accession states are already fully within the process. Each country produces a report each year which is subject to peer review at the economic policy committee. The ten countries participated in that process in January and will take full part from this point on. The broad economic policy guidelines which set the medium-term strategy for achieving the Lisbon agenda will have to be amended over the coming months to take account of the accession countries.

At yesterday's ECOFIN meeting, the Council adopted the key issues paper, which is the key economic message it sends to the spring European Council. In this document, it acknowledges that while the objectives of Lisbon are relevant to existing and accession states, there is a significant variation in the level of challenge. The objectives could be far more demanding for the accession states and that would have to be reflected in any redrafting or updating of the broad economic policy guidelines.

In the context of bringing the committee up to date on progress on the various fronts, my colleague, Mr. Stephen O'Sullivan, will continue.

Mr. Stephen O’Sullivan

My brief is to speak concisely to the committee about financial perspectives. I gather from the Chairman's introductory comments that he wishes us to focus on the Lisbon-Gothenburg process rather than to describe the various elements of the perspectives. I will accommodate him.

On 10 February, the Commission produced a set of outline proposals for the financial framework for the seven years from 2006 to 2013. These proposals are not simply financial, they also map the direction in which the Commission considers the enlarged Union should go from a political perspective during those seven years. While the financial parts of the Commission's proposal have stolen the headlines, the most interesting discussion over the next year or so will relate to other elements of it. These include the areas in which the Commission feels the enlarged Union should involve itself and governments' arrangements in that regard.

There are two points to the Commission's document on Lisbon-Gothenburg. As the EU budget is relatively small, accounting for 1% of the Union's gross national income, it is essential to focus carefully the budgetary means it has at its disposal on a relatively limited number of topics. For that reason, the Commission is trying to group together under the Lisbon heading the various actions which support the Lisbon-Gothenburg process, the aim of which is to make the EU the most successful economy in the world by 2010 in a manner which respects environmental considerations. The Commission is proceeding in this way as there is an annual review under the Lisbon process. By grouping together a number of actions and linking them with broad economic policy guidelines, the Commission is creating the space and the possibility of having, in effect, an annual debate at the highest level on the thrust of the EU's expenditure.

I turn now to our handling of this process as Presidency. Discussions have already commenced in the committee of permanent representatives, COREPER. An ad hoc working group is being established today which will go through the Commission’s proposal to tease out in a little more detail where the Commission’s interests lie. At the informal ECOFIN meeting in April, Finance Ministers will have their first opportunity to exchange views on the matter in some depth. The action between April and the meeting of Heads of State in June will focus on the elaboration at COREPER and the ad hoc working group of the Commission’s proposal in rather more detail. As we hold the Presidency, Ireland’s aim is not to proceed to definitive conclusions. These will take at least a year and probably longer to reach. Our aim as holders of the Presidency is, rather, to focus on the management of the process during our watch. Our goal will be to draw out the Commission on the various elements of its communication to lay the basis for the political discussions which will take place under the Presidencies of the Netherlands and Luxembourg and, possibly, Presidencies beyond those.

Mr. John O’Leary

We will simply cover the first two items. The third item, financial perspectives, is something about which neither the Central Bank nor the ECB would have anything to say. I propose to speak briefly about the Stability and Growth Pact process and to touch on the question of the dissipation in the ERM. Dr. Casey will speak about structural reform.

In looking at the Stability and Growth Pact, one must consider the deficit and debt objectives in the treaty. Together, these constitute the euro area's fiscal framework. The framework is necessary to reconcile the fact that there is a single, centralised monetary policy but 12 national fiscal policies. In the absence of a fiscal framework, loose fiscal policies could give rise to inflationary pressures and place an excessive burden on monetary policy. There are two other reasons for a framework. First, to avoid the possibility of a state having excessive public borrowing. That is reflected in interest rates throughout the euro area and what is termed "the free rider problem". Second, to prepare for the budgetary impact of ageing in the years ahead. This has become increasingly important in recent years.

To stress the positive, the pact concerns stability and growth in the sense that sound public finances are considered to promote sustainable growth. It was found necessary to introduce the pact because when the Maastricht treaty was being drawn up, debt ratios had been growing rapidly and stood at around 60%. It was considered desirable to keep them from growing further. A 3% deficit reference value was chosen largely as it was considered to be consistent with the stable 60% debt limit, assuming the kind of nominal rate of growth and prices one normally gets in the euro zone of around 5%. At the time, the public investment GDP ratio in Germany was around 3%. These were the parameters involved. However, the debt ratio continued to grow after the Maastricht treaty was signed. By 1996, when the stability pact was first mooted by Germany, the debt ratio was about 70%, which was twice the ratio 15 years previously.

Chairman

Is that across the 15 countries?

Mr. O’Leary

Yes. The pact was introduced with the aim of encouraging governments to balance their budgets over the cycle to enable them to address normal cyclical fluctuations and temporary shocks without breaching the 3% reference value. Members of the committee will be aware that the pact has run into difficulties in recent times with breaches of the deficit in a number of instances. The ECB's view is that this has happened as countries failed to use periods of higher growth to copper-fasten their fiscal positions rather than because there was anything fundamentally wrong with the pact. When the Council of Ministers failed to act on the Commission recommendation to France and Germany to take effective action to reduce their deficits, the ECB was concerned that a failure to conform to the rules and procedures foreseen in the pact would undermine its credibility. Since then, the Commission has decided to seek legal clarity on the Council's approach. It will also review the pact.

The view of the ECB is that there is nothing fundamentally wrong with the treaty or the pact. It considers that there is some scope for improving their implementation.

I will now turn to ERM 2 which is an important element in the integration of acceding countries. It is imminent, in the sense that at least five of the acceding countries, albeit mainly the small ones, have indicated that they intend to go into the exchange rate mechanism within about six months of joining the EU.

An acceding country is not obliged to participate in the mechanism. However, it is expected to do so and can do so at any time subject to agreement on the central rate and the fluctuation margins. Each case will be assessed individually, which is understandable given the wide variations between nominal and real convergence in these countries. One thing to be aware of is that the ECB and the acceding countries take a different view of what participation in the mechanism has to offer. The Governing Council, like the Council of Ministers, sees the ERM as having a dual role, namely, to help acceding countries and to orient their politics to achieve stability and convergence. It also acts as a convergence criterion in the sense that participating successfully in the mechanism for at least two years constitutes a precondition for adopting the euro. On the other hand, the acceding countries see the 15% band as conferring little credibility or discipline and they have a strong preference for spending the minimum two years in the mechanism. If a country intends to do that and to go straight into EMU - as some of them intend - it has to be in reasonably good shape before it joins the mechanism in the first place. The view of the ECB is that some countries would be better off deferring participation until they are in somewhat better shape and that others may need to spend longer in the mechanism. For all of them, the timing of entry into the mechanism and the length of time they stay there should be related to the contribution that this is likely to make to the achievement of lasting convergence.

Chairman

ERM 2 will have different criteria for different member states, but there will be an upper and lower rate of fluctuation. I presume there will be some limit beyond which they cannot go. Who will determine that?

Mr. O’Leary

The usual fluctuation bands are the 15% bands; that is 15% either side.

Chairman

When we entered, we chose to enter at a lower band.

Mr. O’Leary

That is going back to its predecessor, ERM 1. When it started, it had a narrow band, 2.25%, which was what applied from when we joined until 1993. The wider band was created in response to the currency crisis in 1993. It was somewhat different from the wider band in terms of the central rate where, effectively, the margin of 15% was between the lowest country in the mechanism and the highest. In the case of ERM 2, the margin is against the euro, so that one country could be 15% below and another could be 15% above.

Chairman

Who will determine that?

Mr. O’Leary

The Minister. There is a procedure for this.

Chairman

Is ECOFIN involved in the negotiations between the Commission and the member states? Is the Central Bank involved?

Mr. O’Leary

ECOFIN will be involved. Decisions on the central rates and the fluctuation band are taken by mutual agreement of the Ministers of the euro-area member states, the ECB and the Ministers and central bank governors of the non-euro-area member states participating in the mechanism. The European Commission is also involved and there is consultation with the EFC. It is a 15% band unless there is an agreement otherwise. There is a possibility for narrow bands but that is highly unlikely in the case of the acceding countries. The ECB's view is that one would only contemplate narrow bands in the case of a country like Denmark which is very far along the road towards convergence.

Dr. Michael Casey

The best contribution I can make to today's session is to say a few words about structural reform, which is at the core of the Lisbon agenda. The EU Commission has been monitoring progress in this area for some years, but we would like to know exactly what is meant by structural reform as it means different things to different people.

The consensus view would suggest that structural reform basically means removing obstacles that impede an economy's ability to produce goods and services efficiently. The emphasis is on the productive or the supply side of an economy. A good example of a structural impediment would be high taxation that reduces incentives to produce. Another example would be subsidies to industry which might prop up lame duck industries at the expense of overall efficiency. There are many other examples to which I will refer later.

The notion of structural reform is rooted in the capitalist system. The emphasis is on efficiency rather than equity. The idea is that, as an economy becomes more productive or more efficient, everyone will benefit, including the poor. This seems to have happened in Ireland during the Celtic tiger period. The rich undoubtedly got richer, but the poor appear to have been taken out of absolute poverty. The question of relative poverty is another matter.

It is widely believed that Europe is much more in need of structural reform than the United States, for example. We have all heard the term "eurosclerosis", which basically means that Europe's economies are hidebound by taxes, regulations and other sorts of rigidities. The free market is prevented from working properly and, consequently, productivity in Europe suffers. That is why the potential GDP growth rate in the euro area is only about 2% a year while in the US, which has less structural rigidity, it is about 4% a year. That is a significant difference.

This is mainly a matter for economic and finance ministries which gives rise to the question of why the European Central Bank is interested in this area. The answer to that is that it is interested in maximising Europe's potential growth rate. It is also interested in structural reform because of its mandate for price stability. The problem is that in a region where potential growth is only about 2% or less, it is more difficult to keep inflation low. As soon as the economy begins to grow by about 2%, it starts to overheat and as it hits capacity constraints, prices start to rise. Given its mandate for price stability, the European Central Bank would then have to raise interest rates. In contrast, the United States does not really have to worry about inflation until its economy starts to grow by about 4% or more. Naturally the ECB would prefer to have more generous speed limits. It would like to be able to allow the economy to grow more rapidly without inflationary pressures kicking in and this can only be accomplished by progressing structural reform more proactively under the Lisbon agenda. I think there is a consensus out there that the Lisbon agenda has gone a little bit off track and needs to pick up some more steam.

The next area which I thought might be of interest to the committee is how to implement structural reform. In other words, why is it taking so long in Europe when everybody seems to know what is the right thing to do? It would seem to be the case that, unfortunately, structural reforms often have political side effects and governments tend to hasten slowly. Some years ago, New Zealand was an exception and quickly introduced dramatic structural reform. They claim to have invented a clever way of lessening the political fallout. Whether it worked or not is probably still an open question. However, there is no doubt that structural reform is a necessary condition for raising potential growth. We have seen it in Ireland. It is a necessary condition but is it sufficient? The answer is probably "Yes". However, there is a complication in the euro area, fortunately not in Ireland. Populations are ageing which creates a number of additional difficulties, for example, lower consumer demand as older people do not demand consumer goods. There is also less dynamism, entrepreneurship, higher pension provision requirements and so on. The US does not yet have these problems.

While nothing can be done in the short run to solve the problems of ageing, it should not be seen as a reason for not proceeding with structural reform. Well-conceived immigration policies are also relevant here, especially for those countries which are ageing rapidly. Structural reform is needed in some specific areas in the euro area for existing members and accession countries alike. A total of nine areas have been identified by the EU Commission: growth-oriented strategies involving knowledge-based productivity; increasing labour market flexibility, social welfare reforms and so on; increasing internal and external competition; reduction of excessive regulation, red tape and so on; increasing expenditure on research and development; fostering an entrepreneurial climate; ensuring long-term fiscal sustainability; integrating financial markets; and improving public sector quality and efficiency.

In regard to where Ireland fits into all this, as we know Ireland has had good marks on structural reforms. Our score card is looking well. We are regarded as being in the top three or four market oriented economies in the world - not because we necessarily have an ideological preference for free markets but our more eclectic approach has brought us in that direction. We are probably the most globalised economy in the world so we need the kind of flexibility structural reform brings so we can compete internationally and respond to shocks. We are fortunate in receiving so much foreign direct investment from the US.

It is not surprising that the EU Commission has given us good marks for structural reform, but it advises us to make more progress in three areas, namely, competition among professional groups, wage moderation and spending on research and development - which is a fairly low proportion of our GDP.

Mr. John Bradley

Unlike my colleagues in the Department of Finance and the Central Bank, the Economic and Social Research Institute does not have an institutional relationship with the Commission. We are a research institute.

When the ESRI was asked to speak to this committee, I was volunteered because my background is in working with the less-developed EU member states and particularly over the past five or six years with the acceding states. Coming from that exposure to the smaller and less-developed EU member states and acceding states, I developed a different perspective on Lisbon which cuts across many of the issues members are concerned with today. In my note, I draw members' attention to the fact that although we are the Celtic tiger and the epitome of success, according to the more than 100 Lisbon indicators which are now monitored very carefully, our success is skewed into two of the six broad categories, namely, general economic performance and employment performance. In other words, these might be characterised as outcome indicators.

When one looks at the other groups of indicators, our performance is much more modest. Dr. Casey has drawn attention to some of these, namely, innovation and research, economic reforms, social cohesion - which is quite surprising - and the environment which is not. As one looks at that type of pattern and as other acceding countries look at it, they will note something of a paradox. The most successful economy in Europe seems to measure up across the whole range of Lisbon criteria very badly. How can a country like Ireland do so well in the crucial output category, which is what matters, yet so modestly in a wide range of what one might call input categories?

The Irish experience is particularly relevant to the acceding states because they are in many ways at a less-advanced stage of economic development than Ireland was even at the time of our first - and aborted - application to join the EU. I draw the committee's attention to a comment in my note by the former Polish Deputy Foreign Minister, Mr. Radek Sikorski. I deliberately included it because it was quoted in Business Week, which is an international magazine which is widely read and because it is refreshingly honest. Lisbon looks very different to the acceding countries than it does to the developed countries of Europe and people in Europe tend to talk about “the world of Lisbon” and “the real world” with the implication that they live in “the real world”. Approaches to the Lisbon agenda tend to divide into two categories, one of which is what one might call the Anglo-American view, which Dr. Casey stated succinctly, which looks to remedy slow European growth by cutting taxes, increasing labour market flexibility, privatising and deregulating. In other words, it is not concerned with the issues which concern the Lisbon agenda. I note that Business Week commented that the influential Sapir report - An Agenda for a Growing Europe - was a devastating critique of European competitiveness. Far from rejecting the relevance of the Lisbon agenda, particularly for the poorer European states and the acceding states, I suggest in my note that the Irish experience suggests that the Lisbon agenda ought to be approached in a slightly different context.

Based on the Irish experience, I offer some observations which apply to other lagging EU states and acceding states. First, one cannot ignore the fact that the success of Ireland was built on massive Structural Funds and the level of that aid for the acceding states is considerably less. The budget debate which was commented on in Europe is about cutting the European budget rather than expanding it. As an Irish person working in almost all the acceding states under national development plans which are being implemented from 2004 to 2006, I detect an unease in eastern Europe that the opportunity offered to Ireland, Portugal, Greece, Spain, the Mezzogiorno and East Germany will not be offered to the same extent to the acceding states. They are being caught in something of a bind because they are being hit by the Anglo-American type structuralist agenda at a time when they simply do not have the resources to implement it. Some countries have done better than others. Estonia has a constitutional ban on unbalanced budgets and over the period from independence in 1992 until today, it has maintained a balanced budget. Other countries do not. Poland, the largest acceding state, is in serious fiscal trouble. The cohesion experience suggests that the Structural Funds are the tool for addressing the Lisbon agenda in the acceding states as they were in the poorer cohesion states of the EU.

I would like the Irish Presidency to make more of that issue, to point to Ireland not as a small-scale version of Germany, France, the UK or Italy but as a unique country that started off poor but became successful through dramatically successful use of European aid allied with very stringent reforms and has become a case study that fascinates most of the acceding states.

The education qualifications in many of the acceding states are formally higher than in Ireland. A higher fraction of their workforce have third level education. However, the Irish experience shows that this is not the whole story. Our use of the European social fund to integrate our efforts in improving skills in human resources is something the Irish Presidency should make more use of.

Another element of the Irish experience is that the Structural Funds and the national development plans were closely integrated with our industrial strategy, which went back to the late 1950s at the time of economic development. The Irish success has come about as a synthesis between Structural Funds, industrial strategy and openness and foreign direct investment. Our experience is not the only development experience. It is different from that of the Nordic countries - Finland, Denmark and Sweden - which show up much better across the whole range of the Lisbon indicators.

Working in eastern Europe, I am slightly distressed that the Lisbon agenda appears to have taken on a life of its own. I strongly recommend that the Lisbon agenda should be addressed as a by-product of coherent national growth strategies, not as an end in itself.

Mr. O’Sullivan

I beg the indulgence of the Chairman and the committee to add one or two points because I deal with the European budget and related matters which have been referred to. Ireland is actively supporting the incoming member states in a number of ways, including in a small-scale way about which not many people will have heard. Before we assumed the Presidency we spent a number of months talking to all member states and acceding states, paying particular attention to the incoming member states. The Minister for Finance, Deputy McCreevy, met the finance Minister of each incoming member state in July 2003 at separate sessions.

Arising from some of the conversations that took place at those meetings, at which the representatives of the incoming states asked us to share our experience in terms of obtaining, using and accounting for EU Structural Funds, we have organised a seminar for the ten incoming states which will take place next week, on 15 and 16 March, in the Irish College in Louvain. Over those two days we will go through our experience of obtaining, using and accounting for Structural Funds, control procedures that must be set up and so on.

This is a major event at which we will not try to educate but to share our experience with the incoming states. The offer has been well received and the seminar will be well attended. This is in conjunction with the twinning projects we run with a number of the acceding states. We are currently running one with the Czech Republic. We hope that once the Presidency is out of the way we will have the opportunity to expand our efforts in that area.

It has been said that the budget debate at present is about cutting the EU budget, but that is not the case. The EU budget is currently running at about 1% of the Union's gross national income. The debate, in which we are not currently active participants - our job is to manage the process, not take sides - is essentially between those who would maintain the budget at that level, which allows for real growth in the budget - in real terms, 2% per year, in line with expansion of the European economy - and those who would increase it by about 25% in real terms over the period of seven years. Nobody, to my knowledge, has suggested cutting it.

In the matter of the size of the Structural Funds and their impact on Ireland, between 1989 and 2003 the amount of Structural Fund assistance we received was about 1% of our gross national product. It has been decided to cap the volume of funds for the incoming member states at 4% of their gross national product. This means the incoming member states may receive up to about four times what we received. Far from being niggardly towards the incoming member states, we will be participating in a financial support effort four times the size of what we received.

In terms of the impact of the funds on Ireland's economic development, it is estimated by the ESRI that the funds have added 1.5% to the level of Ireland's output over a period of time. That must be seen in the context of a doubling of the Irish economy over a seven-year period. This indicates that while the funds have been important, they have not been the whole story.

My last point relates to what Lisbon is about. We must be careful not to equate the Lisbon agenda simply with micro-economic reform because it is about much more than that. It is about strengthening the competitiveness of the European economy. I apologise if this is too technical, but those parts of the Structural Funds which have to do with the Objective One regions and the Cohesion Fund, which deals largely with major infrastructural transport projects and environmental projects, will strengthen the competitive performance of the European economy just as they have strengthened Ireland's competitive position. The debate will not just be about the fact that 18% of the Structural Funds are to be dedicated to the Lisbon agenda. The Lisbon agenda also encompasses the 80% of the Structural Funds which will be devoted to Objective One regions. This must also be borne in mind. Those parts of the Union budget which strengthen macroeconomic performance will also contribute to the Lisbon objective of making Europe the most dynamic economy in the world by 2010.

Chairman

We will take a round of questions and then allow each of you to contribute. Please do not feel restricted to answering questions in your own areas. I did not understand something that Dr. Casey referred to and perhaps he will go over it again. He said that once we moved beyond the EU growth rate of 2%, inflationary pressures kicked in, while in the USA a level of 4% must be reached before this would happen. I did not quite understand the reasons for this.

Professor Bradley made a point about transfers to Ireland. I cannot remember exactly, but I think they did not exceed 3% of GDP at any stage. My recollection from a previous existence is that transport costs to the market in Ireland were twice the European average. I do not think some of the accession states will have that problem. Some of them will have better infrastructure than we have and geographically they are better placed. Geography, presumably, will be an interesting aspect for accession states. They are not remote islands like Ireland and there is the question of the implications of that.

We barely touched on the question of ageing and demographics in the Union. Some of the accession states will not add much to the needs of the Union. One of the reasons the Irish model, as against the European Union model, was able to sustain Asian tiger-type levels of economic growth was the many women switching from working in the home to becoming part of the workforce outside the home. Clearly, we could not sustain such levels of growth again because that resource is no longer available. What are the implications of immigration and the need for immigrants for the future success of the European Union economy? Will the Union need immigrants and, if so, when and in what numbers, if its economy is to become the most competitive economy?

Deputies Carey, Mulcahy and Haughey and Senators Lydon and Dardis are offering. I call Deputy Carey.

Deputy Carey

I found the inputs extremely interesting, although some of them were slightly above my head. I found the analysis of Mr. Bradley particularly interesting because he spoke about the political choices the Lisbon agenda implies. He said Ireland is performing modestly but we should be honest and say it is performing poorly in a range of areas such as innovation and research, economic reforms, social cohesion and the environment. Ireland is viewed as a role model by some accession states. Is there a likelihood that if some accession states, which regard Ireland as a role model, were to pursue the same types of policies we chose to follow, we would end up with a Union that would be unevenly developed socially and economically? I would like to hear the speakers' reaction to that point. I read in Mr. Bradley's paper about the importance of national development plans and the need for them to be integrated. I will put this point another way - it is a little like the joke about the Kerryman who was asked by a tourist how to get to a place and was told he would not start from here.

Some of us heard Professor Rodrigues address the Forum on Europe recently. I got the distinct impression that it is time for a fundamental review of the Lisbon agenda to be undertaken at this stage, if we are to achieve many of the goals that have been set. Its aspirations are laudable, but are they achievable and at what political cost? Some of the speakers probably will not be able to comment on the political choice and cost of achieving those. We have chosen to adopt a particular model of economy. It seems to be successful for many people but it has created a rather divided society. If that were to be replicated by many accession states, would we ever achieve the social cohesion to which we all aspire, essentially, the Berlin rather than the Boston model?

Deputy Mulcahy

I join in welcoming the panel of speakers whose contributions I found most interesting. I think they will agree that were interest rates to increase significantly in the European Union in the short term, many of the goals of the Lisbon agenda would be more difficult to achieve because businesses, as well as consumers, would find them more difficult to achieve with the higher price of money that would involve.

That brings me back to the Stability and Growth Pact. The Minister for Finance attended a meeting of the committee approximately six weeks ago when there was a dispute between the Council and Commission on certain countries' budgetary positions, to which one of the speakers referred. I was under the impression that the President of the European Commission was referring this matter to the European Court of Justice rather than merely engaging in a dialogue on the legalities of it. I raise this issue in the context of the candidacy of an Irish person for the board of the European Central Bank. It might seem slightly off the agenda but I raise it because there seems to be an attitude among the larger countries, some of which are the worst offenders under the Stability and Growth Pact, that they are to be permanent members of the executive board of the European Central Bank, while some of the smaller members, which are, perhaps, better adherents to the Stability and Growth Pact, may be denied their rightful place on that executive board. Will one of the officials comment on that and would they agree that new rules are needed to ensure a fair rotation of representation of member states on the executive board of the European Central Bank?

Senator Lydon

I compliment all the speakers on their presentations. I do not understand economics or finance well, but their presentations were clear. The chairman pre-empted my question to Dr. Casey regarding the 2% and 4% growth rates. Will he elaborate further on that point?

Deputy Haughey

I thank the panel of speakers for their contributions. I found the discussion extremely interesting. This is the third meeting we have had to discuss the Lisbon agenda. It is difficult to get a comprehensive understanding of what is involved. However, that is what the work of this committee is about, to try to understand the process and to examine how we can advance it. Dr. Michael Casey talked about structural reform. For the first time in the three meetings we have had on this matter, it has been stated clearly by him that this agenda is based on the capitalist system and on efficiency rather than equity. I tried to get a similar statement from some previous speakers at the earlier meetings but it was not forthcoming. Now we know where we stand from an ideological point of view.

Dr. Casey stated that structural reform has political side effects. He referred to the New Zealand experience. As politicians, we need to know what are the political side effects as we come to understand this process. It is for us to know what they are, but any guidance Dr. Casey could give us in that regard would be greatly appreciated. Labour market flexibility or privatisation stand out as approaches that might have political side effects. Following one of our meetings I tabled a parliamentary question to the Tánaiste and Minister for Enterprise, Trade and Employment to ask how competitiveness was being pursued in an Irish context having regard to the Lisbon agenda? I think it threw the Department into some convulsion, as I was prevailed upon to withdraw the parliamentary question and told that the appropriate information would be sent to me.

Deputy Quinn

The Deputy did not fall for that one?

Deputy Haughey

I am still waiting for the information.

Deputy Quinn

Exactly.

Deputy Haughey

The crisis had passed as far as the Department was concerned. However, this example highlights the dilemma facing us. We want to know as national, not European, politicians what this process means for the proverbial man on the street. We will endeavour to find that out as this process continues.

Mr. Bradley brought a great sense of balance to this discussion, having regard to the two previous meetings we had on the matter, and highlighted the fact that in the Irish situation, the Structural Funds and the European Social Fund were particularly helpful to our success. That is worth highlighting. Mr. Bradley also went on to discuss the Lisbon indicators and how we are failing in many aspects, aside from in general economic and employment performance. That has brought a sense of balance to this discussion for the first time, and to what this agenda is about. That has been very useful. Slowly but surely we are beginning to understand this. Mr. Bradley in effect said that the Lisbon agenda is not the "be all and end all" of everything. As a committee we should take that into account.

Regarding infrastructure, how are the accession countries doing? I am talking of roads, harbours, airports and so on. Are there indicators? I am sure there are. Have those countries much catching up to do and how advanced are they compared to the European Union as a whole?

Senator Dardis

I thank the delegation for its contributions. They have been very helpful to the committee's work and have given us a very good overview from a range of perspectives. I wonder about an aspect of the Stability and Growth Pact, which was also referred to by Deputy Mulcahy. Regarding the four recalcitrant members, if we may call them that, particularly two, my concern relates to enforcement, how the pact can be enforced, and the length of time it would take to reach decisions which would lead to recalcitrant members being brought back into line, so to speak. Mr. O'Leary spoke about the scope for improving implementation of the Stability and Growth Pact. That is not the same issue, but it is related. I wonder what that scope might be. A statement was made about the acceding countries and the smaller ones entering the ERM within six months. The difficulty lies with the larger countries, particularly those such as Poland, where there is a very wide convergence from where those countries stand to where the European Union is. What sort of time scale is Mr. Bradley thinking about in terms of these countries' capacity to enter the tunnel, so to speak, to achieve convergence and eventually to enter EMU?

It is frequently stated in the lead-up to accession, particularly at the early stages, that the Common Agricultural Policy dimension of it, with regard to the accession states, could be accommodated within the 2% growth already referred to. I cannot see that happening. I wonder how it will be possible to fund the Common Agricultural Policy requirements through the accession states - I am thinking again in particular of the larger accession countries - in the context of 2% growth. Incidentally, similar statements were made regarding German unification, to the effect that it could be funded from within existing resources without additional taxation, but it did not turn out like that.

The final point relates to the Structural Funds and what Mr. Bradley said of them. It is obvious they had a significant impact in this country, and we could argue about what their contribution was to the increase in growth. Mr. Bradley spoke of the wider band, so to speak, saying that the countries could perhaps contribute 4% of their economies. They are, however, coming from a smaller base. If there is less of the Structural Funds available to them, how will they be in a position to achieve the type of growth and convergence which Ireland achieved? There is a difficulty there. Mr. Bradley or someone else might deal with that aspect. I accept that the disciplines are important, and were obviously so in Ireland's case with regard to achieving the single currency and so on. I wonder how those disciplines can be imposed on what is probably a more divergent group of countries.

Deputy Quinn

My apologies to the chairman, the committee and our guests for my inability to attend from the outset. I have been listening to some of the comments and observations made and I am familiar with some of the positions advanced previously. I would say to Deputy Haughey that we are living in a capitalist world and that the choice relates to what kind of capitalist world one wants to live in, gangster capitalism as represented by President Putin in Russia or responsible well-regulated social market capitalism as reflected in the more humane societies which constitute the European Union. That is not a choice about economic efficiency, but about the distribution of the fruits of a well-performing economy. The Government has made those choices very clearly - essentially it is Punchestown versus crèches. It is not disputed that we all need a well-performing economy. As politicians, we need to decide how the resources of such an economy are distributed. It is in that context I put my question to the relevant speakers or chairperson, as they so decide.

The objective of the Lisbon strategy, and the Irish objective, if one takes the Presidency objective set out in the document, is fostering competitiveness, which is a sine qua non, developing and delivering more and better employment and ensuring sustainable growth. If we want to maximise one half of the labour force, the female section of the labour force that is now much better educated than ever before, we must make it possible for that section to fully participate in the labour force. That means realistic and sustainable forms of child care, which we do not seem to have, so that the economic potential can be realised. Leaving aside arguments about equity or the desirability of any other arguments, if one spends up to 18 years educating and training one section, 50% of the workforce, to make an economic contribution and then hand-trip them in the way Peter Stringer hand-tripped the English rugby centre last week, by preventing them from making that contribution, we are then hand-tripping ourselves because 90% of child care is carried out by the female, the mother. To what extent does child care, and all those other wishy washy soft issues which are not seen as market related, help sustainable development?

The second question relates to the CAO figures, the drop in college applications and the likely drop in the numbers of leaving certificate students, possibly falling by the year 2007 from 64,000 to 47,000 in terms of those coming through the CAO system. What do we do to ensure that the supply, starting at primary school level, continues through? Deputy Carey in particular represents, as I do, but more substantially in his case in Dublin North-West, large sections of population whose families will not see their children complete primary education, let alone continue on, unless there is an intervention in terms of what my colleague Niamh Breathnach, and Deputy Bruton's colleague, describes as breaking the cycle. If we want to maintain the skills level of our labour force, to what extent do we need to intervene not at third level but at primary school and pre-primary school level, which is the other side of child care, or a component of it, to ensure that every child has the support system to come through the educational system in the first instance to emerge with a set of skills which will enable that person to achieve the last objective, namely, sustainable growth, which will I presume be based on a knowledge-based economy?

Deputy J. Bruton

I am not a member of the committee, but I was watching Professor Bradley on the monitor and was so interested in what he was saying that I rushed over here to ask him a few questions.

Chairman

I had thought that it was the dynamic performance of the Chairman.

Deputy J. Bruton

I was rewarded by hearing the Chairman's questions, which anticipated those I would have asked. They complemented one another. I have one or two points. First, do the Europeans really want to achieve a technology-based economy that is one of the fastest growing in the world? Do European people really want that? It is one thing for politicians to say that in a declaration. However, Europe is a middle-aged continent and, like most middle-aged people, Europeans are becoming increasingly interested in security rather than changing their lives radically to achieve new objectives. Is there any political sincerity on the part of the population in its willingness to make the sacrifices necessary to achieve the Lisbon objectives, or are those political confection with a great deal of capitalism thrown in with concerned-sounding social dressing? The result is called a strategy, but there is no real underlying political commitment to it. Is "cosmetic" an unfair characterisation of the Lisbon process?

I ask your view of the optimistic opinion of the Commission that Europe must put a great deal more money into research and development. That would be decided by 25 or more Commissioners sitting around a table in Brussels. They would say where the new technologies are and how much money we should be putting into them, with the idea that they will somehow solve the problem by doing so. How qualified are Commissioners to know where we should be spending money on research and development anyway? Do they have any prescience that others, and the market, do not? Should it be decided at that level? There is an idea that, somehow, one should be deciding at political level to put money into research and development.

What likelihood is there that, even if we spend on research and development and have major development as a result of the research, the benefits will stay in Europe? Is it not likely that, if applications require lower-cost capital or labour to be applied, the applications will take place wherever that lower-cost labour or capital is available and not in Europe, unless it can provide those? Is there a real connection between Government spending on research and development, determined at the level of the European Union, and outcomes of a beneficial economic kind? Is there evidence of that?

It seems that the economic reform part of the agenda is fairly closely modelled on what has been attempted in New Zealand. I would be interested to hear Professor Bradley's answer to this: why has New Zealand, having done everything right in liberalising its economy according to the textbooks, achieved damn all? It has achieved next to nothing. Its rate of growth is very low, and its economic performance very poor, yet it has been doing the right thing according to all the textbooks ever since Roger Douglas was appointed Minister for Finance about 20 years ago. I remember that "Rogernomics" was supposed to be what we would do. Here we are, having done only a few things right, not having reformed our economy and still having all these State-sponsored behemoths in existence which the Minister for Transport is even now unable to deal with, yet we are getting it right. We have not carried out those reforms, whereas the New Zealanders, who have marketised everything, have achieved next to nothing. Why is that? I do not know the answer. It is a genuine question and I wish I knew the answer.

I was struck by the fact that Professor Bradley did not refer to demographics in his presentation. From thinking and talking about this subject both here and abroad, it seems that the key to Ireland's economic success is demographics - full stop. There is nothing else to it except demographics. The accident of IT coming on stream at a time when we had a big increase in our labour force and people being into IT gave us a surge or push that others did not have. Europe's problem is that it is old. I would be interested to know if the ESRI or anyone else has examined tracking the relative economic growth rate against average age. Would one find a very close connection between the two and that, as the average age moves from, let us say, 35 up to 40 or 40 to 45, there is, almost immediately afterwards, a fall-off in economic growth? People in their 30s are much more innovative than people like myself in their 50s. That is just the way it is and there is no mystery to it. The economics profession should perhaps recognise demographics as a stronger force, even if that means dumping some of the more optimistic economic advice that is being offered to elderly Governments in elderly countries, which they have not the faintest hope of ever applying.

Chairman

As if Professor Bradley did not have enough questions, the Chairman has two other brief ones. Our economic growth over the past four decades has been focused on attracting foreign direct investment. Other EU economies have been able to develop by focusing on indigenous industrial strength. Given the competition for FDI, should we now consider developing the competitiveness of our indigenous industrial strength? Should we be examining that more closely?

There is now a fairly widespread fear that the US economic recovery will be jobless, that the growth will come from increased productivity and that most new jobs will be exported to manufacturing plants in China or elsewhere. If even the US cannot compete for manufacturing jobs, and now some service jobs, against Asian countries, how can a slow-growing European economy hope to generate new jobs or keep existing ones? Is there a possibility of economic recovery and growth which is jobless?

Dr. Casey

I will start with the Chairman's questions, if I may. The first referred to the speed limits and the fact that the maximum sustainable growth rate in Europe is about 2% a year, whereas it is twice that in the US. That is simply because productivity in the US with the new economy and so on is probably twice that of Europe. The simplistic definition of inflation is too much money chasing too few goods, and there are too few goods being produced in Europe so if the money demand is there, it does not lead to the production of more goods immediately because the capacity constraints are too severe, owing to lack of structural reform and so on. That means that prices rise. In America, the speed limits are more generous. It can achieve a 4% growth rate before it reaches the limits of productive capacity so prices do not rise until it has achieved a higher rate of growth and higher employment, other things being equal. I do not know whether that clarifies the point.

There is some question as to whether the United States has a new economy or whether that is a statistical mirage, but the latest evidence suggests that it has a high-production, knowledge-based economy to which Europe aspires. Deputy Bruton asked whether Europe really wants to go down that road, but I do not know the answer to that. The answer to the question on geography and peripherality is that Ireland is probably the most geographically peripheral country and therefore probably needs more infrastructure to help it compete in trade.

The question on ageing is good. Ageing is important, and I agree that the demographic dividend in Ireland has been extremely beneficial. The opposite has been the case in Japan and is increasingly the case in Europe. That is worrying for the future. I do not know whether immigration can solve that problem completely, but sensible immigration policies can help. I read only recently that a huge number of French scientists have just emigrated to America, where they feel that they have better prospects in a more efficient economy and in places such as Silicon Valley.

On female participation, we are probably now close to the European average so we probably cannot go much further. In the years of the Celtic tiger, the increased female participation added as much as two percentage points to the growth rate each year, and it would be nice if that could be kept going. We may be reaching the limits of that from a social point of view.

Chairman

Europe has probably reached the limit so there will be a need for immigrants. Has that been measured and, if so, what were the numbers and when was it measured?

Dr. Casey

I do not know the answer to that, but I am sure it is being examined. I am sure every country is trying to define its own meaningful immigration policy.

Chairman

Is there a need for an EU immigration policy? That is the real issue. If Ireland is at the European level of female participation and has exhausted its supply of women in the workforce, the same is presumably the case throughout Europe.

Dr. Casey

Yes. The EU may have to start looking at that, especially if it does not go down the high technology route, because more labour-intensive forms of production would be needed.

On the divided society versus social cohesion, it is true that the Lisbon agenda is based on a capitalist model. The only saving grace is that it is not a brutal form of capitalism. I think that I mentioned in my opening remarks that when it works well and is based not on ideology but on pragmatism, it tends to take people out of absolute poverty. It probably cannot ever take people out of relative poverty. The income differentials may become more and more skewed, but the fact that many people can be taken out of absolute poverty is not a bad thing and the fact that the rich get richer must be taken on the chin.

It is true that high interest rates would be bad for business, other things being equal. However, the way the European Central Bank would look on that is that, if inflation is becoming a problem and must be controlled by high interest rates, the curbing of inflation would be good for business. In the long run, a low inflation environment is regarded as being better for business so if the price of that is volatility in interest rates, the feeling would be that it is a price that is worth paying.

I have touched on efficiency versus equity. The political side effects of structural reform can be fairly severe. That is especially the case if countries that have a fairly corporatist approach and high-tech, high-spend economies are told that they must go with the Lisbon agenda and go into reverse. That is not something that can be done overnight. I gather that the way the New Zealanders did it was to bring in the social partners one after the other. As soon as one group of social partners became aggrieved at what it was told about, for example, subsidies being withdrawn, it brought in the next group of social partners and one group cancelled out the other. I was recently at a seminar on why New Zealand has not succeeded. At that seminar, a New Zealander said that it should have succeeded and that the only problem was location, location, location - New Zealand is too far removed from everywhere. I think he claimed that, without structural reform, New Zealand would now have been worse off.

Structural Funds are probably not as powerful a driver as the growth of foreign direct investment. The accession countries might mop up a substantial share of foreign direct investment, particularly from the United States. Even if they do not get extremely generous treatment in structural funding, they might be able to do something with the foreign direct investment from the United States and other developed countries.

I think that Deputy Bruton's questions were directed to Professor John Bradley. The only point I will make on research and development is that Professor Beaumon, who was over here recently, said that it was not clear that research and development, especially Government-sponsored research and development, would lead to positive outcomes. He thought that a country such as Ireland should monitor other countries' technology rather than put an awful lot of resources into its own research and development programme. That is another view. Obviously, the Japanese monitored western technology for a long number of years and that stood them in good stead.

Age is an important factor for growth. Allied with the foreign direct investment, which we were able to use because we had a young, skilled labour force, the demographic dividend in Ireland has been a very positive factor.

On the Chairman's final questions, we should not ignore indigenous industry, but some of it is in secular decline and its productivity is low. People tend to say that it must move up the value-added chain. That seems to be the cry nowadays, but I am not sure that it will happen automatically. I am not sure that the market will deliver that kind of outcome. We need to consider scientific education, and there must be a co-ordinated planning approach - that is planning with a small "p" - to bring that about. There probably is a risk of jobless growth, unless people retrain and move up the value-added chain, but it will not be easy. I am sorry I have taken so long.

Mr. O’Sullivan

I shall answer one or two of the specific questions on the prospective EU budget. There was one question on whether it will be difficult to accommodate the Common Agricultural Policy in the 1% budget ceiling - it obviously will be difficult. There is an agreement, which runs for a number of years yet, on the CAP needs of the 25 member states. The question was how the CAP needs of the incoming countries can be accommodated. That will clearly be an issue. The financial proposals that the Commission has launched are sufficient to cover the incoming countries' CAP needs, but the question that has been raised comes into play when countries argue for the budget to be kept at its present level. In that case, a political choice would have to be made between the Common Agricultural Policy and the new policy areas in which the Commission wants to get involved, such as the EU as a global partner and the citizenship agenda. Difficult choices will then have to be made and that will be the content of the debate and negotiations over the forthcoming 18 months or two years.

There was a question about the accession states and the 4% cap on the funding they can receive. It has been decided that the maximum volume of Structural Funds and other supports which the accession states can have is 4% of their gross domestic product. That compares with an average of 1% which Ireland received between the years 1989 and 2003. The question was if, given their small base, that would be sufficient to generate growth in those countries. However, the question almost answers itself in that if they are small economies, these amounts should be sufficient to kick-start them. The important element in generating growth is not so much the absolute volume of funds coming to those countries as their relative size, and 4% of a country's GDP coming into the country each year is impressive. The real issue for the accession states will be their capacity in administrative structures, planning and the projects they can produce. The main question is whether they will be able to use the volume of supports that will be available to them.

There was a question about the length of time it takes to get countries to react under the Stability and Growth Pact. That is a question for Mr. Moran but the rule is that a country must react within the year following the finding that there is a problem to be addressed. If the finding takes place in January of a given year, for example, the country effectively has 23 months to put its house in order. If it happens in December, the country has 13 months to react.

There was a question about the rules regarding the ECB. There is only one rule laid down in the legislation. It is that the competence of the candidate is the only criterion which can be taken into consideration. Matters such as rotation, regardless of what understandings might be reached on an informal basis, are beside the point. The single rule is the competence of the candidate.

Mr. Moran

There was a wide range of questions but rather than repeat the responses which have been given already, I will concentrate on a few items. Deputy Bruton raised the question of whether Lisbon was a cosmetic exercise and whether it was nothing more than a list of wishes. Certainly, the slow progress on delivering on that agenda would tempt one to think that way. However, given that in the 15 member states the unemployment rates are running at an average of approximately 8%, that there is a rapidly ageing population and that this puts a burden on budgets, it is an unfair characterisation. Countries such as Germany have taken difficult decisions and have started to implement the necessary reforms. Progress has been slow and we need to do better but I would not characterise it as cosmetic. That is a personal view.

There was also a question about research and development spending by the EU, acting as a quasi government. The aspiration is to get spending on research and development in Europe up to the levels of spending in the US. Public investment in research and development in Europe is close to the level of public investment in the US. The issue is to get the private sector element of that spending right. It means trying to create the conditions necessary for the private sector to engage in research and development.

With regard to demographics, the availability of a labour supply that was well educated and young was a significant factor in our economic development. Nobody can deny that. The ageing of the population is a significant issue for Europe in the longer term. Continental Europe has an older age profile than Ireland. In addition, the average retirement age is 58 years across the 15 member states. In some countries, the average retirement age is as low as 54 years. The fiscal burden is therefore increasing all the time. Dealing with this is not easy in policy terms. Certainly, many of the initiatives to encourage people to stay longer at work or to give them the opportunity to do so will, over time, make a contribution to that.

There was a question about the enforcement of the Stability and Growth Pact and the position regarding the legal case. The Commission has taken a case to the European Court of Justice seeking legal clarity on the procedures arising from the ECOFIN meeting on 25 November. My recollection is that the Commission lodged its case at the end of January and was granted the expedited procedure by the court in the middle of February. The next stage is for the Council legal services to lodge a defence. Legal certainty should emerge from that over the next three or four months.

The Commission arrived at a three prong strategy after that ECOFIN meeting. One is to seek legal certainty through the legal case. Pending that, the Commission has committed to operating the Stability and Growth Pact in line with the political commitments, if one can call them that, of 25 November. It has done that. Throughout the first three months of our Presidency, the Stability and Growth Pact has operated. There has been an examination of the various programmes and we are moving on. Ultimately, in terms of enforcement, if countries do not deliver on their commitments, it is always possible to revert to the legal process and impose them in that way.

Mr. O’Leary

I wish to make some additional comments. Mr. O'Sullivan spoke about the appointment of executive board members. He is correct that the treaty provides in Article 11.2 that the president, vice-president and other members of the executive board shall be appointed from among persons of recognised standing and professional experience in monetary or banking matters. That is all that is involved. It is interesting to note what has happened in practice. The initial composition of the executive board was Dutch, French, Finnish, Spanish, Italian and German. Two replacements have taken place, one of which, Lucas Papademos, is Greek and the other Austrian. Two of the six, therefore, are from what would be regarded, at least by the large countries, as small countries. The issue of quota probably does not come into it.

To take a broader view, the more important issue is what happened with the enabling clause. This was the change in the voting modalities to prepare for when there would be a larger euro system which included the accession countries. Discussions on that took place over a lengthy period. There was much negotiating but, much to everybody's surprise, the large countries ultimately agreed that their representation in terms of voting in the governing council would be reduced from 100% to 80%. At the outset it had not been envisaged that the Bundesbank would put up with something like that but it did. There was also no question of weighted voting and everybody who goes there can speak. That is an important matter to bear in mind.

With regard to interest rates, there is no change. Since the launch of EMU, the policy that has been pursued has resulted in anchoring inflation expectations. The outcome of that, against a favourable economic background, is that euro area short-term and long-term interest rates have fallen to their lowest levels in decades.

It is interesting to note that both short-term and long-term interest rates are somewhat above those in the US and that is true both in nominal and real terms, which is not what one would expect, given the current level of the exchange rate which perhaps suggests that the Stability and Growth Pact is having some influence, or at least it is open to that interpretation.

Senator Dardis asked a question on the implementation of the pact. I had mentioned the possibility for some improvements in the implementation of the pact and I did not mention what they were. The problem is of course that we are working against a background where in November 2002, the Commission produced a recommendation and a rake of proposals for improving the pact, very few of which ultimately saw the light of day. One of those proposals was to focus more on the debts since ultimately that is what is important in the consideration of ageing populations. The Council decided that it was enough to focus on the deficit criteria which would give the correct debt outcome. Focusing on the debt would not have been very helpful in the case of France or Germany.

There is also the possibility of examining net debt rather than gross debt but on the other hand it would be necessary to take account of implicit liabilities in terms of pensions and so on and there are complications there. The kind of things the ECB considers as likely in the future would be rather modest and they are related, such as strengthening the incentives to pursue sound policies in good times and improving the analysis of structural balances. Strengthening the incentives to pursue sound policies in good times relates to the issue of early warning which was applied in the case of Ireland but nowhere else. There is no impediment to applying early warnings and perhaps if they had been applied in the case of Germany in 2001, we would not be in the state we are in. That is an important issue. It runs up against the question of cyclical adjustment and the problem of finding a method for cyclically adjusting budgetary positions which is acceptable to all. As Mr. O'Sullivan would agree, that is very difficult to achieve and it has been at the root of the difficulty of dealing with Germany in the current situation.

Chairman

Does Professor Bradley wish to respond?

Mr. Bradley

I will begin by commenting on the two areas where Structural Funds came up, one being the comments by the Department of Finance and Senator Dardis took up that point again. One must be careful in evaluating the role that Structural Funds played in the Irish success story. The Department of Finance has portrayed it as modest funds, on average 1% of GDP, not the whole story, modest increment to the level of GDP and the eastern European countries have a bonanza of 4% to come. I do not recognise that story.

There have been three Structural Fund programmes in Ireland, from 1989 to 1993, 1993 to 1999 and 2000 to 2006. It was during this decade and a half that the Irish economy was transformed. To look at the role of Structural Funds in eastern Europe, one really must go back to the early Structural Fund programmes, the massive expansion in regional development aid that was put through to prevent Spain, Portugal, Ireland and Greece losing out when the Single Market was set up. This was the consolation prize. It so happens that Ireland was uniquely positioned to benefit from those Structural Funds better than any of the other countries because exactly the right fiscal reforms had been put through - we had been through the wringer for a decade of the worst recession in living memory. The reforms were in place and the Structural Funds came on stream just about the time when we could absorb them and use them to best effect.

Senator Dardis commented on the central and eastern European countries with their smaller GDP - Poland has a GDP of 42% of the EU average, but we did not have that even since 1922. I worked closely with the Polish Government as an adviser in drawing up its national development plan prior to the Copenhagen summit. There was a period during that year, 2002, when the Polish policymakers genuinely thought that they would be net contributors to the EU budget from 2004 for one year because of the way the numbers seemed to be coming out - low Structural Funds and minimal CAP transfers made it seem as if Poland would be a net contributor. That is not now the case of course but it was an issue they had to take into account.

Many of the eastern European countries, the new accession states, have fiscal instability. Poland will find it extremely difficult to absorb any Structural Funds, let alone the generous ones that are on offer. This is because the co-financing arrangements are severe. Greece had that problem in 1989 to 1993 and for most of 1994 to 1999. It could not absorb its Structural Funds and had to give them back. There should be no complacency about what is facing the central and eastern European countries.

The average for Ireland of 1% GNP is probably a little misleading. My analysis and the work done by my colleagues in the ESRI show that it went above 4% in certain years. When one factors in the co-finance, it was a huge public investment injection into the economy.

Concerning the returns, I have fought a decade-long battle with the European Commission to try to evaluate Structural Funds in a holistic way. I agree if one plugs in a certain amount of public investment, one achieves these rather modest gains. Dr. Casey spoke about foreign direct investment. Who would believe that Intel would have come to Ireland if we did not have a good broadband telecommunications structure, if we did not have good roads and efficient airports? Of course foreign direct investment comes to countries with good infrastructure but regionalpolicy will not factor that in. A much simpler measure is considered of a road being built, a certain amount of demand being generated for a while and then the building and the road is there, and the rather modest gains are difficult enough to quantify. Unfortunately my colleagues in the ESRI have done most of this evaluation and the 1.5% is attributed to our names.

As I have examined eastern Europe, I have begun to re-think the Irish story in a way that is extremely complicated and pushes one right to the frontier of economic research. Is the infrastructure good in these central and eastern European countries? They are right in the heart of Europe and they do not have seas to cross. Anyone who has driven in eastern Poland knows that the infrastructure is appalling. It may be just down the road from Germany and Austria but the infrastructure is truly appalling. Anyone who has visited north-eastern Estonia, for instance, has seen the other side of the moon in terms of desolation and poor infrastructure. It is an advantage for them that they do not have to cross the sea but their infrastructure is in very bad shape and that will hold back their development.

Deputy Carey raised a very interesting point about whether we should review the Lisbon strategy, whether the Irish model is misleading and whether there is a danger for the accession states in following us. It is clear that Ireland was engaged in a process of convergence from the late 1980s until 2000. We moved from a very low economic base to converge with the EU standard of living. Lisbon is about renewal, not convergence, it is about looking at the developed economies of Europe and recognising that they do not shape up too well when faced with the challenge from America and China. Eastern Europe is not even talking about renewal, it is talking about convergence. Those countries need to move from 40% of the EU average in 20 years to 80%, where Portugal would be now. My view is that the Lisbon agenda is muddying that picture because there are more basic economic issues concerning the promotion of convergence.

Deputy John Bruton asked if research and development is the key. There is a difference between big and small countries. Germany, France, Italy and the United Kingdom have to worry about research and development. Should we invest in research and development? I am uneasy when I look at the huge sums of money that have been channelled into this area. When the institute carried out the mid-term evaluation of the present structural fund programme, it was extremely difficult to trace through the possible benefits of the massive expenditure in research and development. The New Zealand case is a salutary example of how in a decade a country can move from being the world's best to failure, and we ought to bear that in mind. The European model of using the state as a strategic organiser and the Commission playing a complimentary role with the Governments in less advanced EU member states was forgotten by New Zealand. Dr. Casey said it is all about location, but the same could be said about Singapore or other successful economies. They threw the baby out with the bath water and the European model is much better.

On demographics, Europe is not all old - Poland is a young country. There are 40 million Poles about to join the EU and there are many young people in Poland. Africa has the most young people in the world so it is not just about young people but education, infrastructure and technology. If those do not exist, the young emigrate and Europe will benefit from that.

The Chairman drew attention to the fact that during convergence a country can catch up and absorb technologies, attracting FDI, but when convergence is reached, the country must fall back on its own resources. The Danes and the Finns have done that and their models are fascinating. If the committee feels complacent about Ireland it should look at these countries to see how far behind we are. We must develop our indigenous strengths and that will draw on the need for the structural reforms in the public services that we find it so difficult to carry out.

Since the beginning of time people have worried about jobless growth. Economists are meant to be Panglossian optimists. There are periods of development with jobless growth that are often followed by periods of massive growth. Ireland bucked the trend during the economic boom and increased the share of employment in manufacturing as a share of economy-wide employment, which was against the flow of events because in most other countries, services industry employment rose, not manufacturing industry. I am not worried that growth will always be jobless in the long run but the Lisbon agenda focuses on the quality of that growth and it is important to get that right.

Deputy J. Bruton

I read that one of the problems was that all the reform in New Zealand led to a break down in the trust that existed in the economy. It was so competitive that the trust that underlay economic transactions was lost. Are we doing enough in our reforms to build a structure where people will be comfortable doing business with others who are 1,000 miles away?

Dr. Casey

When talking about flexible labour markets, we are essentially talking about putting people on contract. This is what happened in New Zealand, even in its central bank, where almost all the staff were on contract and could be let go at any time. That alienates people. Another version of the story is that the contracts were more apparent than real unless someone did something appalling. There is no doubt, however, that flexibility in the labour market context is close to alienation. The Americans are now talking about the X generation, where the workers who were treated like pawns in companies that can down-size at the drop of a hat are not loyal to the companies. The jury is still out and there may be a middle ground we should seek rather than seeking this brutal form of capitalism.

Chairman

I thank the witnesses for appearing. This has been a useful, interesting and helpful meeting.

The joint committee went into private session at 4.05 p.m. and adjourned at 4.15 p.m., sine die.