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JOINT COMMITTEE ON EUROPEAN SCRUTINY debate -
Thursday, 16 Dec 2010

Stability and Growth Pact: Discussion with Department of Finance

No. 7 is a discussion with officials from the Department of Finance on the proposals to strengthen the Stability and Growth Pact. On behalf of the committee, I welcome Mr. Michael McGrath, assistant secretary, Mr. Ronnie Downes, Ms Brenda McGovern and Mr. Joe Kirwan.

Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give this committee. If a witness is directed by the committee to cease giving evidence in relation to a particular matter and the witness continues to so do, the witness is entitled thereafter only to a qualified privilege in respect of his or her evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and witnesses are asked to respect the parliamentary practice to the effect that, where possible, they should neither criticise nor make charges against any person or persons or entity by name or in such a way as to make him, her or it identifiable.

We will hear a short presentation by Mr. McGrath, which will be followed by a question and answer session with members. I am sure members will have a number of questions on various matters of concern.

Mr. Michael McGrath

I am accompanied by my colleagues Mr. Ronnie Downes, Mr. Joe Kirwan and Ms Brenda McGovern. On behalf of myself and my colleagues, I thank the committee for its invitation to the Minister, who sends his apologies for not being present. We welcome this opportunity to brief the committee on the Commission's legislative proposals to strengthen economic governance in the European Union.

We supplied the committee with an information note on 22 October 2010 and earlier in the year we appeared before the committee in respect of related proposals. I will make some general remarks before addressing the various specific measures of the various proposals.

The global economic crisis over the past two years has led all policymakers to review and revise the framework used to guide fiscal policy. In response to the deterioration in the public finances throughout the Union, member states and the Commission have determined to reform the operation of economic governance in Europe and to strengthen existing rules. With this in mind, in March 2010 the European Council appointed President Van Rompuy to lead a task force, consisting of Finance Ministers, the Commission and the European Central Bank. The task force submitted its final report at the October meeting of the European Council. As part of the process, the Commission published legislative proposals on 29 September 2010. Consultation with member states is now under way and it is expected that the final Commission proposals will reflect the outcome of the Council's consideration of the task force recommendations which, while largely reflective of the Commission proposals, differ from them in some respects.

An example of an area of difference, where further discussions are needed, is an appropriate quantitative reference for debt reduction. The Commission's legislative proposals are designed to strengthen the Stability and Growth Pact, the EU regulatory framework for member states' public finances, and to broaden the scope of economic surveillance beyond the budgetary position. The proposals aim to achieve this by enhancing the importance of the debt criteria, introducing sanctions, including financial sanctions, for euro area member states in the case of persistent non-compliance with the SGP, and a tiered range of procedures and sanctions designed to prevent the emergence of macro-economic imbalances in a member state which, if left uncorrected, could ultimately jeopardise the functioning of the EU and the euro area.

Specifically, the legislative package consists of six proposals. Five of these are in the form of draft regulations and one is in the form of a draft directive. These proposals have yet to be considered in any significant detail by member states, but I will now briefly outline each for the committee.

COM (2010) 526, a draft regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, proposes amendments to the preventive arm of the SGP. The preventive arm requires that member states pursue a medium-term budgetary objective that allows them to have a safety margin with respect to the 3% of GDP deficit reference value and allows room for budgetary manoeuvre. This entails ensuring that the growth rate of government expenditure should not normally exceed a prudent medium-term growth rate of GDP unless matched by discretionary increases in government revenues and unless discretionary revenue reductions are compensated by reductions in expenditure.

The purpose here is to provide a benchmark against which countries' fiscal plans will be examined. In terms of enforcement, the regulation envisages a warning being addressed to the member state concerned in a case of significant deviation from prudent fiscal policy. Where a significant deviation persists, a Council recommendation would require corrective measures to be taken. Additional enforcement measures in the form of financial sanctions are envisaged for the euro area.

COM (2010) 524, the focus of which is the draft regulation on the effective enforcement of budgetary surveillance in the euro area, is to provide for enforcement measures in the euro area arising from the amendments to the operation of the Stability and Growth Pact contained in the other draft regulations. Under the preventive arm, the regulation makes provision for an interest-bearing deposit to be temporarily imposed on a euro area member state that is making insufficient progress with budgetary consolidation. This would arise, where necessary, following the issue of an early warning by the Commission and a subsequent recommendation from the Council.

Under the corrective arm, financial sanctions would take the form of an obligation to lodge a non-interest bearing deposit linked to a Council decision establishing the existence of an excessive deficit and the obligation to pay a fine in the event of non-compliance with a Council recommendation to correct an excessive deficit. These sanctions would be imposed irrespective of whether an interest-bearing deposit had previously been imposed on the member state concerned. Under the Commission proposals the above mentioned financial sanctions are 0.2% of GDP in each case. To reduce discretion in enforcement, the "reverse voting" mechanism by qualified majority is envisaged for imposing these sanctions.

The proposals envisage the possibility for the Council to reduce or cancel the sanctions on the basis of a Commission proposal following a reasoned request by the member state concerned. In the corrective part, the Commission would also be able to propose to reduce the size of a sanction or to cancel it on grounds of exceptional economic circumstances.

In COM (2010) 522 the particular focus of the draft regulation is on speeding up and clarifying the implementation of the excessive deficit procedure to strengthen the SGP rules on budgetary discipline by giving a more prominent role to the level and evolution of debt and overall sustainability. The focus to date has been on the deficit, rather than the debt. The proposal provides for the use of a numerical benchmark for debt reduction where debt levels exceed 60% of GDP, they should be reduced annually by 5% of the excess over the benchmark. The numerical benchmark would be one of a range of factors to be taken into account in the report prepared by the Commission on the excessive deficit procedure. This report would also take account of the quality of national fiscal frameworks, tying in with the proposed directive on national budgetary frameworks.

COM (2010) 527 concerns the draft regulation on the prevention and correction of macro-economic imbalances and sets out a framework for identifying and addressing macro-economic imbalances, including deteriorating competitiveness trends. As such, it complements the country surveillance process provided for under Europe 2020. The new monitoring procedure aims to prevent the occurrence of harmful macro-economic imbalances such as housing bubbles, large current account deficits or excessive overheating in the economy that could jeopardise the functioning of the EU and the euro area. An annual assessment of the risk of macro-economic imbalances and vulnerabilities would be undertaken using an alert mechanism based on a limited number of indicators. In case of actual or potential excessive imbalances, the Commission would conduct an in-depth analysis. In particularly serious cases, an "excessive imbalance position" should be launched by the Council, with a deadline to take a set of policy measures to address the problem.

COM (2010) 525, the final draft regulation by the Commission, further develops the surveillance of macro-economic imbalances. It focuses on enforcement measures to correct excessive macro-economic imbalances in the euro area by proposing financial sanctions in the case of serious and repeated non-compliance by a euro area member state with Council recommendations issued arising from the new surveillance procedure for the prevention of macro-economic imbalances. These would take the form of a yearly fine, until the Council establishes that the member state has taken corrective action to comply with its recommendations. It is proposed that to ensure equal treatment between member states, the proposed fine would be identical for all euro area member states and equal to 0.1% of GDP of the member state concerned in the preceding year.

Directive Commission (2010) 523 is a draft directive on requirements for budgetary frameworks of the member states that sets out detailed rules concerning the characteristics of the budgetary frameworks of the member states that are considered necessary to ensure the effectiveness of the excessive deficit procedure, as provided for under Article 126(14). The proposal sets out minimum requirements for matters relating to accounting and statistics and to macro-economic and budgetary forecasts. It provides that member states should put in place numerical fiscal rules that effectively promote compliance with their respective obligations deriving from the treaty in the area of budgetary policy. Under the directive, member states are required to "establish an effective medium-term budgetary framework providing for the adoption of a fiscal planning horizon of at least three years to ensure that national fiscal planning follows a multiannual fiscal planning perspective". Other provisions deal with the transparency of general government finances and the desired comprehensive scope of budgetary frameworks.

The Commission's proposals envisage that member states will enact the necessary measures to comply with the directive by 31 December 2013 at the latest. It is important to be aware that the Commission's legislative proposals are just that, and will be subject to the normal procedure of consultation and discussion with member states. We will engage positively in this process taking account of Ireland's circumstances and needs.

The Council has set summer 2011 as a target for agreement with the European Parliament on the Commission's legislative proposals. I feel it is worth mentioning in the context of the Commission's legislative proposals, a very significant element in the process of enhancing economic governance in Europe which has already being agreed, is the introduction of the European semester, a reinforced cycle for co-ordination of economic policies with effect from January 2011. We discussed the European semester when we last appeared before the joint committee. Under this it is envisaged that at the start of each year the Commission will publish a growth survey for the European Union including analysis of recent performance and prospective developments at member state level. This will inform subsequent consideration by the ECOFIN Council and the Spring European Council. Based on this work, the Council will identify the main economic challenges facing the EU and provide policy guidance. Taking this on board, member states will submit stability and convergence programme updates for the following year by end-April at the latest. This will not involve submitting the full budget, rather the projections for the budget balance and broad spending and revenue forecasts for the following year. In July, the Commission will issue policy recommendations based on the various considerations that would have been taken by the Council of Ministers in the intervening period. These recommendations will be considered when preparing the annual budget as normal at the end of the year. This will facilitate greater EU ex ante co-ordination of economic policies and discussion of national fiscal policy intentions before they take the form of detailed budgetary proposals. The new arrangements also provide for greater consultation with national parliaments. This process, which we discussed here before, comes into play in 2011.

In terms of where the proposals currently stand, the Commission is aiming for the adoption of their legislative package by summer 2011 and work is ongoing at the various EU level meetings on the outstanding issues. A Council working group has being set up to deal with the Commission's proposals, which will include liaising with the European Parliament.

In terms of their implications, these proposals are very significant in terms of economic governance. The regulations and directive in their current form before consultation with member states have concluded, and would have far reaching implications for all member states. These implications include: more onerous obligations to reduce debt levels; having to satisfy an expenditure rule as a new principle of prudent fiscal policy making; and a broadening of the range of reputational sanctions for failure to meet budgetary obligations.

For the euro area, the proposals provide additionally for financial sanctions in the case of persistent non-compliance with new guidelines on prudent fiscal planning and financial sanctions once deficits exceed 3% of GDP.

Alongside the existing EU oversight of fiscal performance, a new monitoring system in respect of competitiveness issues and structural reforms will aim to prevent the development of harmful macroeconomic imbalances. Euro area countries would be subject to financial sanctions for persistent non-compliance. Member states will also be required to strengthen their budgetary frameworks, for example, fiscal rules to underpin respect of their EU budgetary obligations, ideally on a statutory basis by end-2013.

Before concluding Chairman, if I may make one or two points on the current economic and fiscal landscape at EU level. Events have been evolving rapidly during the last year and it is important to view these proposals as part of the wider developments at EU level. The most important of these developments that has occurred since these proposals were last discussed by the committee is the European stability mechanism. Throughout the current crisis, euro area member states have taken co-ordinated action through the euro area loan facility to Greece, the European financial stabilisation mechanism, EFSM, and the European financial stability facility, EFSF. The focus of recent times is on the need for a more permanent arrangement, as the arrangement for Greece was specific to Greece and the other two arrangements were temporary measures. The committee members will be aware the EU Council will discuss a limited treaty change this week that will be necessary for the introduction of this mechanism. Following this, it is anticipated that Finance Ministers will work on the finer details of the mechanism over the coming months.

The European stability mechanism as it is being termed, will complement the Commission's legislative proposals on reinforced economic governance, as the proposals will focus on prevention and on reducing the probability of a crisis arising in the future, while the mechanism will deal with a crisis if it does occur. Due to the interrelatedness of the proposals and the mechanism it is no harm to bear the mechanism in mind at this point.

The important EU economic policy areas that now need attention are the banking sector, structural reforms that will help economic growth, and fiscal consolidation. The Commission's legislative proposals will help address these important areas. I think we can all agree that the context from when these proposals were published on 29 September 2010 and now has changed substantially, not least in Ireland's case. As members are aware there is policy conditionality attached to the package of support we have, with many policies corresponding to the Commission's proposals. Therefore, the implications of the Commission's proposals for Ireland have a somewhat lessened impact than they might have had heretofore.

The key challenges facing Ireland in the coming years are boosting growth, fostering sustainable employment, repairing the banking sector and restoring the public finances to sustainability. One of the factors that will assist in this is the development of a stronger framework for setting fiscal policy. As outlined in the Government's four year plan, a budget advisory council to provide an independent commentary on the Government's budgetary planning, by means of assessing the appropriateness of the budgetary stance and aggregate budgetary targets, will be established in the first half of 2011. It is also envisaged that a fiscal responsibility Bill will be brought forward. The intention is that this will put key reform measures on a statutory basis. Therefore, much of that envisaged by these proposed Commission legislative proposals are measures that are now very timely in an Irish context. Obviously, these are still in draft form, they will have to take on the views of the member states before coming into force. In this regard work will go on in the first number of months of the new year. In that context hearing the views of the committee members will be of assistance in shaping the Irish position.

I thank the Chairman and members for their attention.

I welcome Mr. McGrath and his colleagues from the Department of Finance. I thank him for this very comprehensive document on Ireland's position at this point in time. It is encouraging that we have adopted a four year plan and a budget, which is in keeping with what is required by the European Union. Seventeen countries out of 27 EU countries are in the eurozone but those other member states are involved in terms of compliance with the eurozone, although they are not members of the eurozone. How does this play out in the development of the European Union? Is it like a two tier European Union with some in the eurozone area and a non-eurozone area. The non-eurozone area countries which are competing in the eurozone area have a say in the way we operate our finances, but we have no say in the way those ten countries operate their finances in terms of devaluation and monetary issues which affect our competitiveness. I know as a former Minister of State with responsibility for trade that we were constantly competing with other European countries for trade. I would like to hear an opinion on how this will play out in the future?

Mr. Michael McGrath

The overall legislative proposals the Commission has set out in regulations and the directive are for the 27 member states. In terms of budgetary discipline, it is incumbent on all EU member states to recognise that. One of the lessons we have learned not just in the European Union, but specifically in the European Union from the recent financial crisis and the economic downturn in the past two to three years is that what happens in one countries will have what is termed as "negative spillovers" to another country. That is quite significant. There have always been obligations that we would not run our budget with a deficit above 3% of GDP. What is happening now is that these are looking to tighten it up, focus on the deficit and the level of debt. If it is above the 60% ratio, the focus will be on bringing it down. There are additional concerns for the eurozone countries because there are additional responsibilities for being part of that zone. Such countries do not have complete monetary independence as they are part of a unit and there are more links between the policy decisions on how a eurozone member runs its public finances and how other members do so. There are additional controls being proposed that deal with sanctions in this area. However, we should still look at it as an issue for the 27 member states of the EU, and the obligations are on all of us. Part of the deal for accession of the new member states in recent years was that they would envisage joining the eurozone when conditions were right, so there is an obligation to meet that divergence towards a potentially two-speed Europe. We should look at this in terms of a 27 member EU, rather than a divergence between the eurozone and the member states.

If the British Government had decided to devalue sterling, that would have major implications for all the eurozone. What influence would they have in respect of Britain complying with the same rules as ourselves? That is my point.

Mr. Michael McGrath

That is a good question. There is nothing in these legislative proposals that has anything to say about the monetary policy of an EU member state that is not in the eurozone. The value of sterling is outside the remit of these proposals, but the obligation is on the UK, as it is on every EU member state, to run a budgetary policy position that is in accordance with sound budgetary rules. Exchange rates are of significance to those countries that trade with the UK, but that difficulty has been there.

I welcome the officials from the Department of Finance. Who carries out the surveillance of the budgetary positions? How often would the Department report? Would it report to the Commission? In respect of the macroeconomic imbalances in competitiveness, when would one know whether a country is competitive? At what stage does one realise that a country is not competitive or that it is losing its competitiveness? Is that not part of the markets? Some countries are more competitive than others. Do we want to be in a situation where every country is at the same level, or will we still be where we are at the moment?

Mr. McGrath stated that the budgetary advisory council being set up will carry out independent commentary on the Government's budgetary plans. I find it hard to see how we can have someone who is independent. Will the person be from outside the country? These so called independent people always seem to come from somewhere. They always have something on the back burner. They always have a view that is linked to somewhere else. Will these people be from inside or outside the country? Will they be from outside Europe?

Mr. Michael McGrath

Proposals for the budgetary advisory council have to come forward, so its exact make-up has yet to be determined by the Government. I understand the Senator's point about the definition of independent commentary. From looking at advisory councils within the European Union and within the OECD, there seems to be a general sense that the membership of such councils should not be that large. They also seem to have some members external to the country so that everyone would not be looking in the same direction. While perhaps there should be some academics, it should not be solely academic, because that could narrow the focus of the council. More work has to be done on the advisory council and proposals have to come forward. Most countries would also receive ongoing independent comment from bodies such as the OECD.

All member states are currently reviewed by the European Commission, which carries out two forecasts each year. It generally engages with each country and holds discussions with the finance ministry and others within the country to get the feel on the ground. It would then make its forecast and that would feed into the overall forecast. There is a spring and autumn cycle to these forecasts. The Commission would then present that forecast to the Council of Ministers, who would then form a view. I think things will build on that. The Commission normally sends a series of questions back to the country involved and seeks clarification on certain points. The Commissioner would bring forward a report to the Council of Ministers, to the eurozone group or to ECOFIN itself. The decision will be taken at that level. The frequency of the reporting is normally once per year, but in some cases it is more often than that. In any event, we have reporting at the end of March and at the end of September under the Maastricht criteria, where the state declares its deficit.

The Senator asked a hard question about the definition of competitiveness and the macroeconomic imbalances. The issues would include whether prices are out of line. These could be consumer prices or more wider price levels like house prices. Another issue would be wage rates. If wage rates are out of line with the bulk of the eurozone average, then the question is whether that is appropriate in terms of productivity. In other words, we can pay ourselves more if we are more productive. However, if the wage levels or price levels are out of line significantly, and if a country is losing its market share on exports, then these are other indicators.

When we think of competitiveness, we normally think of countries losing competitiveness. There is also an issue if a country is over-competitive, which would be an imbalance. The Senator rightly noted that it is not a matter of bringing everyone to the same level. There are various comparative advantages and different countries are specialised in different areas. We must also recognise that they are in different locations, and a country that is closer to the large markets of the core could have very different cost structures than one on the periphery, such as Ireland.

I welcome Mr. McGrath and his colleagues. I am interested in some of the language that is being used. First, will we not be somewhat straitjacketed in our budgetary and fiscal policies over the next four years because of the deal between the IMF-EU and Ireland? We have been given a timetable up to 2015 to correct the imbalances in our deficit and bring it in line with the 3% target set in the Stability and Growth Pact. I am curious, for example, in regard to whether this is one of the reasons Mr. McGrath said, "Therefore, the implications of the Commission's proposals for Ireland have lessened somewhat". He might elaborate on what exactly he means. Is it because all of these proposals are taking place in a sense outside of the Irish reality, which is that we are in a fiscal straitjacket for the next four years and have very limited room for manoeuvre, and that this is essentially about bringing stability to the EU and Europe-wide?

I want to pick up on the points raised by Senator Leyden in terms of the eurozone. Surely, we are suffering to some degree. Has Mr. McGrath an opinion on what seems to be, despite what is in the document on this issue, a lack of co-ordination among the eurozone members on exactly how they should deal with this crisis? It seems to be driven by the German agenda, whereas other eurozone member states have a view that there should be a euro bond issue. Will Mr. McGrath explain Ireland's position in regard to the euro bond issue or does it have one? A euro bond would be another form of quantitative easing in that it would print more money and that, by extension, should help Ireland because we have an open market economy.

Mr. McGrath makes the point that the important EU economic policy areas that now need attention are, first, the banking sector, which we are dealing with under direction, second, structural reforms that will help economic growth, which we are dealing with internally, and, third, fiscal consolidation. Of the three, in terms of Ireland trying to chase growth in light of the recent budget, it seems the Government's priority is towards export-led growth. Surely, it would be in our best interests if there was some form of quantitative easing at European level.

Mr. McGrath said: "The key challenges facing Ireland in the coming years are boosting growth, fostering sustainable employment, repairing the banking sector and restoring the public finances to sustainability". All of that sounds fine but we are at the mercy of international markets in terms of boosting growth. I am trying to get a sense of where we are coming from in light of these proposals, which seem to be happening outside the fiscal strictures imposed on Ireland.

Mr. Michael McGrath

The overall Commission proposals before us follow on from the analysis by all of the crises Europe has faced in recent times and should be seen in the context of the Stability and Growth Pact, which set out that a member state should not run a deficit greater than 3%. Virtually all member states were well in compliance and Ireland was always in compliance since the pact was introduced. Since entering this crisis, however, either 24 or 25 of the 27 have been officially found to be and announced as being in excess of the deficit. In other words, they are running budget deficits in excess of 3% and Ireland's is significantly at the upper end of the range.

It has also been the view, and the Council has found in this regard, that they are not deficits that can be corrected within a one year process so most countries have a number of years to correct them. Ireland had a deadline of 2014, which is what the budgetary position is based upon. Recently, the Council of Ministers, viewing that our growth prospects may be somewhat weaker than anticipated, extended that deadline and the Council of Ministers endorsed that to 2015. Either way, practically all member countries are now, according to the criteria of sound fiscal policy, running budgets that are way in excess of where they should be and, therefore, they need to take corrective action.

On one level, one can look on all of these proposals as being something for the medium term because much of the detail refers to a country that is beginning to get towards being in excessive deficit or, if it does get there, to get it back out immediately. In reality, given the starting position is that virtually all European Union members are already in excessive deficit, the proposals are probably for the medium term. The issue is that we must learn the lessons from this crisis and start putting the solutions in place now. It will be too late if we just solve this crisis and then turn our attention to that. What I should have said in my opening remarks is that while important decisions will be taken in the next year or so, some of the implications of what is being discussed now are of a more medium-term focus.

The Senator's question was whether this leaves Ireland with little room for manoeuvre. The answer is that all member states, effectively, are in a situation where their room for manoeuvre is considerably less than it would have been some years ago given that their focus is on having to reduce their budget deficits. For the vast majority of member states, the EU average debt ratio is somewhere about 80% of GDP, which is well above the benchmark criteria of 60%. Again, the room for manoeuvre in terms of expansionary policies and so on is quite curtailed for all member states, not just for Ireland.

I take the Senator's point that the programme agreed between Ireland and the EU-IMF will obviously put in place mile markers over the next three years as part of a funding line for issues that need to be addressed in regard to the budgetary position and reducing the deficit. However, the targets that are set are the targets that had been set out previously in either the most recent four year plan or, even before that, in last years budget, where we targeted bringing the deficit below 3% by 2014. It is more a matter of the position of the funding partners in terms of disbursements and money being conditional on one meeting the target - that is the conditionality element of that programme. It would not have been as up-front as the position in the market but, at the same time, we have seen that the markets have their own conditions, either through lack of access of through price. While I am not sure if that totally answers the Senator's question, that is what I meant by "lessened somewhat".

With regard to lack of co-ordination at eurozone level, that is probably a fair comment. I am mindful of what I should say because President Barroso in the past day or so has signalled that what would perhaps be best is for the member states to think about the issues, work through them and then bring them forward, rather than what has happened in regard to recent media attention on the European Council, where statements have been made but the markets have taken another view beyond that.

The euro bond issue has been mentioned going back over a period of time. The Belgian think tank, Bruegel, mentioned it some time ago and referred to it as a blue bond, and it has been mentioned by a few others since. Very recently, the euro group president, Mr. Jean-Claude Juncker, and the Italian Minister, Mr. Tremonti, produced an article on this point. Others have also spoken about it. There are varying views on this. It is far too early to be definitive on this matter. We have an open mind but until we see what is, it is too early to make further comment on it.

Senator Mooney's final point concerned where growth will come from. The sustainability of public finances is an essential plank in any growth strategy. If we do not have that, less and less revenue will go to the policies and more are will go to servicing the debt of previous expenditure. We need to control this. It is also important in terms of sending signals for investment. It is of significant importance to a country such as Ireland, which relies so heavily on foreign direct investment, in order to show that we can put our house in order in an orderly fashion. The trade-off is that when one is consolidating, as a number of member states including Ireland are doing, this has an impact on growth. There is a trade-off to be made and the Government and the Minister will argue they have been examining the balance between growth and consolidation.

I have a brief supplementary question on this point. Does Mr. McGrath have a comment on the seeming disparity between growth rates predicted by the Department of Finance and those of the EU Commission? It seems to have had a direct impact on the bond markets, fuelling the view that Ireland will ultimately default. Obviously growth rates are central and essential to us getting out of this.

I do not want to go back over history but there is an added critique of the traditional Department of Finance growth rates in the boom years when the Department did not get its figures right. I am putting in context the fact that growth rate projections of the Department of Finance may be somewhat questionable because of that perception. This will not be helpful in dealing with the bond markets and this will be exacerbated by the divergence from the Commission, particularly in light of the IMF-EU package.

Mr. Michael McGrath

In terms of the growth forecasts of the Department and of the EU and IMF, Senator Mooney is correct that there is a difference in their assessment for 2011 and for some of 2012. Beyond that, their forecasts are pretty similar to that set out in the four year plan and subsequently in the budget. It is an issue for the next 12 to 18 months and those bodies are somewhat more pessimistic than the Department. Our GDP forecast for 2011 is 1.7% and that of the EU and IMF is 1%. In the normal course of events, if someone was talking about this as an economic form, the difference may not be hugely material. However, in a wider context, it must be acknowledged that there are differences and it is important to acknowledge this. The Commission's forecast is weaker than the Department's in terms of its assessment of consumer input into the forecasts. In our forecast there may well be a downside risks on the consumer spending side. Against this, the Commission's forecast on the trade side is broadly similar to ours and we see the trade side, in terms of export led growth, has the potential for upside risk on our numbers. I did not have a chance to analyse the data that emerged from the Central Statistics Office this morning but it shows very strong trade data for the third quarter in terms of the growth of exports and services. There could be potential divergence in that respect. Where this has an impact is that the European Commission has considered our forecast and suggested it does not seem the consolidation plan to 2014 will get us to 3%. This is where it recommended an extra year to the Council of Ministers. It has not recommended a change in the policies, which is significant, but suggested we might need another year to do it. In a sense, it is an insurance because we feel our forecasts are broadly based. In terms of other recent forecasts, the Reuters consensus forecast for November applies across a range of private sector commentators and amounts to 1.6%. The OECD is not too far from our figure.

I take Senator Mooney's point that he does not want to go over history but concerning the previous departmental forecasts, we have set out the forecast record of the Department against other institutions and it bears up fairly well. It is better than some others here or abroad. The period we are examining is the Celtic tiger period when the figures were strong. No matter what forecast one chose, one was always wrong on the right side. Over the past number of years, people have been wrong on the wrong side. The forecast set out in the supplementary budget in April 2009 was a contraction of 7.7% for 2009. It came in at -7.6% according to the Central Statistics Office. We would prefer to be wrong on the right side but we were close enough.

In light of this talk of the importance of competitiveness, does Mr. McGrath have a comment to make on the EUROSTAT figures widely publicised today? I was very surprised at the differential in consumer goods between Ireland and the UK and between Ireland and the European average. This was astonishingly high yet anecdotal evidence suggests essentials such as food and electricity are becoming increasingly competitive, particularly vis-à-vis the North. I am sorry for dragging this out but in terms of the competitiveness issue, these are staggering figures.

Mr. Michael McGrath

I have not seen the figures that have come out today so I am not in a position to add light to the points made. The measurement of competitiveness involves a range of matters, as I said to Senator Burke earlier. When the European Commission considers competitiveness and unit labour costs, it will see the unit labour costs from 2009 to 2011 have improved vis-à-vis the rest of Europe by almost 12%.

I agree with Mr. McGrath but the statistics concern the cost of living across the essential items.

Mr. Michael McGrath

I have not seen the figures so I should not be commenting on them.

I am sorry for throwing this at Mr. McGrath in this regard.

Mr. Michael McGrath

One must consider the cost of living in the context of the overall levels of income throughout the country. Some of the passing through of prices may be to do with the euro sterling costs but it is an issue. I take the Senator's point.

I have a supplementary question on competitiveness. Our competitiveness has been way out of line for years and we are now getting to a position where we are becoming more competitive. Is there an annual review every year in respect of competitiveness? Were measures taken to become more competitive before the crisis hit?

Mr. Michael McGrath

The National Competitiveness Council makes annual reports to the relevant Minister and the Government in terms of price levels and competitiveness indicators in the Irish economy. These reports may even be more frequent than annual. When one considers the figures, it is clear the price levels were not sustainable. However, it must be pointed out that the level of activity in the economy during the few years leading up to 2007 angled more towards domestic demand, house building, etc. This masked the loss of competitiveness on, for example, the manufacturing side. I am not sure whether I can add anything further.

We did not take action on the reports. Given the surveillance of budgetary positions, will we take any further notice of the reports? Who will say whether we should take greater notice of the budget proposals? How will that be implemented? Will it be implemented by the Commission or will there be a separate Irish Department? The reports went to the Minister for Finance, who did nothing about them. Who will take control of the situation and be responsible for saying that he or she received the report and that something must be done about competitiveness getting out of hand? Who will take action, inform us that action is being taken or whatever?

Mr. Michael McGrath

The competitiveness reports went to the then Minister for Enterprise, Trade and Employment. All member countries, Ireland more so than others, must learn the lessons of the past. Clearly, there was overheating within the Irish economy and difficulties within the eurozone. Proposals are now being made because budgetary rules were not sufficiently robust. If lessons are learned from the past, one would expect greater attention to be focused on the Commission's legislative proposals. They mean that member states will need to address these issues and explain what they are doing about them. This is not just an Irish issue. A key factor in this regard is the macroeconomic imbalance scorecard by which members states will view indicators and for which they will be accountable. Greater involvement by national parliaments is envisaged. The days of carrying on as before are over.

I have an observation and a question. This legislation is reacting to events. Unfortunately, it was not in place in recent years. Our little country would not be where it is had the legislation existed. Mr. McGrath referred to correcting macroeconomic imbalances. How would a government or finance Department deal with a housing bubble?

Are 2014 and 2015 merely aspirational dates? This country's interest payment amounts to €10 billion per annum. The last growth figure provided by the EU was 0.9%, although Mr. McGrath mentioned that Reuters suggested it would be 1.6%. Is bringing our fiscal position to a deficit of 3% of GDP by 2014 or 2015 achievable, given interest payments of €10 billion per annum and little growth?

It seems that much of this legislation is being drawn up according to the parameters of the EU-IMF deal. Ireland will need to make a weekly report on the situation and there will be monthly targets for the drawdown of funds. However, these requirements do not seem to form part of this proposal. Perhaps they do in a hazy kind of way, but the conditions placed on the State for drawing down EU-IMF funds seem punitive.

Mr. Michael McGrath

A number of those points are more in the policy space, but I will do my best to address some of them. Regarding weekly and monthly targets, the joint programme set out various conditions that are generally, if not solely, concerned with providing information. Much of the information to be provided monthly would have been in the public domain. For example, the Exchequer statement reports on areas of spending on a monthly basis. This process is being formalised in the context of the deal. Other information is to be provided, including by the Central Bank in terms of the weekly position. These conditions are meant to ensure the situation does not go off track.

There will a quarterly review in respect of the drawdown of funds, which is the norm under such programmes. One area to be reviewed is that of quantitative targets, namely, the tax revenue and expenditure position. The status of the Government's introduction of certain legislation to adhere to policy will also be reviewed quarterly. An audit will be done in advance of the disbursement of funds, which is the norm. It has to do with the joint EU-IMF programme and nothing to do with these legislative proposals. These proposals try to ensure that, when all 27 EU countries no longer have excessive deficits - 24 or 25 already have excessive deficits - in the medium term, more robust procedures are in place to prevent a return to that situation.

Regarding the question on achievability in light of the growth forecast, economic forecasts are just that and one does them on the basis of the best information one has to hand. In examining the economic and statistical relationship, one forms a view. However, there is an element of art as well as science, in that there is a judgment. The forecasts for the period up to 2014 were published in an information note on 4 or 5 November. The Department believes these are robust, credible and achievable. There are internal and external risks, as is the case with any forecast, but the forecasts are achievable.

I thank Mr. McGrath, Mr. Downes, Ms McGovern and Mr. Kirwan for attending and for assisting the committee in scrutinising these important proposals. We will be preparing a report on them, which will be sent to the Minister and laid before the Dáil and Seanad.

Our next meeting will be at 11.30 a.m. on 13 January 2011. I wish everyone a happy Christmas and, hopefully, a prosperous new year.

The joint committee adjourned at 1.20 p.m. until 11.30 a.m. on Thursday, 13 January 2011.
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