JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM debate -
Tuesday, 19 Jun 2012

ECOFIN Council: Discussion with Minister for Finance

Chairman

The ECOFIN Council will meet on Friday, 22 June 2012. I welcome the Minister for Finance, Deputy Michael Noonan, and his officials to today's meeting to discuss the upcoming meeting. A draft agenda and a briefing document by the Department on the agenda items to be discussed at Friday's meeting were circulated to members. The format for today's meeting is that the Minister for Finance will make his opening statement and a question and answer session will follow.

May I remind everybody present that all mobile phones must be completely switched off, as otherwise they will interfere with the sound production in the room?

I now invite the Minister to make his opening remarks.

Minister for Finance (Deputy Michael Noonan)

I thank the Chairman and members for inviting me to speak to them today in advance of the meeting of the ECOFIN Council of Ministers later this week.

Let me give an overview of the European and international dimension to the work of the ECOFIN Council. As this will be the final meeting of the ECOFIN Council under the Danish Presidency, I will brief members on some of its noteworthy achievements. I will speak about the agenda for Friday's meeting, after which I will be happy to take questions or listen to the observations from committee members.

The work of the ECOFIN Council is heavily influenced by the following: the work of the European Commission; the priorities of the rotating Presidency, currently held by Denmark; the work of Heads of State and Government which meet regularly in European Council summits in Brussels; the ongoing volatile situation in the financial markets relating to the crisis in the euro area; and the work of G20 and the IMF.

Specifically in relation to ongoing international developments, the G20 is meeting in Mexico as we speak and it will also be considering a number of the issues that we will be discussing later in the week at the ECOFIN Council. The G20 summit will end today and it is expected that the Mexican Presidency will issue the usual communiqué, setting out decisions taken.

Next Friday's ECOFIN Council meeting will be the final meeting under the Danish Presidency and consequently there is a heavy agenda. The Danish Presidency has achieved some notable successes during its chairing of the ECOFIN Council, including agreement to initiate a pilot phase on European project bonds in 2012-13. This project will contribute to enhancing Europe's competitiveness and thereby enhance the prospects for economic growth, which we all agree is vital to the resolution of the ongoing crisis in the euro area. The pilot phase on project bonds will make co-operation easier between private stakeholders, the European Investment Bank and the EU member states on infrastructural projects within transport, energy and information technology and communication technology.

Under the agreement that will strengthen the regulation of credit rating agencies, the new rules are intended to improve credit ratings so that they reflect the true credit risk. The rules will also reduce dependency on credit ratings both for investors and in financial regulation. The new rules will furthermore improve the possibility for investors and issuers to hold a credit rating agency liable if it fails to comply with the rules. This agreement will be an important driver of improved risk assessments by credit rating agencies, which will in turn restore confidence to the financial markets and ultimately make it easier for governments to access credit.

In regard to the Council general agreement on the capital requirements regulation and directive, the strengthening of bank's capital requirements is an important part of the overall prevention of the future crisis and the rules imply extensive regulation of the financial sector, including more and better capital and liquidity in banks. The possible imposition of different temporary additional requirements for banks to ensure financial stability and elements of good corporate governance and a tightening of the requirements for the member states sanctions on non-compliant institutions. Discussions are ongoing with the European Parliament on this proposal.

On the subject of next Friday's ECOFIN meeting, my Department has already supplied the committee with the latest draft agenda. I will now highlight some of the key issues that will be discussed. First, there will be a presentation by the Commission of its recently published proposal for recovery and resolution of credit institutions and investment firms. Since late 2008, on foot of a request from ECOFIN, the Commission has been working to develop a proposal for an EU framework for bank recovery and resolution. The publication has taken place against the wider backdrop of the proposals for a banking union that has received media coverage in recent days following Commission President Barroso's statements. The banking resolution proposal is one of the main elements of this. Ireland has been supportive of the Commission's work to prepare its proposal. Now that it has been published, officials from the Department of Finance, the Central Bank and the NTMA will examine it in detail in consultation with interested stakeholders to formulate an Irish view.

Second, there will be an orientation debate on the energy taxation directive. The Presidency has outlined a number of questions for answer by Ministers regarding the orientation of future work on this topic which relate specifically to the issues of a carbon tax element to energy taxation, potential removal of the principle of relativity between fuels for similar use, minimum tax rates, and the relationship between the energy tax directive and the EU emissions trading scheme. There are a number of fundamental differences between member states on this proposal and, despite a number of discussions during the past three Presidencies, progress has been very slow. Ireland can support the idea of an orientation debate at this point in discussion of the proposed revision of the energy tax directive. Ireland would have liked to see a mandatory EU-wide carbon tax but it has become very clear that this did not receive the unanimous support required. To this end, Ireland would support an optional carbon tax and a system that allows member states to apply a structure of taxation combining two components, if they so wish.

Third, there will be an orientation debate on the financial transaction tax, FTT, proposal. Opinions on the FTT are polarised. Some countries, notably Austria, France and Germany, are strongly in favour of an FTT, while others, notably the Netherlands, Sweden and the United Kingdom, are strongly against it. Agreement on the current proposal is not looking likely at an EU-wide level and agreement for others to move forward on an enhanced co-operation approach may be sought.

Fourth, Ireland has indicated that an FTT, in whatever final form it might take, should apply on a wide international basis to include, in particular, the major financial centres. This is in line with the Commission's desire that the tax should be applied on a global basis. Such an approach would avoid the danger of activities gravitating to jurisdictions where taxes are not levied on financial transactions. Ireland also believes it is important that any such tax should apply on an EU wide basis, rather than only in the eurozone, to prevent any distortion of activity within the Union.

The fifth key issue concerns Council conclusions on the report of the code of conduct for business taxation. The code of conduct group was established in the late 1990s, with the aim of identifying and abolishing harmful tax practices. This report presents a progress report on achievements during the Danish Presidency. It is now becoming the norm for these reports to be presented at the end of each Presidency term.

Sixth, there are no issues of particular concern to Ireland contained in the report, and this item may become an "A" point, which will allow for its approval with no discussion.

Seventh, in preparation for the European Council meeting on 28 June, ECOFIN may be asked to endorse two reports on tax issues. The high-level working party on tax issues has prepared this report for endorsement by ECOFIN in advance of its presentation to the European Council. The report provides an update on the state-of-play for each of the legislative proposals that are currently being discussed at the various working groups, as well as highlighting progress in certain areas of tax co-ordination.

Eighth, the report is factual and provides a fair assessment of the current situation. There are no particular issues raised which are a concern for Ireland.

Ninth, Ministers will be asked to approve draft Council recommendations on the national reform programmes 2012 to each member state and draft Council opinions on the updated stability or convergence programmes. Ministers will also discuss a draft Council recommendation on the implementation of the broad guidelines for the economic policies of member states whose currency is the euro. Ministers will be asked to approve the draft Council recommendation on the implementation of the broad guidelines for the economic policies of the member states whose currency is the euro.

Tenth, following a series of meetings at official level, an amended text has been arrived at that reflects the views of all member states, including Ireland. The recommendation addressed to Ireland was to continue with the implementation of the EU-ECB-IMF programme. The text now recommends that those member states whose currency is the euro should take action within the period 2012 to 2013 in order to, among other things: strengthen fiscal discipline and fiscal institutions at both national and sub-national levels to enhance market confidence in the medium and long-term sustainability of public finances in the euro area; pursue fiscal consolidation in line with the rules of the Stability and Growth Pact, which account for country-specific macro-financial situations; take action to improve the functioning and stability of the financial system in the euro area; accelerate the steps towards a more integrated financial architecture, comprising banking supervision and cross-border crisis resolution; and implement structural reforms, which also promote flexible wage adjustments.

We will discuss in restricted session issues related to the implementation of the Stability and Growth Pact, namely, the Council decisions abrogating excessive deficit procedures for Germany and Bulgaria and a Council implementing decision lifting the suspension of commitments from the cohesion fund for Hungary. The abrogation of the EDP for both Germany and Bulgaria is expected to be a straightforward process as both countries have corrected their excessive deficits in a durable manner. In regard to Hungary, on foot of a request from the ECOFIN, the Commission has assessed that the country has taken effective action in response to a recommendation from the Council and, accordingly is proposing a Council decision to the effect that the suspension of Cohesion Funds, effective from early next year, should be lifted.

There will also be an exchange of views on the convergence reports from the Commission and the ECB which have been recently published. The origin of these reports is a treaty requirement for both institutions to assess convergence in member states with a derogation at least once every two years. The recently published analysis concludes that none of the eight member states with a derogation currently fulfils the conditions for adoption of the euro.

Commissioner Rehn will inform ECOFIN Ministers about the discussions at and proposed follow-up to the G20 summit in Mexico on 18 and 19 June 2012, to which I alluded.

Let me refer to Ireland's economic and budgetary circumstances. My Department's latest projections were set out in the 2012 stability programme update, which was published on April 27. GDP growth of 0.7% is projected for this year, which would be the second successive year of positive, albeit modest, growth. Yesterday, the ESRI published a fairly similar assessment. The exporting sectors are leading the recovery, and this underscores the importance of restoring sustainable growth in the euro area, which is a key trading partner for Ireland. In this context, resolving the difficulties in the euro area will be vital. Furthermore, taking account of the Exchequer returns for the first five months of this year, our budget is on track.

The June European Council will build on President Van Rompuy's statement following the informal Heads of State and Government summit on 23 May. This statement sets out what needs to be done to bring the EU as a whole back to economic and monetary stability. Central to the statement is that EU policies must fully support growth. We need to find innovative ways to finance new investment and allow SMEs better access to credit and, above all, we need to address the issue of job creation and get people back to work. If the European Union can do this and individual member states can address their government deficit and debt issues, we can look forward to a more positive and stable future.

Ireland will mark 40 years as a committed member of the European Union next year during its Presidency. We take up the Presidency of the European Union on 1 January 2013 and will work in collaboration with the other members of our trio, namely, Lithuania and Greece. During that time, membership of the European Union has been good for Ireland in terms of attracting significant foreign direct investment and in the provision of access to a much bigger market for its exports. Equally, Ireland has been perceived by its European partners and successive members of the European institutions as a diligent, pragmatic and constructive member of the Union. Ireland has demonstrated this continually during the past six occasions on which it held the Presidency of the European Union, and it has gained a reputation for holding efficient, business-like and pragmatic presidencies. In 2004, Ireland presided over the enlargement of the European Union to 25 member states. The Government believes Ireland's future is linked intimately with continued membership of a strong and vibrant European Union and as a member of the euro area. It is the intention of the Government to continue to engage proactively with senior officials in the European Union's institutions and with its European Union partners in the implementation of policies aimed at strengthening growth and stabilising turbulent financial markets. I thank members for their attention and will be happy to respond to any questions or observations they may have.

Deputy Michael McGrath

I thank the Minister for his attendance and welcome this initiative of providing members of the Oireachtas joint committee with an opportunity to engage with the Minister in advance of ECOFIN, thereby enabling them to ask questions of and make suggestions to the Minister.

I wish to raise a few issues. One of the first items on the ECOFIN agenda is the proposed directive on the bank resolution regime. The fact the European Commission has been working on this proposal since 2008 but only published its proposals on 6 June this year highlights the utter inadequacy of the response of the European institutions to the crisis with which we have been living since 2008. The crisis in respect of the banking system in Europe continues today and has persisted for the past four years in one shape or another. While there have been different phases in the crisis, essentially we have been living through it since 2008 and it has taken four years for the European Commission to bring forward proposals that now are to be considered by ECOFIN. I cannot understand the complete lack of urgency among the European leaders and institutions in coming forward with realistic policy solutions. This is a prime example of just how inadequate the response has been, which has been characterised by complete inertia.

The key question is, what if the Spanish banks need more money over and above the €100 billion that has been committed? What if the Irish banks need more money, as many commentators believe? How long more must we wait for this proposed directive to be put in place? Moreover, just as the European Commission publishes a directive providing for the burning of senior bondholders under certain circumstances, another arm of the European Union or of the eurozone, the ECB, will next week require Ireland to pay back €1.1 billion in unguaranteed unsecured bonds in respect of the IBRC. One must question where is the joined-up thinking in this regard and one must ask where is the cohesive policy response to the crisis. How quickly can this proposed directive be put in place? What practical benefit will it be to Ireland? While one cannot say Ireland is coming out of its banking crisis, it is to be hoped it is at least in its latter stages, and in this context, what benefit will this be to Ireland regarding the losses that have been crystallised and which the Irish taxpayers have taken on?

I will turn to the proposed financial transactions tax, FTT, which also is on the ECOFIN agenda. Having read the guidance notes kindly provided to members by the Department, I note they refer to the fact that pressure may be put on ECOFIN to agree that some member states can introduce such a tax by way of enhanced co-operation. In his opening statement, the Minister again has set out, in general terms, the Irish position on the introduction of a financial transactions tax. However, what is Ireland's view on other member states agreeing among themselves to use the enhanced co-operation method to proceed with the introduction of an FTT among themselves? If a proposal is tabled in this regard, what will be the Irish position?

I understand that under the list of items to be adopted, Ireland's updated memorandum of understanding is due to be adopted but not discussed at the meeting. I wish to raise a couple of issues in this regard. Newspaper reports appeared yesterday of apparent proposals by the troika to lengthen the maturity of the loans that have been drawn down and have yet to be drawn down under the programme of assistance with the EU, IMF and ECB. It appears, from the Minister's remarks this morning, that he appears to have been as surprised as anyone else that such proposals have emerged. Nevertheless, what is the Minister's view of these proposals? Would they be of benefit to Ireland and is Ireland seeking such a measure? I note provision was made as long ago as the communiqué of July 2011 for maturity dates of up to 30 years and Ireland has already drawn down at least one tranche with a 30 year maturity date. Does Ireland seek to have this applied retrospectively to the loans it already has drawn down? This unquestionably would help Ireland to regain market access.

I wish to make two further brief points, which again are in respect of the memorandum of understanding that is on the agenda at ECOFIN. I refer to the fundamental question of Ireland returning to the sovereign debt markets. I acknowledge the NTMA's stated position is it hopes to dip its toe in the market this year with some short-term commercial paper. The real test, of course, is a long-term Government bond, that is, the ten year Government bond. Today, a nine year bond for Ireland is trading at approximately 7.3%. Spain borrowed some money for a period of 12 months at a rate in excess of 5% this morning, which is an absolutely crazy rate for 12 month money. In light of the current turmoil, which one hopes will pass before Ireland must return to the markets, what is the Minister's sense at present regarding Ireland's prospects of returning to the bond markets in a meaningful way well in advance of the funding cliff it faces in January 2014, when the remainder of a sizeable bond, which I understand to be approximately €8 billion, is left to be redeemed?

My final question is on the issue of the growth and stimulus package. While it does not appear on the ECOFIN agenda, will ECOFIN make proposals to the European Council meeting scheduled at the end of the month to propose specific elements of a growth and stimulus package for the European Union? If so, what is Ireland's position in this regard and what practical ideas is it bringing to the table that could be applied to the benefit of our people or more widely to the benefit of the European people?

Deputy Michael Noonan

I thank Deputy Michael McGrath, who has asked a lot of questions. On the first question regarding the bank resolution regime, the Deputy is aware the Government has published a Central Bank (Supervision and Enforcement) Bill, which involves domestic bank resolution and has been debated on Second Stage. However, I believe the Deputy has in mind the development of the proposal on bank resolution into a proposal for a European banking system, in effect. The proposal for this kind of banking union, first mooted by the Commission President, Mr. Barroso on 23 May, has developed considerably and at pace in recent weeks in the context of the ongoing euro crisis. The debate is taking place in the media in the absence of any great detail on what a final banking union might look like, but it would fall into three elements.

First, there would be an integrated system for supervision of cross-border banks. Second, there would be a single deposit guarantee scheme. Third, there would be a single European Union resolution fund. It is obvious that different member states are taking their own view on what a banking union might mean to them and there are different interpretations of how it might play out. However, it would need to have the aforementioned three elements at least to be a valid, integrated banking union. Of the three proposals, Ireland is open to the idea of a shared deposit guarantee scheme, as well as to a shared European Union resolution fund, on the basis that such funds are truly mutualised and there is no direct link to the sovereign in future related calls on such funds. So if it kicks back on the sovereign it is not worth having from our viewpoint, but if it can be done on a separate basis there is merit in the proposals.

From Ireland's point of view, the mutualised bank resolution fund will have to apply retrospectively to cover the Irish banks' recapitalisation. That will be our policy position. Any resolution fund will need contributions to be paid in whether by way of levy on the institutions or otherwise. There is not much point from Ireland's viewpoint in contributing to a resolution fund from which we cannot benefit because we have already resolved our banks. To be paying in to resolve colleagues' banks in other EU counties does not make a lot of sense. It will be a policy position that if that were to occur it would apply retrospectively.

On Ireland's supporting an integrated system of supervision, the options for supervision would either be the ECB or the European Banking Authority. The EBA is London-based and as the UK has already decided that it does not want anything to do with such a banking system, it seems inappropriate that the regulator would be in London. That leaves us with the only option of the ECB being the possible regulator. In that case, it is necessary to ensure that the shared supervisor cannot impose costs on Irish banks, which would then have to be met by the sovereign. It is back therefore to whether the ECB is the regulator, but separating the banking industry from the sovereign. One can see our policy position, which I do not think is any different from the Deputy's, in stressing that. That is the way we will be arguing the case.

In terms of colleague nations, President Van Rompuy and President Barroso are in favour of developments in this direction, as are France and Spain. The Netherlands' position is unclear. Germany is very cautious but not ill-disposed, emphasising a stronger fiscal union before a banking union, and has suggested the need for a European body to monitor major banks without endorsing a banking union. The German Bundesbank has warned of the possible risks of a banking union to the European Union, unless accompanied by a fiscal union that allowed control over national budgets. One can see therefore that while France and Spain are in favour, more or less as presented with certain conditionality, Germany tends to be in favour but is tying it into the idea of a fiscal union. Therefore, it will go if it can get more fiscal control and more rules to control the fiscal positions of the sovereigns.

The UK wants a banking union to proceed but without its participation. The UK is adopting a position that has developed in the past 12 months, which says "Drive on and do that because the euro is very important to us. We wish you well but we are not participating". That is basically the position on the banking union, and I have explained our policy position.

I do not have a lot to say on the financial transaction tax beyond what I said in my opening remarks. It is coming up and there are divergent views. There will certainly be no financial transaction tax which will be supported by the 27. There may not even be enough to allow people to proceed by enhanced co-operation.

To reply to the question on what our attitude would be, for the reasons outlined in my script, we would not participate in enhanced co-operation. We would like to see what comes out of it, what type of tax is being proposed and then we would look at it on its merits as to whether we would participate. We already have a financial transaction tax within the terms of the French use of the language. Former French President Sarkozy effectively proposed a stamp duty on financial transactions, principally share transactions in quantums of excess of €1 million. His rate was 0.01% but we have a 2% stamp duty on share transactions of very low value. The UK has a 1% stamp duty on transactions. Those who are tending towards enhanced co-operation now, led by Germany, are not looking at the kind of proposal in the Commission's policy paper but a proposal to go down the stamp duty route.

We are not yet clear on, and require more information about, whether they intend applying the stamp duty just to share transactions or would they apply it to other financial derivatives. Would that have an impact on the financial services industry in Dublin if a similar tax did not apply in London, and would there be dislocation? If there is enhanced co-operation we would not see ourselves as blockers. We would not participate but we would allow it to proceed, see what comes out of it and then judge. The advantage of a financial transaction tax is that, if there was no dislocation of activity out of Dublin and if Dublin continued to be as attractive as it is now vis-à-vis our competitors like the Netherlands, Luxembourg, London and Paris, and if it brought revenue into the Exchequer through a tax on the financial sector, it might be worth considering rather than taxing personal income of citizens who are already under strain. So we leave ourselves open to that kind of argument, but that is the approach in addition to what I have already said in my opening remarks.

I was asked about Ireland's position on the memorandum of understanding. The April review is now presented in the memorandum of understanding and has been submitted to Brussels. The final sign-off is at political level. There will not be a discussion at ECOFIN but there are two meetings. The Thursday meeting is of the 17-member euro group. It is not within this committee's remit to scrutinise me in advance of that. There will of course be a conversation about Ireland at the euro group meeting, as distinct from the ECOFIN meeting. I do not think it will be a very long discussion. Normally when the conditions of the programme are fulfilled, it moves on pretty quickly because they are fairly full agendas.

I was also asked about Ireland getting back to the markets and the policy position is the same. We are funded until the end of 2013, which is 18 months away. We can see the pace of events in Europe where there is something happening every week and sometimes twice a week. We are not therefore going to take up an alternative position. Our policy is to test the market as this year proceeds to see what we can do and how far we can fund in advance of going back into the markets. We will then continue with that policy unless events prevent us from doing so. That is the policy position.

I am still reasonably confident that we will get back into the markets. I also know from looking at the literature, that internationally where the IMF intervenes there is always a bit of hand-holding with successful countries getting back to the market. At the moment, however, our plan is to test the markets at an early date, then move to get funding both domestically and in the markets abroad, and continue with our plan to get back to the markets.

Deputy McGrath's last point concerned the growth and jobs agenda. I have no doubt that practically every country will mention growth and jobs. However, the actual proposals for the Heads of State and Government are being developed not by President Barroso and the Commission but by President Van Rompuy within his circle of activity. He and his advisers, in consultation with member states, are developing the jobs and growth proposals, which the Heads of State and Government will discuss at the end of June summit.

Deputy Michael McGrath

I have just one final point without wishing to nit-pick. We are advised by the Department that the memorandum of understanding is on the A-list of items for sign-off. That does allow me to ask the Minister for his response to the suggestions that the maturity of the loans would be extended to 30 years. It is on the agenda.

Deputy Michael Noonan

I intended to answer that. It is just that Deputy Michael McGrath asked many questions. Sometimes I find it hard to read my own writing, especially when I take my glasses off. I should have been a doctor.

Deputy Michael McGrath knows that at present there are half a dozen or more proposals of what should happen in Europe, but I do not know where this one came from. Certainly, it did not come from any official document because there is no such proposal transmitted to us in government or, indeed, before either the euro group or ECOFIN.

There are some contradictions even within the proposal as presented. When the Taoiseach renegotiated the interest rates in July of last year at the heads meeting, the terms of the loans was also renegotiated. We have got money on a 30-year loan and we have got money on 20-year and 25-year loans as well.

There would be an outstanding issue, which would be helpful to us if, when loans mature and we were re-financing, one could roll short-term over into long-term. The Deputy mentioned debts that arose from the war in certain European countries only being paid this year or not yet being repaid.

Deputy Peter Mathews

Sometimes it is not factual, as in the First World War for England.

Deputy Michael McGrath

We are not looking to have loans drawn down converted to 30 years.

Deputy Michael Noonan

I am simply making a point that if one can lengthen the maturity dates of loans and one can keep them at low interest rates, and there are no penalties attached to lengthening the maturity dates, obviously, inflation takes care of much of one's problem.

Deputy Michael McGrath

Has the Government raised this in respect of loans already drawn down under the programme, retrospectively, increasing them to 30 years?

Deputy Michael Noonan

I have not raised it. I do not know where this proposal came from but I presume that once RTE ran the story, it must have had a source who thought it was some kind of viable idea.

Deputy Pearse Doherty

I want to pick up on a few points.

I welcome the Minister's attendance at the committee and also that we are discussing the matter. I hope that it will become a regular function of this committee to have such a discussion before all ECOFIN meetings.

The Minister mentioned that everybody will talk about growth. There is probably a reason for that. It is because we all want to see growth. We have heard much talk about growth proposals. As the Minister stated, it is not on the agenda of ECOFIN. It will be the Heads of State who will discuss the proposals that come forward.

Since this is the first interaction prior to ECOFIN, I was a little surprised to note that the finance Ministers would be meeting without the issue of growth being on the agenda.

Deputy Michael Noonan

That is not what I said.

Deputy Pearse Doherty

It is what I am saying. I am surprised that it is not a fixed item on the agenda given that one of the major issues facing, not only this country but the European Union, is the issue of growth. The idea of finance Ministers from across the European Union coming together and it not being a fixed item on the agenda was a surprise to me. I wonder if that is the norm at these meetings. Perhaps the Minister would enlighten me.

On the proposals on the banking union, the Minister spoke of the supervision or regulatory role which may be fulfilled by the ECB. Is there also a role for the European Banking Authority in this? President Barroso has commented that none of this, the idea of a banking union, would require treaty changes. I would like the Minister to elaborate on where the role of the regulator-supervisor would fall. Also, how would the powers of such a body or individual lie hand in hand with member states' own regulatory functions? I understand from the proposal that it is a case of designing rules and that these are to be implemented by the regulators in the member states. I ask the Minister to elaborate on some of that.

I welcome the Minister's comment that the European resolution fund would have to be retrospective. There is no shadow of a doubt about that. It should be a red-line issue for the Minister. Is it a red-line issue that a banking union, in terms of the resolution fund, would have to be retrospective? Does he see it so clearly in black and red?

The Minister mentioned that there will be capital from the sovereign required if a resolution fund were to be established. We have our own resolution process following the legislation passed by the House. At the time, I stated that it was all well and good, and it was about time that we had such a process in the State. However, it cannot sit in isolation and we need a European resolution fund because of the interconnectedness of the banks.

The Minister will be aware from our legislation that our own resolution fund, if called upon, would require a transfer from the Exchequer to that fund and the Minister has the discretion to make those transfers. Has the Minister any idea of the initial call on member states if such a fund were to be established? How would the banking framework, the Central Bank legislation and the resolution fund legislation, interconnect if this were to take place?

Also, his comments indicate that there are various views across Europe on this issue. The issue, unless it is retrospective, is far too late in terms of Ireland. There is now the issue of Spain. There are other countries which have problems with their own banks. I argued last year that the European stress test did not uncover the problems that existed, particular with Spanish banks, and was rebuffed. However, we see that there are problems right throughout Europe. As the previous speaker stated, for Ireland, it is four years too late. Where does the Minister see this going, given the divergent views in terms of Europe, and can he outline to the committee the timeframe in which such a banking union would be in place?

It is clear that there will not be a financial transaction tax across the European Union. I welcome the Minister's comments, in terms of enhanced co-operation, that the State would stay out of it on the basis of the potential damage to the sector. In the hypothetical situation where there was agreement across the European Union, and particularly with Britain, to enter into a financial transaction tax, what position would the State adopt? The Minister stated that this could bring in revenue for the Exchequer. The proposal before us, the draft directive, is clear that none of this money from the financial transaction tax goes to the Exchequer. It is estimated that in a single year it would raise €57 billion, which would go to the European Commission. On the substance of the proposal, does the State agree with the idea of the Commission having an independent revenue stream? What would be the impact of existing taxes that are applied to that sector? The Minister mentioned stamp duty. For example, if there were to be a financial transaction tax that would be to the benefit of the Commission, albeit that could possibly result in reduced direct transfers to the Commission at a later stage, what would be the impact on existing taxes in that sector, and also in terms of the leverage that member states have where the Commission at present must enter into negotiations with member states to have a budget? A financial transaction tax would give a group of unelected officials an independent revenue stream which, they themselves estimate in their draft proposal, would be to the value of €57 billion.

The last point I want to raise with the Minister relates to the memorandum of understanding. I take it that there are no amendments to the memorandum of understanding, that it is merely a case of passing it at the meeting. The Minister mentioned the idea of the 30-year average bond. That is what the report was saying. While I am conscious there are longer terms loans, there are also short-term loans. One of the loans from European sources is one-year money but the average loan is 15 years. I understand the Minister's point about what this would do in terms of rolling over the debt when those debts mature but the reality is it does not reduce our deficit now. It will reduce our debt in the long term but we will continue to pay the interest for a longer period.

Reference was made to RTE earlier and the Minister mentioned Ireland getting into the international markets. He is well aware of my view that we need a debt write-down. He made comments to that effect in America when he referred to the warehouse in IBRC. Four unguaranteed senior bonds in the bank mature next week - two on Tuesday and two on Thursday - with a total value of €1.15 billion, yet the Minister's proposal to share the burden on them was shot down. RTE claimed in last night's new bulletin that the IMF will only lend to a country if it can prove that it has sufficient resources for 12 months. I recall the original proposal when Ireland went into the clutches of the troika. It was supposed to dip its toe in the market for a few billion euro last year and again this year. The profile for getting back into the markets was published at the time and that would be consistent with having enough money for 12 months. Is it the case that the IMF will not lend to a country if it does not have funding for its affairs for 12 months? If that were the case, Ireland would have an issue in the context of accessing IMF funding in six months.

Deputy Michael Noonan

There were many questions, for which I thank the Deputy. He expressed surprise that growth does not appear on the agenda. This is purely to do with the allocation of the work within the European system. Syria is important and it does not appear on the agenda and agriculture, which is also important to Ireland, does not appear on the agenda either. The growth and jobs issue will be discussed a week later by the Heads of State and Government when dealing with the proposals President Van Rompuy is putting in place. On the other hand, I have no doubt that growth and jobs will be discussed at the eurogroup meeting because its agendas are much looser and people speak more freely and informally. The group's agenda is not as tight as ECOFIN's. There is no significance in growth not appearing on the agenda. There is a great deal going on and the Heads of State and Government will deal with jobs and growth. ECOFIN does not have a role in this agenda item in preparing the work for the Heads of State and Government. Sometimes it does on financial matters and even then it would be the preliminary run where it would break down issues to net points in preparation for Heads of State and Government but it is not doing so for this agenda item.

The Deputy questioned whether the EBA would have a role in the banking issue. The authority is one alternative as a regulator instead of the ECB but, as it is headquartered in London and the UK has said it wants nothing to do with this, even though it is a European institution, this will be agreed for a number of reasons, including location. That leaves the ECB in pole position to be the regulator. In the same way as at various times during the debate, we transferred functions from this Parliament and Government to the Commission in Brussels, the relationship between the ECB and the Central Bank of Ireland, CBI, is that there will be a transfer of function from the CBI, especially in respect of the larger banks. The delegation of licensing of large banks, for example, may transfer to Frankfurt while smaller banks might still be licensed by Dame Street as they are now. The Deputy can think his way through it and see it in terms of a transfer of function to a cental European regulator from individual sovereign regulators with everything to be worked out.

In case I have misled anybody, only the banking resolution framework is on the agenda for the ECOFIN meeting. Given that the debate has been principally fuelled by President Barroso's statement, I expect the debate will broaden into banking union, which I am discussing today. If it is confined to the agenda, only the banking resolution issue will be an ECOFIN item on Friday. We will see how that plays out in practice.

The Deputy stressed again that if something is applied to Ireland, it would need to be retrospective and so on. With regard to the financial transaction tax, the position in the Commission proposal is that two thirds of the yield will go to the Commission and one third to the sovereign. It will also replace other transaction taxes and, therefore, we would lose the yield from our 1% stamp duty on share transactions. The equivalent tax in the UK is 0.5%. We would have to measure one against the other. How much will be raised depends on the rate and incidence of tax and, therefore, it is impossible to answer that question because there are too many variables. That is why I said if they were to proceed by enhanced co-operation, the prudent thing for Ireland to do would be to see how it develops and what kind of tax they are talking about. A strong debate is ongoing about how the Union is funded and it has been the Irish policy through successive Governments that European budgets should be funded by contributions from member states. We have never agreed that there should be a pan-European tax, which would feed into European budgets. The financial transaction tax is being used as a vehicle to reintroduce this idea by those who want separate funding for Europe. Our policy position is still to argue that it is better and more accountable to parliament if Europe is funded through contributions on an agreed basis by member states in proportion to their GDP and population, as per the present system.

The Deputy asked what would happen if everything went well and everybody agreed and such a tax were introduced. It would again depend on the rate and incidence of the tax and how it affected us but, in our general negotiating policy position, we have said we would agree if it were universal and applied to the key financial centres of the world and our secondary position is that if it was pan-European, we would be able to look at favourably, although we are not saying up-front that we would agree. However, if it comes back down to a tax in the eurozone or a subset of the eurozone, we would have extreme difficulties with it because of the London-Dublin relationship and the fear of dislocation of financial services in Dublin. A total of 33,000 people are employed in financial services in Ireland. That is a great deal of employment at a time jobs are top of the agenda.

Deputy Pearse Doherty

Are they all in Dublin?

Deputy Michael Noonan

No, throughout Ireland. This sector also has potential. We know from IDA inquiries that is an expanding sector of the economy and we would like to grow it more. There is not much disagreement between us across the House on that. There are minor amendments to the memorandum of understanding but nothing of a policy nature. They will not cause us grief.

A question was asked about the write-down of debt and the remarks I had made in the United States. I am one of the few Deputies in the House who has been consistent on this matter. Throughout the election campaign, the programme for Government and my time as Minister for Finance I said and have always stated we would like to see write-downs for bondholders, senior as well as subordinate, but that I would only proceed with the agreement of the European Central Bank. I did not get this agreement, as I have stated several times. There is no inconsistency in my position. What I stated in the United States was that I could only proceed with the agreement of the European Central Bank. However, I did ask for such write-downs. It is part of the folklore that the Government never asked, but ten days after entering government when I recapitalised the banks and put in place the two pillar banks at the end of March 2011, I had long conversations with Jean-Claude Trichet who refused to allow any write-down. I had subsequent conversations with him in Brussels at formal meetings at which I repeated the request and he refused, for good and sufficient reason from his perspective but not from mine. On the other hand, the European Central Bank agreed to the write-down of subordinated bonds and we wrote them down effectively. We will see how things play out.

The position of the European Central Bank and Europe at political level has hardened since March 2011. When private sector involvement, PSI, was agreed for Greece, the communiqué from the Heads of State and Government which accompanied the agreement stated Greece was unique and that it was only in the case of Greek there would be a write-down of private debt, that it would not apply anywhere else. The European Central Bank made it absolutely clear that it was agreeing to it on these terms only and there was a rider that there would be no write-down of official debt. In the Greek case, private sector debt was written down and what Greece owes to Frankfurt is still at nominal rates and was never written down. These issues keep coming back, but we are now in another situation.

I will intrude on the committee's patience to make one final comment. Despite the conventional wisdom, Europe has had a good month. The referendum went through in Ireland; I know some colleagues do not agree that this was a good event, but from the European perpective, it was a success. A centre government is being agreed to in Greece and rather than trying to claim an ideological position, what is significant is that Greece is committed to the bailout programme and implementing it with certain modifications. The French successfully ensured the party of the President had a majority in Parliament, and those who know French politics and the bad experiences with cohabitation will know how important it is for stability in Europe that the Parliament and the President speak with one voice. If we have expectations of President Hollande in driving a growth and jobs agenda which could benefit all of us, it is very important that he has the support of a majority in Parliament to do so. Spain, after being in denial for so long, has finally accepted that it has a banking problem, even though it has not yet been quantified and certainly has not been resolved. As mentioned, there is much uncertainty today with regard to the bond rates in Spain. We need full acceptance throughout the Community, particularly by Germany, that it is not an Irish, Greek, Portuguese or Spanish problem but a eurozone problem and that the initiative to ease it must be a eurozone one driven by the big powerbrokers in Europe. I hope something will come out of Mexico. They should be finishing up there tonight and will report back to ECOFIN through European Commissioner Mr. Rehn and to the Heads of State and Government at the meeting at the end of the month.

Deputy Pearse Doherty

With regard to a resolution fund is retrospection a red-line issue?

Chairman

I will ask the Minister to make a note of these questions which he will answer when he next speaks.

Deputy Pearse Doherty

My other question is on the IMF and the report yesterday that it will only lend to a country with funding for 12 months.

Chairman

We will come back to these questions later.

Deputy Michael Noonan

I can answer them very quickly.

Chairman

In net terms, please.

Deputy Michael Noonan

I do not speak in terms of red-line issues. I told the Deputy that it was our negotiating position and that we would not be prepared to agree, unless it was retrospective. If that is what he describes as a red-line issue, then it is. The IMF did not state a new position. It is has been its position since time immemorial to take a view of countries one year from the end of their programme and undertake a sustainability test. If it states the country is sustainable and that it has funding for 12 months ahead, it is a case of driving on and getting back into the markets. If not, there is a problem.

Deputy Richard Boyd Barrett

I do not know where to begin in trying to ask the Minister questions on these issues because his final comment in response to Deputy Pearse Doherty indicates how we view things in completely the opposite way from one another. We live on different planets.

Deputy Michael Noonan

I thought Deputy Pearse Doherty and I were coming together.

Deputy Richard Boyd Barrett

It is something Deputy Pearse Doherty should worry about if that is the case.

Deputy Pearse Doherty

On some issues.

Deputy Richard Boyd Barrett

How, in all honesty, can the Minister state we have had a good month? I find that extraordinary.

Deputy Michael Noonan

I said Europe had.

Deputy Richard Boyd Barrett

How can the Minister suggest we have had a good month? The situation in Spain has got disastrously worse and we are facing a crisis the proportions of which we do not know, but it is certainly likely to be massive. The Spanish people are being put on the hook because of the crisis in their banking system as a result of the gambling of Spanish bankers and developers in the same way that we were put on it. The response of Europe to the Spanish crisis is a repeat of what was done to us with such disastrous consequences. What we can take from the response of the ECB and Germany to the Spanish crisis is that no lessons have been learned. They have learned absolutely nothing from the disastrous consequences in this country of a blanket bailout to meet gambling banks; there have been disastrous financial consequences for the State, with austerity being imposed. Despite this experience and a similar experience in Greece, they want to do it all over again in Spain. How is this a cause for anything other than despair? I am amazed that the Minister, other European Finance Ministers and leaders are not looking at what has happened in Spain and admitting that they did not fully understand because of the pace of events. The crisis hit so suddenly in 2008, which perhaps explains a little some of the mistakes made. The reason countries are locked out of bond markets is they have been forced by European authorities and the ECB to take on the gambling debts of banks. As soon as a country even thinks about doing so, it is locked out of bond markets. That is what happens. It is what happened to us and now it will happen to Spain and probably Italy. At what point will people wake up and smell the coffee and realise this is a disastrous strategy? The Minister mentioned that the Government's approach, with which I agree, was to disentangle the banking debt from sovereign debt.

(Interruptions).

Deputy Richard Boyd Barrett

Perhaps the chit-chat to the side could stop.

Chairman

We allow a certain amount of latitude, but colleagues might try to co-operate.

Deputy Richard Boyd Barrett

There is no sign of the European Central Bank, ECB, or Germany being willing to entertain that suggestion in any shape or form. At what point do we start screaming? Even with the agenda for this meeting, there is a sense of fiddling while Rome burns. Although a cross-European banking resolution process is to be welcomed at some level, surely it is just closing the door after the horse has bolted. These are minimal measures to avoid a recurrence, yet we will still take actions in Spain and Italy that have proved disastrous. It is difficult to understand why people are not screaming against the idiocy of this policy.

The obvious conclusion is that, where debts have been wrongly imposed with disastrous consequences on states as a result of private institutions' activities, there is no road to recovery unless that debt burden is lifted from the shoulders of ordinary people and national economies and placed where it belongs. Given the fact that our austerity is propping up the European financial system, we must begin to discuss controlling the banks, not just the putting in place of a system that would force banks to contribute towards a crisis fund. Is this not the lesson? We are financing them and should be controlling them and setting their lending and investing priorities instead of leaving everything up to the anarchy of markets and competition.

In terms of financing our societies and economies, the financial transaction tax is the only half decent European proposal that even points in the direction of imposing some cost on the financial markets, the banks, etc., yet this small, minimal proposal is the one measure against which the Government has set its face. The Government claims it is not and that it will consider the proposal, but it will not participate with enhanced co-operation. While it likes the idea in principle, it will not go for it because Britain is against it, which means it will not be introduced. Can the Minister state otherwise? It is chit-chat about a nice idea.

The Minister used the loss of IFSC business to London as his main justification for not supporting this tax. If we place a small extra tax on financial transactions in the IFSC, through which vast amounts of money pass and where there could be a significant potential revenue to the State, what evidence is there to support the assertion that there will be a large outflow of financial services?

Deputy Kevin Humphreys

The issue of the financial transaction tax, FTT, was missed when answering two questions. Will the Minister provide the committee with the ESRI's report on the FTT that the Central Bank commissioned? Our decisions and positions must be based on evidence.

Deputy Michael Noonan

I will take the last two questions on the FTT first. It is incorrect to claim that the Government is against an FTT in all circumstances, but anyone, including Deputy Boyd Barrett, who views the jobs crisis as Ireland's main problem will not take a decision that will damage job creation. We will not take a decision that will cost many people working in the financial services their jobs.

Deputy Richard Boyd Barrett

Has the Minister evidence to the effect that it would cost jobs?

Deputy Olivia Mitchell

Listen to the Minister.

Deputy Michael Noonan

We have evidence. The ESRI report to which Deputy Kevin Humphreys referred stated that applying an FTT in Dublin and not in London would have an impact on the industry in Ireland and would lead to a reduction in activity and a loss of jobs.

We have a second piece of evidence from Sweden. Some years ago, Sweden introduced an FTT because the Government of the day believed it to be a good idea. Sweden destroyed its financial services industry and most of the firms that were active there transferred to London. When Sweden reversed the tax subsequently, it did not get those firms back. There is evidence to the effect that an FTT would be damaging.

On Deputy Boyd Barrett's first point about no lessons being learned and repeating the mistakes of our bailout in Spain, the key issue is putting the resolution and recapitalisation of the banks on the sovereign balance sheet. This was done in Ireland and Spain. I am on record as stating that Europe should separate the recapitalisation of banks from the sovereign debt position, but it is not just enough to say that, scream and throw the toys out of the pram. One must devise an alternative way of recapitalising the banks. This is being debated. If the €100 billion given to Spain to recapitalise its banks does not appear on the sovereign balance sheet, where does it go and who pays? These are the questions one must face. Does one go down the route of mutualising or part-mutualising the debt? Does one have the debt retention fund proposed by the five wise men in Germany? Does one opt for full euro bonds and, if so, how does one get the people paying the piper to make the contribution? There is no point in throwing a wobbly on the issue and saying it is dreadful. One needs to go beyond that and determine who will fund the recapitalisation if it does not appear on the sovereign balance sheet. I hope that this issue is being addressed in Mexico. If it is not, it should be, as it is the key issue.

In our case, we want to invoke a long-standing unwritten protocol of the Union to the effect that everyone is equal in the Union and that, in the spirit of the Union, whatever concession one member state receives should apply retrospectively to another member state when the rules were different. This is the way to proceed.

I will take the report to the Government. As soon as it has cleared the Government, I will publish it.

Deputy Kevin Humphreys

How long does the Minister expect that will take?

Deputy Michael Noonan

It will be in the next couple of weeks, certainly before the summer recess.

Deputy Kevin Humphreys

I thank the Minister.

Deputy Michael Creed

I thank the Minister for his contribution. I share Deputy Michael McGrath's concern on the apparent lack of urgency on the part of the Commission and Europe generally on these issues. We are four years into a European and euro-wide crisis. It stretches credulity somewhat that many of the glaringly obvious crises are not on the agenda as presented for the ECOFIN meeting, other than, perhaps, under No. 12, which is any other business. I would like to be a fly on the wall when that item is reached. Many of the issues referred to by previous speakers are ones that require an urgent Europe-wide response, including the Spanish banking crisis, the Greek issue, the growth agenda and so on. While I appreciate that those issues may be on the agendas of other fora, the agenda before us appears to be an agenda that is missing the point in many respects.

I would like to address two issues that are on the agenda, one of which is the financial transaction tax. It appears to me that there is a type of patchwork tax on financial transactions across Europe. We have a stamp duty tax, which is somewhat similar to that in the UK. However, other countries have different arrangements. Nobody likes to pay tax. The financial services sector is big business and can flex its muscles in terms of not wanting to pay. In terms of debt being the issue, if one does not want the sovereign to have to accept responsibility for banking debt, a prerequisite, therefore, in terms of addressing the problems of the banking sector, is the establishment of a European-wide fund rather than a tax which goes to individual Exchequers. A fund should be established to deal with the Irish, Spanish, Greek and any other country's banking crisis, including a German banking crisis, which might emerge. In terms of a financial transaction tax, the principle of which everyone supports, will the proceeds of such a tax wind their way to Europe or does the Minister envisage, in terms of the proposals which he will be considering, their being at the disposal of each individual Exchequer to use as they see fit rather than the establishment of a fund to deal with banking debt across Europe?

The second issue I wish to raise arises under No. 7, namely, draft Council recommendations on the National Reform Programme 2012. The Minister stated in his speech that the Council will take action to improve the functioning and stability of the financial system in the euro area. I believe the timeframe in that regard is 2012-2013. In that context, does the Minister see an opportunity to deal with the haemorrhage on Irish banks' balance sheets from tracker mortgages? Is that something he will be progressing in that context given that the figure in that regard for Allied Irish Banks is approximately €280 million per annum. I am not sure of the figure in respect of other institutions. It is a real problem which these financial institutions face.

Deputy Michael Noonan

It is not true to say that there is a lack of urgency at ECOFIN. The meeting will kick off with a report from Commissioner Rehn. It will then hear a report from Mr. Draghi of the European Central Bank. Both reports will address matters relating to Greece, Spain and Italy, on which there will be a discussion. The agenda as circulated is then dealt with.

As I stated to Deputy Pearse Doherty growth and jobs is not on the agenda not because of a lack of urgency but because we know it will be principal item at the Heads of State and Governments meeting and that President Von Rompuy is bringing forward proposals in that regard. Effectively, it is the Hollande agenda that is being driven. The matter will be discussed at that level. There is no lack of urgency. The euro-group will spend all day Thursday discussing what is currently happening in the eurozone. The tendency the following day is for Ministers who had a great deal of time to debate these issues the previous day to pull back a little. Ten countries participate strongly on the general discussion at ECOFIN. The remaining 17 do not. The UK, Sweden and so on will lead the discussion because the rest of us will have had our say. I do not want Members to misunderstand the process.

The jobs and growth issue is being discussed elsewhere. There will be an urgent discussion on all the crises that have arisen. The agenda includes a report from the G20 in Mexico, which report will, I presume, include solutions as proposed by the US, Canada, China and other countries. In that context, there will be a debate on European issues. It is wrong to say there is any lack of urgency. On the financial transaction tax, I want to distinguish between any type of payment or levy to fund the bank resolution fund and the financial transaction tax. They are two separate streams of income. The resolution fund will be used where a bank goes bust, say, in Italy, to resolve the situation. That is not what the financial transaction tax is about. It is a tax on financial institutions of all sorts, depending on where the lines are drawn. The proposal from the Commission is that two thirds of the proceeds of that tax would go to fund the European Union budget and would be paid to the Commission and one-third will be retained domestically. That opens up another issue in terms of how Europe should be funded, on which differing member states have well established views. The Irish view is that Europe should be funded through contributions from the member states and not by taxes levied at community level, which cuts across another policy position. There is not a lot more I can say.

There is a view in some member states and in the Commission that if a financial transaction tax was pitched too high it could stifle growth and cause financial institutions to have liquidity problems. It could actually add to rather than relieve a problem. That is part of the debate. On tracker mortgages, these were given out by the banks at a time when they appeared to be a good idea. As stated by Deputy Creed, the banks are currently losing money on their tracker books. This is in the first instance a matter for the banks to resolve because they are under contract with trackers. Trackers work themselves out over time, as do all mortgages. Trackers are not usually impaired. They tend to be the loans on mortgage books that are reasonably serviced because of low interest rates. The suggestion has been made that as well as resolving the promissory note the opportunity should be taken to restructure some bank debt and that in that context something should be done about trackers. This forms part of the technical paper that is being prepared. Much work remains to be done on that.

Deputy Michael McNamara

The Minister stated that this was a good month for Europe and in that regard referred to the passing here of the referendum on the fiscal treaty and the Spanish banks bailout. Is that not entirely contradictory? We had a Spanish bank bailout, with €100 billion being put into the Spanish bank sector on the sovereign, pushing the Spanish debt to GDP ratio from 68.5% to close to 80%. That is further from the 60% target contained in the fiscal stability treaty introduced at Germany's insistence and which was sceptically accepted by the Irish people as a necessary step. The first European reaction is to completely flout this. Are we going back to the Maastricht experience, where there was a necessity for 3% deficit targets but these were flouted by big states?

The Minister mentioned that the banks must be recapitalised, and the issue is where the money will come from if it is not on the sovereign. Must we recapitalise the banks? The Irish experience in recapitalising the banks has not been happy and we have endured enormous sacrifices as a society to do so, with the property market remaining moribund and, from what I hear in Clare, small and medium enterprises are not getting the credit they would normally get from a healthy banking sector. What are the advantages to society? The advantages to Germany are clear as German bondholders and, ultimately, savers are being spared the consequences of reckless lending by the people who manage those savings. Is there a broader benefit for society in recapitalising the European banks?

Deputy Michael Noonan

To say it was a good month for Europe was a provocative remark. We can consider what would have happened if the opposite were true. What would have happened if the referendum did not go through in Ireland, the new left won the Greek elections, the Spanish authorities were still in denial over their banking problem - which everybody has known about for a long time - and there was a difficult political position in France, with a group other than the French President's party controlling the French Parliament? I am arguing that it could have been much worse and perhaps it should have been phrased like that.

We will have to see how the Spanish issue rolls out in the next two weeks. It certainly could not go on as it had been. Our policy is that we would like to separate the recapitalisation of banks from the sovereign balance sheet but the question then arises of who will pay for it and on whose balance sheet will the money be reflected. It seems the only route that can be followed in terms of burden sharing is mutualisation of the debt, or part-mutualisation.

I recommend that the Deputy examine the proposal from Germany on a debt retention fund. The idea is rather than going to full euro bonds, debt in excess of 60% of GDP would be transferred to a fund, which would be mutualised. As debt rolled over, it would be available at perhaps 100 basis points above German rates, as the fund would finance the rolling over of debt rather than the sovereign. The terms of the treaty would apply and each country would take tranches of one twentieth of total each year over a period. The debt would be parked. The entire European debt in excess of 60% of GDP is 25% of European GDP. There is no country at present with a debt of only 25% of GDP but a country would see that as easily handled. If it were pooled, it seems the same rules should apply.

Deputy Peter Mathews

It would perpetualise it as well.

Deputy Michael Noonan

I do not know about perpetualising it but it could certainly be run for 20 to 25 years, depending on when programme countries would start the process. The idea is that the tranche of one twentieth would be taken if a country is funded but a programme country would not have to start until the programme was completed. It would bring about a better chance.

It is interesting that the German economic council, the "five wise men" came up with this. It has not been accepted by Chancellor Merkel but it has traction in the German parliamentary system. It does not go the whole way to euro bonds. The other big attraction is that it passes muster with the German constitutional court, meaning the German Constitution would not need to be changed, and the process could be achieved in the German Parliament. It has certain attractions and from all the ideas that have been around in the past three weeks, it is the one I see as most interesting. It is big enough to provide a solution but it is within the parameters of what might be acceptable. That is entirely a personal opinion and I am only picking up the proposal from people I know in the system rather than official channels at government level.

Deputy McNamara mentioned big countries ignoring the rules but that is not true any more. They ignored the rules of the Maastricht treaty in 2004, when Germany and France were the first to break the 3% rule on debt. Since that time and with the six pack, there are many new rules in place. An excessive debt rule is on the agenda for ECOFIN and I referred to it in my speech. Germany and Bulgaria are now being taken from the excessive deficit rule because not only have they reached under the 3% level, but it is deemed that this is a structural change and those countries will not drift over that level again. Hungary, which would not comply with the rules, had cohesion funds suspended early in the spring under this excessive deficit rule. A significant amount of Cohesion Funds were parked and not transferred to the Hungarian Exchequer until that country complied with the rules. It has done so, and one can see on the agenda for the excessive deficit rule that the Hungarians will now have the Cohesion Funds committed to the country released because it has complied with the rule. Not only are there rules in Europe but they are being applied and enforced with penalties; the big penalty for Hungary was the parking of its cohesion funds.

We need time but we also require another major policy initiative to apply to the eurozone as a whole. Deputy Mathews has frequently spoken about mutualising the debt and that might be the way to go. I do not want to be prescriptive and I am giving a personal rather than Government view.

Deputy Stephen S. Donnelly

The Minister is welcome before the committee. I have two questions and a follow-up query on the debt retention fund. My first question area concerns convergence and fiscal union. Much of the briefing materials and the Minister's statement mention convergence, and if we are talking about moving to a banking union or a single insurance fund to support the various European banks, we are also potentially considering further fiscal union. As the Minister noted, the Germans are willing to support a bank resolution process if they can have tighter fiscal union.

In ECOFIN meetings, what is the Government's position on fiscal union? How far would the Government like to go or is it willing to go in a fiscal union? Obvious parameters would include elements such as federal taxation, cash transfers, federal control over expenditure and so forth. What would the Government like to do and how far is it willing to go in the process?

The second question area concerns potential solutions. I asked a question before about lobbying for or proposing that the ECB target inflation ceiling of 2% be raised temporarily to an appropriate level, such as between 3% and 5%. I think the phrase the Minister used in the Chamber was that he would not jump up and down in opposition if that was proposed. Does Deputy Noonan still support this and does he intend to take any actions at the forthcoming ECOFIN Council or did the Government make any suggestion that the 2% ceiling could be temporarily moved, as part of a policy response?

On the question of the debt retention fund, which sounds like a good idea, the Minister spoke about one twentieth of the debt being paid down a year, which would be analogous to the fiscal compact debt brake, one of the advantages of the one twentieth rule is that nominal GDP growth or inflation actually takes care of most of it and therefore the idea is that one would not be forced to pay anything down. Is it the Minister's understanding that the proposal for the debt retention fund would require actual pay downs even if nominal GDP was growing sufficiently so that the one twentieth rule was met? Does the Minister know what the 100 basis points is for?

Deputy Michael Noonan

I will respond first to the last question. I am speaking from memory of a paper I read, I already told members of the origins of that paper, but there seemed to be some flexibility and choices. The fund would raise the money, so the margin would be the expected additional costs of the money above German rates. Nobody is getting the money, it is simply setting the rate.

Deputy Stephen S. Donnelly

Would the fund be able to raise it at German rates?

Deputy Michael Noonan

The expectation is that if one mutualises it, one takes the good with the bad, and there would be some additionality to the German rates. Ireland's debt is a very small amount but if there is large quantum of debt in more indebted countries, that probably would not be funded. This was an opinion expressed by the people who drew up the paper. The working out of the repayments and how that would relate to growth rates was not quite clear, but on my reading of the paper, it would involve some transfers. On the other side, the retention of control over debt up to 60% of GDP would carry the benefit of the growth rate. To use the analogy of swings and roundabouts, one would have to look at the two pieces of debt and even though there were transfers to get the one twentieth reductions, it was balanced by accruing the benefits on the debt that was domestically controlled.

Deputy Stephen S. Donnelly

The short to medium term demands would be the same, but the advantage would be the quantum of debt is falling.

Deputy Michael Noonan

That is what it looked like. This is what it seemed to me having read it a couple of times but not doing any analysis on it.

In response to the other issues the Deputy raised, the 2% inflator is not an European Union treaty rule, it is an ECB mandate to keep inflation at 2%. The ECB is not subject to direction from ECOFIN. If there were to be a change of view on the remit of the ECB, and its primary remit driven by German considerations is to keep inflation below 2%, it would help many countries if a more relaxed view on inflation was taken. I would have no objection to such a relaxation and inflation being somewhere between 3% and 4% for a period. We must be careful as we do not want to start a spiral and the existing cap would have to be replaced by an alternative cap that is slightly higher but not an open ended mandate.

Deputy Stephen S. Donnelly

Or a dual mandate, like the Federal Reserve system.

Deputy Michael Noonan

One would not start by changing the inflation cap. The reason that people focus on the inflation cap is when they are demanding that the European Central Bank would have the same powers as the Bank of England and the Fed to provide quantitative easing. It is from that point of the argument, the end position, that one comes back to the effect on inflation, driving it above 2%. I do not think there is any move in that direction at present. We are having an interesting conversation, but I do not think it is having any practical effect. They are very unlikely to do that. I do not think there will be any quantitative easing in Europe or any change in the ECB mandate in that respect.

Deputy Stephen S. Donnelly

On the fiscal - - - - -

Chairman

There are three other members offering. We must finish by 5.40 p.m.

Deputy Michael Noonan

On the fiscal union, we will not be the first mover. In terms of the bottom line, we would want the power of the sovereign to fix individual tax rates maintained. We would not see that as a negotiable position. That is not to say that anything else is negotiable either, but we would like to see the nature of a proposal. We will not be filing proposals at the table on this and we will not be the first mover on this issue.

Deputy Peter Mathews

It is very taxing to slog through meeting after meeting and go through agenda after agenda and I thank the Minister for his patience.

At the ECOFIN Council meeting on Friday, I am asking the Minister to do everything he can to change the tone and the tempo. Deputy Michael McGrath put his finger on it when he said that we are four years into this so-called crisis and it is not improving, the symptoms of the disease are getting worse. The bond yields on Spanish and Italian debt have risen, the temperature is rising and it is like a thermometer reading that all is not well. It is not. We now have evidence to confirm the suspicion that the banks are holding rotten assets on their balance sheets. German banks are also highly leveraged and are carrying assets that are very doubtful. People who have experience of looking at portfolio content and the assets underlying them, rather than running models, as economists do, would say that there could be shortfalls of €3 trillion. That would correspond to 25% of European GDP and that is the scale of the figures the ECOFIN Council should be looking at during its meeting on 22 June. The agenda should be cleared to deal with this issue. The bull must be taken by the horns. There is a need to act swiftly to prevent trust going out the window and confidence being run down.

At the moment, there are a great many telephone calls about which bank is safe and what currency is safe but nobody is talking about that publicly. In the case of Germany, if interest rates rose by 1%, the capital loss on a German bond would be 40% because they are at zero rates of interest. We are in a very dangerous situation and there is a lack of leadership. Let me say the Minister has the ability and the courage to lead this debate, to take the podium and say it as it is. It does not have to be somebody from Germany or France who takes the initiative, because to date they have been dithering. When Mr. Van Rompuy visited Ireland this time last year, he did not realise that our banks had been given a €135 billion loan by the ECB and our Central Bank to enable the redemption in full over a period of two years of the senior bondholders in our banking system. I know he did not even understand that because when I spoke to him about it he asked me if there was a paper on it. People are looking for papers and reports but the problem is as plain as the nose on your face. I am asking, by way of encouragement and exhortation, for the Minister to do everything he can and to keep asking for a debt write down, which is the correct thing to do. Ms Carmen Reinhart understands the problem from a long period of academic and practical experience of debt supercycles and debt resolution regimes across economies. They all require a debt write-down and restructuring and creditor repression, as it is termed, whereby creditors must supply the capital to banking systems that have gone bust with rotten assets and write down the debt to collectable amounts. We are seeing the difficulties and our lawyers are making a difficulty of seeing how to address the situation in the economy with regard to the mountains of debt on households and businesses that are simply too big. They do not need more credit. They need less to get going again, as well as to get the indigenous economy going. The Minister should remind them of these points. He should grab the microphone; it would be worth it, as this is a crisis. Spanish bond yields have gone up because the problem has not been solved; it is probably a €500 billion banking problem. From the time when it was first admitted to when they got it right, our problem had multiplied five times. On 31 July last year when the recapitalisation of the banks took place, some €20 billion from the National Pensions Reserve Fund was put in. That should not have taken place. It should have been a creditor.

Chairman

The Deputy has reached five minutes and there are two colleagues waiting to speak.

Deputy Peter Mathews

I am right behind the Minister. He should give it everything and do a Khrushchev, take his shoe off and bang it on the table to get their attention. He is well able for it.

Chairman

I am going to ask Senator Sean D. Barrett and Deputy Olivia Mitchell to speak and will then call on the Minister to make some closing remarks.

Senator Sean D. Barrett

I think the Minister will keep his shoe on in Brussels. Aside from him, I have no confidence in any of the people who will attend the meeting, as they have been floundering around for four years. The people who gave us a dud currency now want a greater fiscal union, political union and banking union. Why should we continue these transfers of sovereignty, given that they have been a disaster for Ireland?

We knew there were design faults in the euro when we started out. There was no bank regulation and no exit mechanism, something Greece really needs; there was a one-size-fits-all interest rate; loss of exchange rate as a policy instrument; potential for a tsunami when credit from a large country such as Germany destroyed a small country such as ours; and an inadequate fiscal transfer mechanism such that to work within Germany some 15% of the population of eastern Germany had to get out. That is the equivalent of 700,000 people leaving this country. The real issue to which they must face up is how much sticking plaster remains to be applied before the Minister's colleagues in Brussels address the serious design faults in the euro.

The markets have decided that the currency has no future. The crisis moves from one country to another, from Greece to Spain, Portugal, Ireland, Cyprus, Italy and Belgium. Three countries are not involved, namely, the United Kingdom, Sweden and Denmark. Luckily for them, a further eight countries failed to qualify to join the euro. Someone in Brussels should admit the problem and, to paraphrase the character in the Tom Crean play, we might then hear something we had never heard before: "We made a mistake." We cannot continue with a 25% unemployment rate in some countries and a 50% youth unemployment rate in others. We must recognise that we need to go back to the drawing board on the currency. This has caused so much despair and damage to young people and the unemployed. It has wrecked governments in most of the countries involved. People in Frankfurt and Brussels should show some humility and admit that they made a grave mistake, that the currency is not working and that we should go back to the drawing board. The clichés and the claims to hire more public relations people, to invest in science and technology and about the existence of world class systems here can no longer cover over the cracks of the design faults in the currency.

As a free trade area, the European Union worked rather well for Ireland, but the currency was badly thought out and it went against the advice of Milton Friedman, Robert Mundell and Martin Feldstein. The people at the centre of the euro should get the world's greatest economists together to discuss how to get out of the crisis and whether there is any resolution. When people make a mistake, we should correct it rather than visit that mistake on the unemployed and low income countries.

The Minister referred to the Greek case, but his remarks on feta cheese were misunderstood. Greece must have exports to other countries. I used the example of Greek wine and people going there on holidays, but it is the same idea. Greece simply cannot operate with an over-valued exchange rate. The United Kingdom works because a great deal of money goes from the centre to Scotland, Wales and Cornwall. If Germany is no longer willing to do this for Greece, it should allow it out of the currency.

There have been 18 summits and four years in which nothing has been done. The message from other countries to be given through the Minister for Finance is that it is not good enough: we want better governance than we have been getting from Brussels and Frankfurt. Those involved may be well insulated from the misery that has been caused, but we badly need a plan B. I echo what other Deputies stated. Can we make this point to them as one of the countries that has suffered most? We have no wish to be the best boy in the class; we want something better. These emperors have no clothes, nor do they have the solution.

Deputy Olivia Mitchell

I have much sympathy for the previous speakers. People are beginning to lose patience with the apparent reluctance to tackle issues at a European level, the Minister for Finance excluded. My question is specific and relates to the role of the European Central Bank. The Minister has indicated he did not envisage its mandate being increased. Among the myriad suggestions coming from everywhere, one is that its role should change to that of being a traditional, national central bank that would operate as a lender of last resort to the banks of Europe. The Minister might rule this out, but if we have learned anything during the past four years it is that we should rule nothing out because anything can happen and usually does. How would such a role for the European Central Bank fit in with the notion that there should be a move towards greater integration and a transfer of functions of the Central Bank to another body? I presume this would involve functions of supervision and regulation. Is this not strange? The Minister suggested these functions would not be given to the banking authority but to the ECB. Would that not effectively be self-regulation? We may not consider the ECB as the body most likely to be reckless. On the contrary, it is probably the least likely to be reckless, but who knows what will happen in the future? Would it not be strange to give it a regulatory function for other central banks in addition to being a central bank in its own right? Would there not be a conflict? However distant it may be, it does not appear to be a clever idea.

Deputy Michael Noonan

Deputy Peter Mathews has certainly given me the courage to drive forth on Thursday morning and Friday to take them on.

Deputy Peter Mathews

Exactly, the Minister should do so. Now we are talking.

Chairman

Deputy Peter Mathews has a box of spinach outside for the Minister.

Deputy Peter Mathews

The Minister looks great when he is fired up.

Deputy Michael Noonan

A lot of the useful work at these meetings is done on a bilateral basis on the margins.

Deputy Peter Mathews

Bring it onto the stage.

Deputy Michael Noonan

Sometimes one can have a stronger influence in developing the network of contacts.

Deputy Peter Mathews

What has happened in the past four years suggests otherwise.

Deputy Michael Noonan

We have tried the rhetoric on occasion also and made some progress.

Senator Sean D. Barrett has become disillusioned about the future of the euro. We will at the least have another go at refitting the architecture for the currency zone. There is a good and effective currency zone on the other side of the Atlantic. Let us consider the way it operates in the United States, the powers of the Federal Reserve and the system in which there are transfers between individuals states. If Boston goes bust, it can be rescued through transfers. It has to pay a little also, but we have seen it working on several occasions. We have seen it happen in Boston, New York and California which is only now coming out of it. They do not appear to have the cataclysmic events we seem to have in Europe. That goes to the European Central Bank as well. If one were redesigning the European Central Bank, if it had the powers of the Federal Reserve, it seems to me that this would meet many of the present needs of Europe. Deputy Mitchell asked whether the European Central Bank should be the regulator. Any central bank is the bankers' bank and it is also the organisation that licenses banks. I do not think there is any contradiction in having the bank in Frankfurt being the licensee for some of the big European banks but I do not think it would need to be the licensee for a lot of small banks. In my view, there should be a division of labour between the local central banks and the Frankfurt-based European Central Bank. We will examine with great care whatever proposal comes forward.

I thank the committee members. I have another engagement so I must move on. This session was helpful to me. At least I know I will be reflecting views when I go there.

Chairman

It has been extremely important and I thank the Minister for his attendance, for the briefing he gave us and for his participation in the question and answer session. A couple of members referred to the fact that the committee, through its sub-committee, is conducting a study into the question of a financial transactions tax and we hope to prepare a report for the Houses and for the public by extension. We will forward the report to the Minister and I hope it will be taken into account in the deliberations.

The joint committee adjourned at 5. 42 p.m. until 2 p.m. on Wednesday, 4 July 2012.