Exchange Control (Continuance) Bill, 1974: Second and Subsequent Stages.

Question proposed: "That the Bill be now read a Second Time."

Parliamentary Secretary to the Minister for Finance (Mr. Kenny)

The Bill is designed to continue the existing exchange control legislation in operation for a further period of four years. The present legislation, which is contained in the Exchange Control Act, 1954, is due to expire on 31st December, 1974. Exchange control was first introduced in the emergency conditions of 1939. At that time we, along with the other sterling area countries, had to take measures to protect the area's foreign exchange reserves to which we had access for our requirements of foreign currencies. The 1954 Exchange Control Act replaced the emergency legislation under which exchange control was first operated. In the hope that exchange control would be only a temporary necessity the 1954 Act was expressed to expire after a period of four years. However, the operation of the Act has been extended at four year intervals ever since as it has not proved possible to dispense completely with exchange control.

The 1954 Act gives power to control:

payments to and on behalf of persons resident outside the scheduled territories—at present, the State, Northern Ireland, Great Britain, the Channel Islands, the Isle of Man and Gibraltar;

dealings in gold and foreign exchange;

dealings in foreign currency securities and unregistered sterling securities;

dealings in sterling securities on behalf of persons resident outside the scheduled territories;

the export of currency notes and the manner of payment for goods exported outside the scheduled territories.

The Act also empowers the Minister for Finance to specify foreign currencies which must be sold to a bank so that they may come into the official reserves of foreign exchange. It further contains power to require the deposit of foreign currency securities and unregistered sterling securities with an authorised depositary, but it has not been found necessary to bring these latter provisions into operation.

The Act provides that exemptions from compliance with its requirements may be granted by regulations and by general or limited permissions to carry out transactions. These provisions are being operated so that all bona fide current payments may be freely made by Irish residents in accordance with our obligations to the International Monetary Fund. Such supervision as is applied is designed to ensure that unauthorised capital transfers do not take place under the guise of current transactions.

Control of capital transfers continues to be necessary. Funds for direct or portfolio investment outside the scheduled territories are not generally provided at the official rate of exchange. Investment currency, which usually stands at a substantial premium over the official exchange rate, may be purchased for the purpose or it may be financed by foreign borrowing. Sales of foreign currency securities are subject to certain conditions on the disposal of the proceeds of the sale.

The day-to-day administration of exchange control has been delegated to the Central Bank of Ireland since 1965.

In the EEC, member states are required under the Treaty of Rome to abolish progressively restrictions on capital movements between themselves to the extent necessary to ensure the smooth functioning of the Common Market.

So far, two directives have been adopted by the Community requiring the liberalisation of particular categories of capital movements. The principal transactions involved are direct investment in business undertakings and the purchase of publicly quoted securities. In the negotiations for membership of the Community we obtained arrangements for the gradual removal of restrictions on these transactions over a transitional period. Nevertheless, on entry to the Community we implemented a considerable liberalisation of direct investment, under which official exchange is allowed up to a limit of £250,000 per project per year for all new approved direct investments by Irish residents in EEC countries other than the UK. Applications to transfer larger amounts at the official rate of exchange are considered on their merits. Relaxations were also made in relation to capital transfers by Irish residents taking up employment in other EEC countries.

Under the exchange control legislation, as it is proposed to continue it in the Bill, we will be able to meet our EEC obligations as they now stand by making suitable amending regulations and giving necessary permissions. No major changes will be required before the Act again comes up for renewal in 1978.

Whatever may happen in the future in relation to foreign exchange transactions, there is no immediate prospect that sterling will become freely convertible on capital account. We need, therefore, to retain the 1954 Exchange Control Act and I am asking the House to agree to its extension for a further period of four years. I trust that the Bill will be acceptable to the House on this basis.

Mr. Yeats

We are agreeing to the enactment of this Bill. When the original Exchange Control Act, 1954, was going through this House it would have been a wise man who would have been able to prophesy that this temporary Act would still be a part of our law in 1974. It could be described as a sad commentary on the way the countries of the world regulate their affairs that after 20 years of this temporary legislation the world's currency is more chaotic than in the past. Not alone will we be needing in the year 1978 to re-enact this legislation, or something similar, but the likelihood is that for many years, perhaps generations to come, some controls of this kind will be needed.

As far as this country is concerned, things may change in years to come as far as sterling is concerned. Obviously, one must agree with the policy of the Government, which was also the policy of the Fianna Fáil Government, that under present trading conditions with Great Britain the link with sterling must be maintained. Whatever about the so-called Green £ in agricultural matters, the general link with sterling is probably an advantage to us. It is not easy to see the advantage of a revaluation or a devaluation of the Irish £. This situation could well change in the coming years. Already our trade with Britain, as a percentage of our total trade, is declining year by year. It may well be in a few years' time that we will have so diversified our foreign trading position that it will be possible for us to think in terms of breaking the direct link between our currency and that of Britain.

Would the Parliamentary Secretary state what attitude the Government have to the proposal which was produced by the EEC Commission, which is at a stand-still at the moment—for a pooling of national reserves in the context of the concept of economic and monetary union? I know that the present British Government have, in effect, said they will not agree to it. It is clear that economic and monetary union is dead until this whole problem of the so-called renegotiation between Britain and the EEC is solved. Nonetheless, it is of interest to this country to have some kind of standpoint on the initial proposal which was made by the Commission that from January last 20 per cent of official national reserves would be pooled amongst the members of the EEC. The attitude taken by our own Government on this in the Council has not been stated, as far as I am aware. In the context of this legislation it would be of value to us to know. I hope the Government took a positive view and did not go along with the British attitude.

We are in favour of the general principles of this Bill and realise that it is necessary.

Dr. West

With Senator Yeats I welcome this Bill. I also realise that owing to the unstable financial situation in the world in general it is essential that we control the import and export of money. Controls of this nature will be necessary for a long time to come.

There are just two points which I would like to raise. One of them has already been mentioned by Senator Yeats. It is our relationship with sterling. Ten, or perhaps five, years ago it would have been heresy to say in Dáil Éireann or in Seanad Éireann that it might be worth our while investigating what would happen if we broke away from the sterling link. It is interesting that the situation has changed so much.

Only a few weeks ago the Minister for Finance indicated that his Department had been examining the situation. He felt that on balance it was not an opportune time to crawl out from under the sterling umbrella, but he said he was keeping the situation under review and that if it became clear that it was to our advantage, not just in the short term but in the long run as well, he would seriously consider a break with the sterling link. Now, of course, this sort of thinking is in the realm of conjecture but it very much depends on what happens to the British economy in the next few years. We all hope that Britain's economy will pull out of its present slump and that there will be a sign of development and a sign of growth in the British economy. There are many financial experts who do not see this happening and see Britain entering a long period of depression. In that situation, then clearly, if our economy is to grow and if we are to import British inflation and union troubles and other British problems we will have to consider revaluing against sterling.

Because our economy is in a healthy state at the moment and because we do not want to import inflation which is any worse than the inflation which we generate ourselves, or inflation which is absolutely necessary through oil prices or through rising external commodity prices then we must keep the situation constantly under review. We have to look at our own and Britain's situation. We have to look at the EEC and the world currency situation. I think that this would be put in sharp relief if it turned out that this country was the possessor of large reserves of oil and natural gas off our shores. It seems, from the geological prognostications, at the moment that this is quite likely to be the case. We cannot say until the licences are issued and until the exploration is done what the situation is. If this is the case then it will strengthen considerably our financial situation vis-á-vis commodities outside because we will have something very important to sell. One or two oil wells, or one or two finds of natural gas would be sufficient to deal with all the energy requirements of this part of the country and of the North of Ireland. If this happened and if there were considerable reserves we would have a very marketable commodity and we would be then in a very strong position vis-á-vis any European country.

The argument for breaking away from sterling would become extremely strong. I do not see anything sacred in the sterling link. Perhaps there was something sacred before we joined the EEC. The proportion of our trade, as Senator Yeats has said, with the United Kingdom was an overwhelming proportion but one of the most important benefits of the European Economic Community is that we have been able to reduce the proportion. We have been able to diversify. We have been able to export to and import from many other countries. The customs barriers are coming down. Our economic situation, as a result of diversification, is in a much healthier state. We have to treat the sterling link as a financial link. The only sentimental attachment we should have to it is our position vis-á-vis Northern Ireland.

This introduces a great complexity into the situation. There is no question about it. We cannot contemplate breaking from sterling without contemplating what would happen to our financial relationships with Northern Ireland. Let us remember that it is not all that long ago when there was an exchange difference with the North of Ireland and trade continued quite happily.

I have no doubt that in the event of major discoveries of oil and gas reserves off our shores it would make the partnership between the two parts of this island a much more attractive thing for the Northern people. After all, they are hard-headed businessmen. They know which side their bread is buttered on. It is being buttered to the extent of £300 million or so per annum by the British economy at the moment. If we were in a stronger economic position to provide some of this subsidy, as I have argued in a debate previously, we should be providing part of the subsidy to Northern Ireland. There is no point in talking about abstract political ways of helping the Northern situation if we are not prepared to put our hands in our pockets and tell the Northern people that we will provide some of the subsidy to keep them going. All the rest of this talk of political abstractions is really nonsense if we are not prepared to say: "Let us see what it comes to in cash terms."

For this reason, we would all welcome any mineral and oil resources which would certainly put us in a stronger position vis-á-vis sterling. Certainly, we would be in a much firmer bargaining position in any exchange negotiations that would have to be done with Britain and Northern Ireland if these oil and gas reserves materialise as we hope they will.

I should like the Parliamentary Secretary to refer to current thinking in the Department of Finance on this breaking of the sterling link. What do they feel currently? How do they see the situation developing? It is very important that the Minister has already referred to the fact officially. It is something that we must keep watching. We may have to take a decision very quickly. The whole point about these monetary decisions is that we have to have control like this. If problems arise we may have to make a very quick decision. I want to see that the Minister and the Department of Finance are sufficiently geared to making this quick decision if problems arise.

I should also like to know if in our exchange control regulations we have any concessions for developing countries in the third world? Do we go out of our way to treat the developing countries with the generosity they deserve? I know there are some restrictions because of our membership of the EEC but do we make efforts to develop trade with the third world countries and to give them a better than fair deal when it comes to trading arrangements? I feel that if this is not done fairly soon we will be forced into doing it by the withholding of commodities that we need. We have a missionary tradition in this country. I would like to see this being expressed in our financial dealings with the developing countries. I do not think we should be giving things away but let us see if we can give them concessions to make trade and exchange interesting to them and at the same time beneficial to us. If we do so then we will reap considerable benefits.

We should not be slow in developing these contacts with the third world. We should press on with them. We should press for further development by the European Economic Community in this direction. If Ireland does not press for this nobody will. We are regarded, rightly, as a politically neutral country. Irish involvement is generally welcomed overseas because we are not big enough and powerful enough to want to take somebody over or to buy them out. We should be pressing the European Economic Community to develop these links. We should be looking at our own exchange control regulations to see what concessions we can give to developing countries which would not just benefit them but bring us long term benefits as well.

Mr. Halligan

I just wish to raise some points on the two issues mentioned by the previous speakers—the questions of parity and economic and monetary union for the EEC. Both questions are relevant to the Bill before us because the Parliamentary Secretary in his opening speech referred to control given in respect of certain transactions outside the scheduled territories which include not only this State but Northern Ireland, the United Kingdom mainland and the Channel Islands. This, of course, is where the legislative expression of the link with sterling lies. I have never believed in it. I do not believe in it now and I am pleased that I am living at a time when, as the previous Senator said, it is no longer heresy to raise the issue in this House. The expressed justification for parity resides in the Banking Commission's Report of 1934-1938. As an economics student I remember that particular commission report in the library of the university at which I studied falling open automatically on the pages where the arguments were advanced in favour of parity because a traditional first-year economics question was: "Advance the reasons as stated in the Banking Commission Report". When one examined the reasons one found that there was nothing profoundly analytical at all. In the last analysis it was simply a matter of commercial convenience. Our external trade was with one country and that was the reason advanced.

Therefore, we find within the context of this Bill that we are maintaining a legislative unit for exchange control purposes with the UK. I think if one is to play the game of capitalist economics one should carry it to its ultimate. It is a system that depends upon the laws of the market. Currencies are no different from other commodities in certain respects and their values should be determined by supply and demand. That, after all, is the reason why currencies float. Regardless of whether we like it or not, our currency is floating at the moment. It happens to be floating because another currency happened to be floated first and we are joined with it on an equality parity—that is sterling.

I welcome the fact that the issue is being discussed and that the farming community have raised it in a very particular manner. I think that the way in which Senator West has raised the point should also cause us some concern. There is no doubt but that the British economy is going through a very rough time at the moment. Many of us fear that it may sink to the bottom. We must keep foremost in our minds our own national self-interest because our own economy at the moment is doing remarkably well despite the very difficult external world economic situation. It is showing a growth rate at the moment that is one of the best within the EEC. It shows every sign of withstanding the worst effects of world economic recession next year. At the same time as the indications for our economy are of a positive growth rate in national income the indications for the United Kingdom are that there will be a negative growth rate next year, in other words, a decline in national income. In these circumstances it becomes a matter of very grave financial policy on a national basis whether we should give consideration to the continuation of the sterling link in terms of the parity for £1 Irish for £1 sterling.

On the question raised by Senator Yeats as to what would be the Government's attitude on the Economic and Monetary Union we cannot get away from the fact that the Economic and Monetary Union and regional policy are indissolubly linked. We are considering here the monetary side of the Economic and Monetary Union. It seems to me that if you extend the confines of our economic boundaries to be coincident with the boundaries of the EEC you are in fact aggregating nine different economics to comprise of one separate economy. Within that economy you would find regional variations because there are always regional variations in terms of economic development. A traditional method of dealing with regional variations in terms of economic development on a Continental level has always been manipulation of exchange rates. Since the evolution of the EEC, various countries have changed their exchange rates. The D-mark has changed, dramatically, the franc has been changed a number of times by the French Government and even a currency as strong as the Dutch guilder has been changed. This is, as it were, Governments' responses in terms of exchange rate control to offset variations in economic development on a Continental level.

If we proceed with monetary union we shall have one currency for the whole of the Community. In that situation one is robbing the national Governments of one of the most powerful weapons they have in defence of their own regions if they are lagging behind in economic development, that is the right to change the rate of exchange. There is no argument for proceeding in that direction unless one has a very powerful regional policy that will, as it were, counteract and counterbalance the tendency that would be created by monetary union, in other words, a policy that would consciously push capital into areas that have been drained of it by the operation of market forces. We have seen the reluctance on the part of the more powerful economies within the EEC to move in the direction of a meaningful regional policy. At this moment, seven months after the end date for the inauguration of a regional policy, there is no regional policy. Therefore, the Government's attitude on the matter should be that when we are all equally good Europeans we will play our role and that if we agree cojointly to a policy of proceeding with economic and monetary union then we will play our part not only in the economic union but also in the monetary union. If we are satisfied that it is in our interests and in the interests of the Community progressively to pool our foreign exchange reserves then we will do so but it would not be in Europe's interest and it most certainly is not in our national interest to agree to any such policy until such time as there is a definitive regional policy that has a central political authority to give it effect and which, at the same time, will have at its disposal funds adequate to deal with the magnitude of the problem.

There is no point in saying that when we are talking about Ireland in this context we are talking also of Southern Italy because we are, of course, talking also about vast stretches of the United Kingdom and of parts of France, parts of Germany, of Belgium and Holland. It is this issue which operated very much to the detriment of the European cause in the referendum in Norway. The people there were not convinced that there would be within the meaningful periods of development a real European Regional policy. So far they have been proved correct and their economy has not suffered as a result of staying out. On this question we must be very careful in giving responses now on matters that await the reawakening of political will in Europe towards the creation of a more integrated Europe. What really is lacking is the political will to proceed towards greater integration. Perhaps we should give to the new German and French Governments the opportunity of settling in, of analysing the problem and of establishing a rapport with each other which is necessary and we must also give the political situation across the water time to develop on a more stable basis from which to plan for the latter half of this decade.

Parliamentary Secretary to the Minister for Finance (Mr. Kenny)

I am very glad that the speakers—Senators Yeats, West and Halligan—have agreed to the contents of the Bill and that they are favourable towards the continuance of exchange control for the next four years.

In reply to the Senators, the principal advantage of the sterling link is that it provides a stable monetary basis for our trade with the United Kingdom. Although the proportion of our trade with the United Kingdom is declining that link is still of major importance. More than half of our exports go to the United Kingdom and about half of our imports come from there. The link provides stability of exchange for all this trade. Down through the years— before the slight decline in the United Kingdom's economy—our trade with Great Britain was much greater than it is today. In recent years, our economy has been developing to a great extent with the result that we do not trade as much with Great Britain as we used to. Our exports to the Common Market and to other European countries has progressed; therefore, our trade with Britain is declining.

Stability and the exchange relationship is also significant for capital inflows. The elimination of exchange risks gives confidence to investors and promotes capital mobility from Britain to this country. This is significant in view of our heavy dependence on imported capital for industrial and other development purposes. With regard to the future of the sterling link with Britain each of the three Senators who spoke mentioned that there was a chance that in future we might break that link. If, as Senator West said, we are in a position to do that, if the indications that reserves of natural gas and oil around our coasts prove to be sound, then we shall be in a position to talk to Britain in our own language. In business or in trade the stronger person is in a position to dictate terms. Up to this, we had not been able to do that but, if indications prove correct, we might be in a position at least to be on a par with Great Britain in respect of bargaining. In addition, we might be in a position to give some help or be of some benefit to Northern Ireland.

The balance of advantage with regard to the future of the link is considered to lie on the side of maintaining the sterling link. The underlying factors are, however, changing. For example, for a number of years we have been expanding the share of our trade with countries other than the United Kingdom. This trend may be expected to continue, particularly in relation to the other EEC countries. It is possible that this trend may result eventually in the balance of advantage tipping over in favour of a change in our relationship with sterling. In that case, change would be considered. It has been mentioned before in the domain of a Ministry of Finance but although the possibility is being considered, nobody can foretell the future. If the future is beneficial to us, we will be in a better position to consider change. The question is continuously under review.

Senator West mentioned aid for developing countries. Of course, we should have contact with all countries possible by trading and dealing with them. However, up to the present no specific concessions exist in the regulations or conditions for developing countries between Ireland and the developing countries. In applying the regulations, however, more liberal treatment is in many cases given to missionary and development bodies involved in the developing countries. Therefore, we are giving some concessions and some privileges to certain bodies or associations in the developing countries.

Dr. West

Would there not be a case for extending those concessions to the area of trade? Helping missionary bodies must be merely a tiny concession.

Mr. Kenny

I mentioned only missionary bodies but other bodies, too, will be included as we progress in our trade and commerce with the developing countries. Of course, every country that trades does so for its own benefit. All we can do is give some concessions to those developing countries so that in future years they might give some concessions to us. We are increasing our direct official aid to the developing countries. Senator Yeats mentioned the pooling of reserves. Pooling of reserves has to be looked at in the overall context of economic and monetary union and would be acceptable, in principle, subject to the full package of measures involved being adequate to safeguard our interests. As Senators know, it is only human for people to benefit themselves, if they can. Human nature does not change, and when humans get together, or are together in a country, their first aim is to benefit that country—the national economy. If the package benefits the country, then we see to it that that package will be given.

Question put and agreed to.

Agreed to take remaining Stages today.

Bill put through Committee, reported without amendment, received for final consideration and passed.

Seanad Éireann debate - Wednesday, 24 Jul 1974