Speaking for my party, I can say that the requests of the Minister of State will be met and that the extension of the exchange control legislation proposed will be agreed as will be also the proposal to amend that existing legislation to enable these controls to be applied in transactions between this State and the United Kingdom. Having said that, it is desirable to emphasise the grave nature of the proposed change in the legislation. Of course, the powers given do not, for any reason, have to be exercised; the matter is different and the gravity disappears. But assuming that—and this is the only reason for agreeing to the request for powers—the powers being sought may in an actual situation apprehended as likely to arise be exercised then the gravity of that change for this State can hardly be over-stated; the gravity of the change for every citizen, and in particular for everyone who has the conduct of enterprises in this country.
It is reasonable to remind the House of the historical background to this. The situation currency-wise that exists today before we enact this legislation, which will exist until the new powers, the different powers proposed in this legislation, are exercised, is not something that arose merely yesterday. It has existed for more than 150 years. For that period, we have been in an exchange race and currency union with a dominant currency. It will change our position dramatically if we, in effect, by the exercise of these powers move out of that union.
The matter can be quantified to some extent by reference to two statistics. One is the extent of the trade with the union that we would be leaving. Taking the Central Bank Report of this autumn, Table 59, the figures given there for exports to the United Kingdom showed that our exports for that year were £1,182 million worth of a total EEC export figure of £1,916 million worth of goods. I am only speaking about trade. Therefore our exports to the United Kingdom, which includes Northern Ireland, represent 61.7 per cent—according to my computation, not that of the Central Bank, so that calculation could be wrong—of the total exports to the EEC. The import figure is even greater. Total imports from the EEC amounted to £2,100,000,000; the United Kingdom portion of that was £1,486,000,000, or 70 per cent.
It is a curious, ironic reflection on the situation that proposals which it is known by Members of this House are under consideration and which it is not appropriate for us to debate—that is not the nature of our debate today—are coming to this Community for consideration under the general proposal that we are seeking to enlarge and make freer an existing market. It is not proposed that we have a currency union with the other people who may join the European Monetary System but in general the objective is by removing to some extent the exchange risk which is an impediment to trade to make the trade freer. It is an ironic comment on that, that that being put before this community for consideration, the increased freedom in that area—if this goes ahead—is going to lead possibly, but hopefully not, to an increased control in a very much larger area of our existing trade because if the 30 to 40 per cent trade that we do with the other EEC countries gets to some degree freer the 67 per cent trade that we are doing with the United Kingdom may become subject to impediments.
Control is not encouragement. The inter-position of exchange control is a limitation of freedom. I am not talking in abstract terms. I am talking about a free exercise by every citizen, in which he may engage every day, of buying and selling, once he breaks over the border of trading and engages in transactions with people outside this. In so far as controls exist there, to that extent his freedom is limited, his choices are limited and all sorts of elements enter in which were not there before, including the costs, because there has been no exchange risk—which is an interesting point—in trading between the UK and this State, which may be one of the elements making for the expansion of that trade, a withdrawal of which may be an element in the reduction of that trade.
Apart from anything else, exchange control is an administrative cost. Even if the cost is not directly or immediately transferred into the books of the customer by paying his £4 for his £100 worth of foreign money, or £500 worth of foreign money, or whatever it may be, there is somewhere in the system an additional cost involved in the production of paperwork, the consideration of applications, the decisions with regard to transactions which arise. This is one quantity which indicates the gravity of the matter. There is another quantity. We have approximately three million people in this State, approximately one-and-a-half million in Northern Ireland and about one million Irish people resident in Great Britain who were either born in Ireland or who are in many cases the young offspring of living parents resident in Great Britain and who were born here. Therefore, we see the dimensions of the problem with which the Central Bank is going to have to endeavour to cope in having to, in some fashion, trap and monitor transactions involving proportions relative to this population of two-and-a-half to three million here and two-and-a-half million resident outside this State. The problems with which the Central Bank may be asked to cope when faced with the exercise of these controls will be very great.
Apart from this trading relationship, apart from the very large sums that are deposited in Great Britain from this State, there has been the very considerable facility of capital flow between the two countries. It would seem to me that the interest of the State so far as it can be achieved in this area must be to maximise the freedom, though one recognises the problems that may arise if the situation is that we leave what I describe as the union, the currency union. All I can say about the Central Bank—the way I would like to put it—is that I am glad that it is this institution that has the burden to carry because of its past performance, its considerable experience, though its experience is not, I think, contestably deep enough in relation to the operation of this new problem. I am glad that it is an institution that has always shown appreciation of the economic advantages of the freedom that we should seek to retain to the maximum extent, that has shown a great deal of flexibility in the administration of the powers it has had to administer, which has—let us face it—an international reputation and enjoys international trust.
The policy which some might have fought and criticised of good behaviour in relation, for example, to the sterling area in the past may build up a bank of goodwill of great value to this country now as between the Bank of England and the Central Bank. The Bank of England will know the genuineness and truthfulness of the Central Bank in its communications with it. The Central Bank, after all, is rather like man, his pre-history and his history. The Central Bank itself derives from the Currency Commission—I suppose, that is almost pre-history—but really it did not have any great powers until 1972. Now, six years later, it receives this enormous new problem, this very considerable extension of power and is faced with a financially unique situation. I may be wrong, but I do not know of any other situation internationally where the economic, historical bind is as close as that which has existed in the past and, which continues—despite the reduction in the proportions of UK trade to the overall trading of the Irish economy—to be vastly significant. There is a close relationship between Canada and America, a still closer relationship between Belgium and the Netherlands; that latter linking seems to operate on minimal controls. While one apprehends the UK attitude not to impose controls, for a number of reasons, one of them being that they are aware of the disadvantages to their own overall policy in extending control to Ireland, if controls come into the field, though not desired by the Central Bank—conceiving the Irish interest in the matter—one can see where they may have to come in. They may have to come in to prevent the disturbance to the international value of the punt caused by the continued existence, without control, of the movement of funds, the free movement of funds in and out, of the punt, in and out of portfolio investment in this economy. Five hundred million pounds internationally may not be a great deal of money. It would make an enormous impact on the Dublin situation, even stretching, perhaps, the rating of the punt one way or another to the full of the proposed 2½ per cent band and causing consequential operations by the Government, by the Central Bank in relation to its reserves. Maybe the Central Bank will be able to contrive some sort of monitoring of this in association with the UK authorities, but one conceives that it may not be able to do so.
The difficulty the Central Bank is faced with, being at once flexible and realistic, is perhaps indicated by the one problem which existed even before this Bill came before this House, and that is that the development of a forward exchange market in the punt has been stopped, as I understand it. Might I suggest to the Minister and the House that this step was not realistic and that the fact that the forward market on the punt was not allowed to be developed by the banks so that people who want sterling, for example to pay something in March next, cannot now buy sterling for delivery in March next, unrealistically ignored the fact that the strong customers of the bank do not need the forward market. It is the weaker customers who need the forward market. The strong customers who incur a liability in sterling to be discharged in March simply place the money on deposit in sterling now and do not need to buy forward sterling because they can have it forward by making the deposit now either out of their own funds or, because of their economic and financial strength, can borrow from their local institutions to make the deposits. The absence of a forward market merely catches the person who is so circumstanced that he cannot make that money either available directly out of his liquid resources or by borrowing.
I would take this not so much for itself, though it is of considerable importance, but as an instance of something of more general character of extreme importance in the operation of any controls if they are to be operated realistically. recognising realities that are not particularly agreeable, for example, to a preview of this. I take it the objection in principle to this would be the presumption that if this market existed the one-for-one link would go. Even if it never goes it is realistic to recognise that there are people in the market who, once this arises, will want to cover themselves against the exposure and it is good business for them to do so. In regard to a forward market, it is inherently important that it be dealt with by the Central Bank and that in the general administration of exchange control, of this exchange control in particular, that actual solid realities as they emerge will be constantly and immediately and flexibly recognised and responded to.
There has been a large amount of material in the newspapers about interest rates and, it seems to me in my innocence, a simplistic kind of idea that were it not for the wretched British we would be able to lend each other money at 2 per cent, 1 per cent, anything, but that these savage new impositions are really caused by the link with sterling and once we get rid of that everything will be splendid. Everything will not necessarily move at all in the direction that is anticipated by those who so write.
For example, at this moment Irish industries, companies and co-operatives, raise a considerable amount of money cheaply. I hope the figure I am operating on here has some rational connection with reality. There is about £150 million being used at the moment and at any moment in aid of Irish industry, which consists of more cheap type of finance from the point of view of the person who raises it than he would experience if he were to raise it at home, and he raises it essentially through acceptance credit facilities that are dominated in sterling and discounted in the London Discount Market. It is likely that that may disappear. Is it certain that it will? I do not know, but it is possible that it will.
Again it is estimated that there may be funds at use, as I shall in my loose fashion describe it, from the UK in the Republic of the order of £500 million. Apart from the effect on our banking system of providing the £150 million which at present comes out of the London Discount Market and which, if that as a source of finance went, would constitute a new pressure of £150 million locally, to some extent the £500 million at use in this country will be withdrawn, and as an offset to switching plus withdrawal there will be the impact on local funds of withdrawals from the UK deposits, and the overall effect, at least in a medium term or in a short term—in this area one does not know how short a short-term is or how medium a medium-term is: we are not talking about weeks, we are not talking about years—there is more likely to be a pressure on liquidity tending to raise interest rates as a consequence. At least there is a very real danger of this.
Another element in this picture is the effect the movement of international British funds, gambling or speculating on the future of sterling or the punt, might have on that scene, but I do not intend to make any guess what it would be.
In relation to the possible impact on our local financial scene we have at the moment a system whereby the associated banks can get their Exchequer bills re-discounted and to that extent the Central Bank operates as a lender of last resort to that part of our banking financial system. It seems we will have to develop a system side by side with that if we are to avoid the tendency in the situation I have described for interest rates to rise excessively, to pump some liquidity into non-associated financial institutions.
I will go back to the words I spoke with regard to the Central Bank, and that is its understanding of the whole scene. I think that this area is particularly one in which we must avoid any patriotic songs. We must close our ears to tunes which may be coming from the devil, as merry tunes generally do, and have cold regard only to what is financially and economically beneficial, and in doing so remind ourselves that we are not behaving like hard-faced men who think of nothing else, but that in behaving like that we are thinking of people's lives and their wellbeing and their wealth.
In terms of capital flow as between the UK and Ireland, so far as one can make a judgment, one senses that if you disregard portfolio investment in which probably capital flows out—I have not looked at the balance of payments figures—I would not be surprised to find that there is some flow out of portfolio investment, and it is difficult to get the figures for real investment, direct investment. If you want to make a judgment, we are net beneficiaries of that, we are net beneficiaries of a free system, and it is enormously important that this whole thing be operated in such a way that we will remain-net beneficiaries.
I have not referred to the EMS and I do not propose to except to say that we should be like the strong armed man going into battle, and I am not so sure we are. Maybe the date for the battle was not fixed by us but the risks, the costs, are very real. Mistakes in the formulation of economic policy would tend for the first time to get expressed in a way that it has never been the Irish experience that they should be expressed. With all the jumbles of millions of decimal points that are being whizzed around in public, even the most constant of men tend to lose their balance, and what is happening or likely to happen to the balance of payments or whether we can afford what is happening to it moves into the realm of templar wisdom. But people will understand very well indeed if their punt becomes worth only 95 sterling pennies. They will be very pleased indeed, may I add, in case anybody writes only that sentence down, to find out that their punt is worth 105 sterling pennies. The point I am endeavouring to make in my infinitely laboured way is that we are very like a subsidiary company about to be hived off from the parent when our balance sheet will be looked at the first time by a lot of people who will be quite content to take us as part of the group. I use balance sheet here in the non-technical sense of our overall economic performance which will take in not merely growth rate but whether we can afford the growth rate. Reserves—where do they come from?
