I should like to thank the Members of Seanad Éireann for their co-operation in helping to enact this legislation. This is an important Bill and I think it is in the national interest that it should be enacted before the end of this year.
In 1988, as part of our EC obligations Ireland, along with other member states, agreed to liberalise capital movement under a directive on capital movements. This remains the current EC legislation in this area. This will be replaced by the provisions of the Treaty on European Union in 1994. For most member states the deadline of 1 July 1990 was laid down. However, we received a derogation to allow us to keep our exchange controls until the end of 1992. Spain, Portugal and Greece were also allowed derogations. However, only Greece will continue to maintain controls from 1 January 1993.
Since 1988 we have been liberalising our controls on a phased basis. The most recent liberalisation measures took effect on 1 January this year. Only a few controls remain, principally those rules restricting residents from holding deposit or current accounts abroad and on short term lending in Irish pounds to nonresidents.
It would be remiss of me if I did not mention the crisis that occured in the past few months in the currency markets. The attack mounted on the members of the European Monetary System has been unprecedented in scale. The initial turbulence occurred for a number of reasons which have been well rehearsed.
The weak dollar and low US interest rates, the cost of German unification and the resultant high German interest rates all combined with uncertainty over the outcome of the Maastricht Treaty and helped set the conditions for further uncertainty. When doubts in the market grew about the sustainability of certain exchange rate parities given the economic conditions pertaining in a number of countries the crisis occured. The Irish pound, like other currencies, was put under enormous pressure and we were obliged to support the pound by raising interest rates and intervening heavily in the markets. This action, and that taken by other member states, was partially successful but one member had to devalue while two members of the system had to withdraw. Hopefully, these withdrawals are temporary.
Things had begun to return to some normality during October, but in November another crisis arose — Spain and Portugual devalued. We again had to intervene to support our pound and establish a new system of extending wholesale credit to prevent speculation against the pound. This has been successful to date.
Turning to interest rates, I can assure the House that we are acutely conscious of the fact that our interest and mortage rates are exceptionally high. I know that the Central Bank, which has statutory responsibility for monetary policy, shares our view. Indeed, the Central Bank has taken all the steps which are open to it to defend the currency with the minimum possible impact on interest rates. Unfortunately, it was not possible to defend the currency without increasing interest rates. We are satisfied that the benefits which will flow to the economy from a stable exchange rate will, over a reasonable timescale, significantly outweigh the short term costs of defending the currency now. We believe that failure to defend the currency would prove very costly in terms of investment, jobs and general economic well being for years to come. Already wholesale interest rates are well below their peak levels and we are confident that once stability is restored to the currency markets interest rates will fall quickly from their present levels.
During the crises exchange controls were of help to us in defending the punt. They gave us a breathing space. However, we cannot continue to hide behind controls indefinitely. These controls are effective in the short term, but we must depend on other ways of dealing with crises, whenever they arise. This is what happens in other countries. As I said, controls have been reduced or fully abolished in all member states except Greece. Portugal abolished its remaining controls yesterday. It is unfortunate that we must take our final step in removing controls at such a delicate stage in the currency markets. However, that is outside of our control. The exchange Control Acts, 1954 to 1990, will lapse at the end of this year.
Ireland has had the current exchange controls since 1954, when the Exchange Controls Act was enacted. This established the rules for capital movements. However, we have recognised that, in the modern financial world these controls are being relaxed and are no longer effective in the new Europe. In the Community of the Single Market, capital must be free to flow between countries, if the market is to work. We have accepted that. Under this Bill, a future Minister for Finance will have the power to restrict financial transfers, if necessary, in an emergency situation. However, we do not foresee any circumstances, where these would be used to defeat currency speculation.
I have set out the general background to the introduction of this Bill. I would like to turn now specifically to the Bill. This Bill was envisaged to deal with a variety of situations. In particular, the Exchange Control Acts were used to impose financial sanctions against Iraq and the former Yugoslavia. With the ending of these Acts, there will be no power available for a Minister for Finance to impose financial sanctions in the event of the international Community taking such an action. We are obliged, because of our UN membership, to implement UN resolutions. I would envisage that when this Bill is enacted, the Minister of Finance will make an order, under section 4 to continue our existing financial sanctions in relation to Iraq and the former Yugoslavia, Serbia and Montenegro.
In addition, under the provisions in the Treaty for European Union, the Community may act to restrict financial transfers. Under Article 73 (g), the Community, acting jointly, may impose sanctions against third countries. There is also provision to allow the Community to impose capital movement restrictions, where the Community wish to take retaliatory action where there is discrimination against Community firms, by a third country. Such action is provided for in certain existing Directives, such as the Second Banking Directive. The Community may also take action to prevent turbulence in the Community's financial markets or threat to the single currency. The Treaty provisions emphasise the Community, as a group, taking action. There is some provision for a single member state to act, for example, for serious political reasons, in the sanctions area. However, any measures must be subsequently approved by the Community.
These Treaty provisions are another reason for this Bill. We must be in a position to fulfil our obligations under the Treaty. While the Community might act by way of regulation, which are directly binding on us, we must be in a position to prevent breaches of these regulations, by means of domestic law. The Community does not prescribe punishments for offences. Enforcement is left to the member state. Therefore, to ensure we can fully enforce any EC decisions, we need domestic law to create offences for breaches and appropriate punishments.
Under the 1988 Directive on Capital Movements that I referred to earlier, member states may, under Article 3, take action to impose restrictions on capital movements, where there is severe disruption to the markets. However, we do not forsee any circumstances at present, that would require the use of this power to defend the currency. From January next, investors will be able to hedge their investments, which they had been unable to do previously. This is a normal and accepted practice elsewhere and we will now come into line. I hope that this will, in time, help to support our currency and investments in Ireland.
The Bill of its nature is short and attempts to achieve it aim simply. It is envisaged that the Minister for Finance will need to have wide powers which will allow flexibility in dealing with the variety of situations which might arise. In the field of sanctions, they might be selective or wide ranging. They might name a number of countries or only one. Indeed, they may arise either from the UN or the Community, under the new Treaty provisions, taking action. Therefore, I feel that there is a need for flexibility and, consequently, the Bill gives wide discretion to a Minister, when to act and how to draw up the implementing orders.
Section 1 is the normal short title provision. Sections 2 and 3 are the definitions sections and define the transactions to be covered. Mention is made here of EC legislation in the area. The phrase "financial transfers" is wide, but attempts to define it too closely could lead, inadvertently, to loopholes. Therefore, we have put in a cross reference to EC Treaty provisions and the legislation flowing from that. In this way, we attempt to indicate the activities to be covered.
Section 4 is the main provision in the Bill. This section allows a Minister for Finance to make an order to restrict capital transfers, with other countries. The Minister, as I indicated above, should be given powers to decide on the details of each order to meet each and every situation, as it arises.
Section 4 also allows a Minister for Finance to delegate certain of his powers under this Bill. What is envisaged here is that the Minister could delegate to the Central Bank the day-to-day operational details. This is similar to what has happened under the Exchange Control Acts. The delegation to the Central Bank at present has worked well and is a model for the future. Its central position in the financial system make it the natural body to administer any restrictions in the future.
Section 5 creates the offences and includes a provision to allow for prosecution of corporate bodies. It is a feature of other Acts.
Section 6 sets out the penalties for breaches of orders. Some may find these penalties high — conviction on indictment could result in a fine of up to £10 million pounds. However, we feel that these harsh penalties are necessary in order to cater for the future, but also to deter transgressions in an area, where the amounts involved can be huge.
Section 7 provides that an order, under section 4, should be presented to both Houses of the Oireachtas, within 21 sitting days. This provision is in no way meant to lessen the input of the Oireachtas, but is necessary to ensure speed of implementation. Sanctions or other restrictions may need to be imposed at a time, when the Dáil or Seanad are not sitting.
I commend this Bill to the House. We must not allow a vacuum to arise after 1 January where, without this Bill, we will have no way to fulfil our international obligations.
I thank you, a Chathaoirligh, and Senators, particularly Senator Manning and his colleagues, for allowing this legislation through. I know it is inconvenient for the House to meet at this stage. My colleague, the Minister of State, Deputy Noel Treacy, will reply to the debate. Since this is the last occasion in 1992 on whch I will address this House, I wish all Members and you, a Chathaoirligh, a very happy Christmas and a successful new year.
