I welcome the opportunity to address this House on the subject of Economic and Monetary Union. As today marks the first Seanad debate on this subject in recent times I will begin by briefly setting out the background to economic and monetary union, what it involves, the stages in it, the criteria for economic and monetary union and Ireland's performance against them, and the institutional aspects of economic and monetary union. I will then outline the opportunities and challenges that economic and monetary union will present for Ireland and give a short summary of the recent ESRI report, Economic Implications for Ireland of EMU, before turning to the preparations we need to make for it and the transition to the single currency, which will be called the Euro. I apologise in advance for the relative length of this speech but I have decided to treat the Seanad with the respect and seniority it deserves. I will outline for the House the work on economic and monetary union which has been going on under the Irish Presidency at the Council of Economic and Finance Ministers of the European Union or ECOFIN and the prospects for next week's special ECOFIN meeting and the Summit of EU Heads of State and Government in Dublin on 13 and 14 December.
To begin, economic and monetary union is not a new idea—it goes back to at least 1970. While its fortunes have varied since, the Community has never lost sight of it as a goal. The European Monetary System and its exchange rate mechanism, which were set up in 1979, were intended to be a move towards economic and monetary union and the single market programme of the late 1980s gave fresh impetus to it.
The Delors committee report of 1989, together with the European Commission report One Market, One Money of 1990, laid the foundations for the provisions on economic and monetary union that are set out in Articles 102a to 109m of the Treaty on European Union, otherwise known as the Maastricht Treaty. The treaty received widespread support in Ireland and the leaders of the four main political parties issued a joint statement urging a “yes” vote in the referendum on it held in June 1992. The treaty was endorsed by a substantial majority; just under 70 per cent of those who voted were in favour of it.
EMU essentially involves three inter-related elements: the establishment of a single currency among participating member states; the creation of a single monetary policy implemented by an independent European Central Bank; and closer co-ordination of the economic and budgetary policies of participating member states.
The treaty envisages economic and monetary union being approached in three stages. Stage one involved the completion of the single market and closer co-ordination of the economic and monetary policies of member states. Stage two began on 1 January 1994 and involves intensifying the co-ordination of member states' economic and monetary policies. This is based on multilateral surveillance of policies within the context of broad guidelines laid down by the Council of Ministers. Most importantly, stage two brought into being the excessive deficit procedure under Article 104c of the treaty. This requires an annual examination of each member state's budgetary performance to see if it meets the deficit rules laid down in the treaty, with the Council making a recommendation for ending the excessive deficit of any member state which does not meet them. An important aspect of stage two is the setting up of the European Monetary Institute or EMI. The EMI is the forerunner of the European Central Bank or ECB and has, inter alia, the task of indicating, by the end of 1996, the regulatory, organisational and logistical framework for the ECB to perform its tasks.
Stage three is the final stage of economic and monetary union. The Madrid European Council in December 1995 confirmed that stage three would begin on 1 January 1999, which is the latest date envisaged in the treaty. The ECB will have been established before then. On that date, the exchange rates of the currencies of participating member states will be irrevocably locked, the single currency, the Euro, will come into being and the ECB will begin operation of the single monetary policy in respect of it.
In early 1998, the European Council will decide which member states meet the criteria for moving to stage three. In fact, the treaty requires that there be such an examination by the end of this year but I will deal with this later. Before the European Council makes its decision in 1998, the Commission and the EMI must report to the ECOFIN Council on the performance of each member state against various criteria. The emphasis in the reports will be on the achievement of a high degree of sustainable convergence. ECOFIN will then assess whether each member state fulfils the necessary conditions for the adoption of a single currency and will recommend its findings to the European Council. The European Parliament will be consulted and will forward its opinion to the European Council also.
The criteria for economic and monetary union relate, first, to the avoidance of an excessive budget deficit, meaning that the general Government deficit must not exceed 3 per cent of GDP unless it has declined substantially and continuously and reached a level close to 3 per cent, or unless the excess over 3 per cent is small, exceptional and temporary and, second, the ratio of general Government debt to GDP must be below 60 per cent or, if above, must be sufficiently diminishing and approaching 60 per cent at a satisfactory pace.
There are also criteria in relation to inflation, interest rates and currency stability. These are as follows: average inflation must not exceed by over 1.5 per cent that of the three best performing member states; the average nominal long-term interest rate must not exceed by more than 2 per cent that of the three best performing member states in terms of price stability; the member state's currency must, without severe tensions, have respected the normal fluctuation margins of the ERM for two years before the examination and its central rate must not have been devalued on the member state's initiative against any other member state's currency in that period. The phrase "normal fluctuation margins" has not been defined since the widening of the ERM bands in August 1993. The Commission and EMI are required to report on other matters too. These include the compatibility between central bank legislation and the treaty obligation that the central banks of economic and monetary union members be independent, and the situation and development of the balance of payments on current account.
Ireland's performance on the convergence criteria is excellent and the Government is determined to maintain that record which has been shared by a number of Governments to which I pay tribute. The Irish pound trades comfortably in the ERM, our rate of inflation has been consistently low and our average nominal long-term interest rate is within the required ceiling.
As regards the fiscal criteria, our performance is among the very best in the EU. Our general Government deficit has been below 3 per cent of GDP every year since and including 1989, while our debt to GDP ratio has fallen from over 116 per cent in 1987 to around 81 per cent at the end of last year and is expected to be around 75 per cent at the end of 1996. Accordingly, though the ratio is above the treaty reference value of 60 per cent, it is nevertheless "sufficiently diminishing and approaching the reference value at a satisfactory pace". On the basis of our performance on the fiscal criteria, the European Commission has judged that we do not have an excessive deficit as defined in Article 104(c) of the treaty.
The excessive deficit procedure in the treaty was implemented in 1994 for the first time, and this judgment was made in respect of Ireland in 1994, 1995 and 1996. Ireland is one of only two member states — the other is Luxembourg — which has never been judged to have an excessive deficit. The Government's programme contains a clear commitment to keep our general Government deficit comfortably below 3 per cent of GDP, an objective which, given continued growth, will ensure that our debt to GDP ratio continues to decline. Accordingly, we should continue to escape censure under the excessive deficit procedure. Our performance in 1997 will be particularly important, since 1997 outturns will be used in arriving at the European Council decision in early 1998 on which member states qualify for economic and monetary union.
Keeping to the Maastricht criteria is vital from an economic and monetary union point of view, but in fact they make good sense in economic terms also. High Government borrowing has not proved to be a sound foundation for growth and jobs in the past and it would not provide a sound foundation for them in the future either. In the Irish case particularly, we have seen the negative effects of high borrowing, and it is no mere coincidence that we are achieving both high economic growth and high employment growth at a time when we have successfully demonstrated our ability to keep our deficit low and our debt ratio falling.
Ireland's position otherwise in relation to economic and monetary union is also favourable. We have growth levels much higher than the EU average, a balance of payments surplus and significant employment growth. In addition, the productive capacity of our economy is being strengthened significantly by investments being made under the Community support framework in particular, a factor which should further enhance our prospects. Furthermore, the age profile of our population is significantly more favourable than that in some of the other member states, and this should prove an advantage to us in the budgetary sphere over the coming years.
The House will appreciate that I do not propose to go into detail about the performance and prospects of other member states. It is common knowledge that the majority of member states meet the inflation and interest rate criteria and that it is the debt and deficit criteria which have been causing the greatest difficulty. However, I would point out that as economic and monetary union draws nearer, recent times have seen very determined efforts by member states to bring their public finances into line, particularly as regards their 1997 budgets, and this shows the depth of their commitment to the economic and monetary union project. It has also helped to reinforce the conviction, generated by the Madrid European Council and sustained by developments at EU level since, that economic and monetary union will happen, on time, on 1 January 1999.
While I am on the subject of sound public finances, the House will be aware that late last Autumn, Germany tabled proposals aimed at further ensuring that budgetary stability is maintained after the formation of economic and monetary union. Their rationale is that, in favourable times, member states should aim for budget deficits considerably below 3 per cent in order to ensure that they can reliably keep under the 3 per cent ceiling over the course of a normal economic cycle. I will set out later the current state of the discussions in this area.
I have described the foundation of price stability and fiscal responsibility on which the economic and monetary union project rests; we should now look at the building which will be erected on these foundations. Economic and monetary union essentially involves three elements: the establishment of the single currency; the creation of a single monetary policy implemented by an independent European central bank, the ECB; and closer co-ordination of member states' economic and budgetary policies. I will take these three elements in turn.
The establishment of the single currency, the Euro, will take place on 1 January 1999. Under Article 109L4 of the treaty, at that date the Council will adopt the conversion rates at which the currencies of the member states participating in economic and monetary union will be irrevocably fixed against each other and against the Euro, and it will become a currency in its own right. Euro notes and coins will be introduced into circulation by 1 January 2002 at the latest, and national currencies will have been completely withdrawn from circulation by 1 July 2002 at the latest.
Article 4(a) of the Maastricht treaty provides for the establishment of a European system of central banks (ESCB) and a European central bank (ECB) to operate the single monetary policy of the single currency. They will be set up in 1998 after the Council decision on which member states qualify for economic and monetary union. The primary objective of the ESCB, which will comprise the ECB and the central banks of the member states, will be to maintain price stability. Without prejudice to this objective, the ESCB will support the general economic policies in the Community with a view to contributing to the achievement of the Community's objectives. Briefly, these are to promote sustainable and non inflationary growth, a high level of employment and social protection, and economic and social cohesion and solidarity among the member states.
Article 109 of the treaty gives the Council of Ministers a clear role in the setting of exchange rate policy. It provides that the Council may, acting unanimously on a recommendation from the ECB or from the Commission, conclude formal agreements on an exchange rate system for the Euro in relation to non-Community currencies, having first consulted the ECB in an endeavour to reach a consensus consistent with the objective of price stability, and having also consulted the European Parliament. In the absence of such an exchange rate system in relation to one or more non-Community currencies, the Council, acting by a qualified majority, either on a recommendation from the Commission and after consulting the ECB or an a recommendation from the ECB, may formulate general orientations for exchange rate policy in relation to these currencies. These general orientations shall be without prejudice to the primary objective of the ESCB to maintain price stability.
The President of the Council of Ministers and a member of the European Commission may participate at meetings of the governing council of the ECB, although they will not have the right to vote, and the President of the Council may submit a motion for deliberation to the governing council. There will also be a role for the president of the ECB in relation to meetings of the Council of Ministers — ECOFIN — in that he or she will be invited to participate in such meetings when the Council is discussing matters relating to the ECB's tasks and objectives.
Provision is also made for accountability of the ECB. It must present an annual report on the activities of the ESCB to the European Parliament, the Council of Ministers and the European Commission as well as to the European Council. The report must cover the monetary policy of both the previous and the current year. The ECB's president will present this report to the Council and to the European Parliament, which may hold a general debate on it.
The ECB president and the other members of the executive board may be heard by the competent committees of the European Parliament, either on their own initiative or at Parliament's request. The ECB and the ESCB will be independent in implementing their tasks within these arrangements. Article 107 provides that neither the ECB nor a national central bank shall seek or take instructions from Community institutions or bodies or from the Government of any member state. Overall, these arrangements are very similar to those currently operating in Ireland where the Central Bank is independent but must operate within a framework for exchange rate policy set down by the Minister for Finance and present an annual report to the Oireachtas. The current governor agreed to initiate the practice of appearing before the Select Committee on Finance and General Affairs. Tragically, that was not the case in the past.
The last element of full economic and monetary union is closer co-ordination of the economic and budgetary policies of the member states. Apart from the ongoing process of multilateral surveillance of the consistency of member states' economic policies with the broad economic guidelines of the Union, the key point here concerns the excessive deficit procedure. The treaty provides that from the start of stage three, the procedure will be considerably strengthened.
In stage three, if a member state participating in economic and monetary union has an excessive deficit and persists in failing to put into practice the Council's recommendations, the Council may decide to give notice to it to take, within a specified time limit, measures for deficit reduction which the Council judges necessary to remedy the excessive deficit. Members may wish to consider that aspect carefully because it is a slow and deliberate procedure. If the member state fails to comply with such a Council decision, the Council may decide to apply sanctions. It may require the member state to publish specific additional information before issuing bonds and securities. It may invite the European Investment Bank to reconsider its lending policy towards the member state. It may require the member state to make a non-interest bearing deposit of an appropriate size with the Community until the excessive deficit has, in the Council's view, been corrected or it may impose fines of an appropriate size. An important point is that in making the various decisions referred to above, the vote of the member state whose deficit is at issue shall not be counted. This is to ensure the even handed application of the procedure.
I have described the process of moving towards economic and monetary union and the elements of economic and monetary union itself and it is appropriate to set out the reasons the European Union and member states set themselves the objective of achieving economic and monetary union. The main objectives are as follows: the elimination of transaction costs and exchange rate risk for trade, tourism and investment among participating member states; final completion of the Internal Market; low and fairly uniform interest rates among participating member states; promotion of price stability, sound public finances and sustained low inflation growth in participating member states; increased attractiveness of participating member states to foreign investment and a voice in decisions about the single monetary policy of the Union. We do not have this voice at present. For example, when the Bundestag Council meets and decides to move its monetary policy, it quickly affects monetary and interest rate policy across the Union.
Like most things in life which confer benefits, however, economic and monetary union is not without potential disadvantages. The obvious one is that participating member states cannot devalue their currencies for any reason. In addition, a single monetary policy will involve some pooling of sovereignty among participating member states. This disadvantage will be felt more keenly in the larger member states. The discretion about monetary policy enjoyed by smaller member states is considerably less. It might be argued that the restrictions on budgetary freedom, especially the exposure to possible sanctions if an excessive deficit is not corrected in accordance with a Council notice to that end, are a disadvantage of economic and monetary union participation. However, a number of points are important.
First, the obligation to avoid an excessive deficit, as defined in the treaty, applies from the start of stage three, irrespective of economic and monetary union participation. Only the sanctions will be new and, in any case, failure to abide by a Council notice to correct an excessive deficit would already expose us to a suspension of Cohesion Fund aid. Second, while nonparticipation would exclude the possibility of formal economic and monetary union sanctions for an excessive deficit, there is no doubt that financial markets would impose a penalty in the form of higher interest rates. Third, avoiding an excessive deficit would be in our interest. Our experience in recent years shows that keeping the deficit within the treaty parameters is in no way inimical to sustained growth in output and employment. Indeed, keeping our deficit within the 3 per cent threshold has not precluded improvement in public services and significant progress on tax reform combined with increased employment to which I referred.
The move to economic and monetary union will necessarily involve transition costs for business, public administrations and the financial institutions which may be significant in some cases. In considering these, it is important to bear in mind that they are an investment which will yield long-term benefits for the whole economy. In the case of financial institutions there will also be an ongoing loss arising from the elimination of transaction costs and exchange rate differentials between participants. However, this ongoing loss of revenue to the financial institutions will be an ongoing gain to traders and business and should help them to improve their performance. Healthier companies will, in turn, be of benefit to all the financial institutions.
Successive Governments have stated that Ireland's policy is to be eligible to participate in economic and monetary union from the outset. The current Government endorses that position. Ireland has always supported the process of European integration and economic and monetary union will mark a substantial stage in that process. Economic and monetary union will have substantial implications for Ireland. In dealing with these, I wish to make two general points because it is vital that we do not ascribe to economic and monetary union effects that will arise anyway.
First, the global economic environment is changing fast. This process will continue and would continue even if economic and monetary union had never been considered. It involves greater globalisation of activity, increasing intensification of competition among all countries and increasing technological change. Second, the formation of economic and monetary union will mark a substantial change in the economic environment of the Union as a whole. This is true for all member states, regardless of whether they join the single currency; continuation of the status quo is not an option for any member state. Economic and monetary union will change things even for member states which decide not to join.
From the Irish point of view, we were concerned about the implications for Ireland of economic and monetary union. In order to get an independent view of the implications, earlier this year I commissioned the Economic and Social Research Institute to carry out an in-depth study of the likely economic implications of economic and monetary union for Ireland, with particular reference to employment, including different sectoral levels, in the context of various membership scenarios. The ESRI published its report at the end of July and it has been widely circulated, including to all Members of the Oireachtas.
The report runs to 350 pages so there is no need to go into it in detail, especially since the report itself contains a summary chapter. However, the ESRI said that its quantification "indicates that Ireland can expect to benefit modestly in terms of income and employment through membership of economic and monetary union. This conclusion is reinforced by the fact that the unquantified benefits are also likely to favour economic and monetary union entry". There is no doubt that economic and monetary union will involve a very significant change for Ireland in removing our ability to adjust our exchange rate, as a last resort, in the face of an economic shock. Many people, not unnaturally, speculate on this arising in the context of a substantial depreciation of sterling. Chapter 5 of the ESRI report considers the potential impact on Ireland of a 20 per cent fall in the value of sterling in two scenarios — with both Ireland and the UK outside economic and monetary union, and with Ireland in but the UK out. In both cases such a fall in sterling would present problems for Ireland. The ESRI estimates that with both countries out there would be a loss of some 16,000 jobs in Ireland while with Ireland in economic and monetary union and the UK out, the loss would rise to 28,000 jobs, a net difference of 12,000 jobs.
Clearly in either case such a sterling depreciation would be unwelcome, but it is worth noting that not being in economic and monetary union would not give us total protection from a sterling fall. Furthermore, the ESRI itself points out that it considers a 20 per cent fall to be an exceptionally large shock, chosen not because it seems at all likely but because it provided a useful test of the model used by the ESRI. Finally, it should be borne in mind that economic and monetary union should, as a general rule, remove the interest rate problem which created such difficulties for Irish industry during the currency crisis of 1992-93.
Most people think of sterling when they think of the exchange rate exposure involved in Ireland's joining the single currency and it would obviously be appropriate to say something here about the position of the United Kingdom in relation to economic and monetary union.
As the House is aware, the UK has an opt out from the Maastricht Treaty provisions on economic and monetary union. The UK Government has not yet said whether it will exercise this opt out. It has said, however, that it would not join economic and monetary union if economic and monetary union were to be formed in 1997. As we know, the Madrid European Council confirmed 1 January 1999 as the commencement date for economic and monetary union. The UK has not said it will not join economic and monetary union in 1999 only that it will decide closer to the date. Also, the UK — and Prime Minister, John Major — in particular, has never said it will never join economic and monetary union, which should be borne in mind. In short, the UK position is unclear and speculating about it on this side of the Irish Sea will not make it any clearer. The clear priority for Ireland is to ensure that whatever happens, Ireland qualifies for economic and monetary union membership.
It is time now to turn to how we should prepare for economic and monetary union. I would emphasise, of course, that change in the Irish economy will be necessary anyway. As I have said before, competition is intensifying throughout the world market and no country can escape from it. This would be so even if economic and monetary union had never been thought of.
First, we need to make sure we continue to meet the Maastricht criteria. In particular, we must go on keeping our general Government deficit comfortably below 3 per cent of GDP and ensuring that our debt ratio keeps falling. This is of the first importance anyway for our own economic benefit — servicing our debt is using up resources which we could put to much better use elsewhere.
Second, we also need to meet the other criteria. We are already keeping inflation low, but there is no room for complacency and a great deal of room for improvement. The inflation criterion in the treaty is a relative one and some member states have brought their inflation to quite low levels. Low deficits, moderate wage increases in the successor to the Programme for Competitiveness and Work and increased competition throughout our economy will all help us to do so. This will also, of course, help us to meet the criterion for exchange rate stability and also that for the long-term interest rate.
Third, we need to improve as much as possible the working of our economy in terms of competitiveness and efficiency. This means not just the Government; employers and employees also need to look at every aspect of their operation to see how they could be improved. Continuous improvement needs to be at the top of everyone's agenda.
Finally, an aspect of our economy that will become even more important as we move towards economic and monetary union is to improve flexibility throughout the system. In economic and monetary union we will have to respond to shocks by means other than the traditional adjustment of the exchange rate. We need to develop those means — essentially, this means increased flexibility on everyone's part, which I stress.
We also need to make preparations at a practical level. In the public service we have already taken a number of steps in this area. In June 1995 my Department circulated copies of the European Commission's Green Paper on the practical preparations for the introduction of the single currency to all Departments. In turn, each Department then made copies of the Green Paper available to the public sector agencies and bodies under its aegis. The scenario for transition to the Euro agreed at the Madrid European Council in December last was also circulated to all Departments.
Arising from this exercise, a single currency officer team — SCOT — consisting of one officer from each Department was set up in autumn 1995. The SCOT also includes representatives from the Office of the Comptroller and Auditor General, the Office of the Revenue Commissioners, the Central Statistics Office and the National Treasury Management Agency. The purpose of SCOT is to see what preparations are necessary for the introduction of the single currency and to plan for them.
We have also set up an informal group representative of relevant interest groups in the private sector to advise on technical issues in the run up to the 1998 Council decision on which member states qualify for economic and monetary union. It is expected that this group will form the nucleus of a more formal structure, like the Decimal Currency Board which oversaw the decimalisation of the Irish pound in 1971, which would need to be set up in due course to oversee the practical arrangements needed to manage transition to the single currency.
Finally, next week will see the launch of a Government public information programme about economic and monetary union and the changeover to the Euro. This will include a business awareness campaign, which will be run by Forfás in co-operation with the Department of Enterprise and Employment, the Department of Tourism and Trade and my Department. The campaign will aim at increasing awareness of economic and monetary union and the changeover to the Euro in the business sector, especially among small and medium sized enterprises, and at helping businesses prepare themselves for it.
As part of helping the public to familiarise itself with the idea of changing over to a new currency, I have arranged that next week will be a Euro Week when, for one week, supermarkets and pubs will display both euro and Irish pound prices on selected items. The conversion rate for the Euro has not yet been fixed, of course, so the Euro prices displayed next week will be based on a notional rate of one Euro equalling 80p. Naturally this carries no implication for what the final figure will be — it is just an average figure which, more importantly, is fairly easy to calculate.
In addition, as part of our publicity campaign, we will unveil, in concert with a simultaneous unveiling in Frankfurt, the winning design for the Euro notes. The Governor of the Central Bank on the afternoon of Friday, 13 December — I hope the connotations of that date do not apply — will unveil in the Central Bank the winning design which was selected independently and separately by the governors of the board of the European Monetary Institute, which is, as I said earlier, the forerunner of the European Central Bank. That Friday will be the first day of the two day Heads of Government Summit meeting in Dublin.
I promised to end by outlining for the House the work that has been going on in relation to economic and monetary union under the Irish Presidency. The focus has been on three areas which were highlighted as priorities by the Madrid European Council last December. The objective we set as Presidency was that ECOFIN would be able to present conclusions showing substantive progress to the European Council in Dublin which, as I said, will take place the week after next. Even in advance of ECOFIN's final meeting on 12 December I can say that considerable progress has been made on the objective we set last July.
The first area highlighted by Madrid concerns the monetary relationship there is to be between member states which adopt the Euro from the outset and those which do not — the question of the ins and pre-ins. The second area concerns strengthening budgetary discipline among member states in economic and monetary union or, as I described it earlier, the "stability pact". All member states now recognise the importance of such a pact or agreement for the success of the single currency. The final area is the legal framework for the Euro. This framework is needed to enable market participants to plan effectively for the changeover to the Euro, although certain elements are more urgent than others.
Considerable progress has been made on all three areas during our Presidency. In Dublin in September I hosted an informal meeting of EU Finance Ministers and central bank governors to review progress and to chart the course to the December European Council. That informal meeting was very satisfactory and the momentum it provided enabled the Commission to adopt in mid-October legislative proposals on the stability pact and the legal framework for the Euro, as well as a draft communication to Council on the relationship between participating and nonparticipating member states.
As regards the latter issue, the report from ECOFIN to the Dublin European Council will address the new exchange rate mechanism to be put in place on the formation of the single currency. The main features of this are already known, in particular the fact that the central rates of participating currencies will be set against the Euro only, because of its anchor role and because of the goal of convergence to the Euro area. Work on the details will be put in hand after the Dublin summit, although these cannot be finalised until the European central bank is set up in 1998.
ECOFIN's report to the Dublin summit will also address the arrangements for enhanced surveillance of economic policies with a view to ensuring they are conducive to the convergence essential to monetary stability. On the budgetary discipline question, the ECOFIN Ministers have made considerable progress towards formulating the key elements of the stability pact. There is already a consensus on many of its features. We have agreed that member states in economic and monetary union will be obliged to submit stability programmes demonstrating a commitment to medium term objectives that will keep their deficit below the treaty reference value of 3 per cent of GDP over the course of a normal economic cycle. There is also agreement that there should be an early warning system to help prevent excessive deficits arising. Member states not in economic and monetary union will submit convergence programmes demonstrating their commitment to convergence oriented policies.
Work has been advancing on the question of how to clarify and speed up the excessive deficit procedure in the treaty, including its enforcement aspects. It had already been agreed that when sanctions are first imposed they will include a non-interest bearing deposit. This would be converted into a fine after two years if the excessive deficit persisted.
At the ECOFIN meeting on 2 December we agreed on the detailed specification of the sanctions. The amount of the deposit will be made up of a fixed component equal to 0.2 per cent of GDP and a variable component equal to one tenth of the excess of the deficit over the 3 per cent reference value. There will be an upper limit of 0.5 per cent of GDP for the annual amount of deposits. Sanctions are aimed more at deterring excessive deficits than at punishing them and the objective is to ensure, as far as possible, that member states avoid excessive deficits altogether, thus providing a strong foundation for the Euro and creating the conditions in which low interest rates can be consistent with price stability.
ECOFIN has agreed to meet again at my request on 12 December, in advance of the European Council meeting the next day, to try to resolve the few remaining issues, notably the question of the definition of when the excess of a Government deficit over the treaty reference value is to be considered "exceptional". This will not be an easy matter to resolve but I am cautiously optimistic that it may be possible to settle it, if not at the ECOFIN meeting then at the Dublin European Council. The basic principles of the stability pact and how it would operate would then be in place. This would enable work to begin after the Dublin summit on enshrining the pact in secondary legislation under the treaty.
There has been considerable progress on the legal framework for the Euro. The European Commission produced two regulations in mid-October, one based on treaty Article 235 which contains the urgent provisions and the other based on Article 109L4 which contains the remaining provisions. This latter regulation cannot be finally adopted until the member states participating in economic and monetary union have been decided. The Irish Presidency has chaired several meetings of a Council working group on these two regulations and by dint of sheer hard work and with excellent co-operation from our partners, we have brought the Article 235 regulation to agreement and the Article 109L4 regulation very close to agreement. The opinions of the European Parliament and the EMI on the two regulations have recently been received and these will now be examined at working group level.
As I pointed out earlier, there is a treaty procedure under which the European Council must decide before 31 December 1996 whether a majority of member states fulfil the necessary conditions for the adoption of a single currency, whether it is appropriate for the Community to enter the third stage of economic and monetary union and, if so, to set the date for the beginning of the third stage.
The European Council has already decided, in Madrid and Florence, that 1 January 1999 will be the starting date for economic and monetary union, so the outcome of this procedure is already clear. The procedure must nevertheless be carried out. Our aim is that the Dublin European Council will reaffirm the 1 January, 1999 commencement date for economic and monetary union and, thus, further reinforce the message that the progress to economic and monetary union is irreversible.
