Seanad Éireann debate -
Thursday, 16 Oct 1997

Vol. 152 No. 5

Economic and Monetary Union: Statements.

Minister for Finance (Mr. McCreevy)

I welcome the opportunity to speak to this House on the question of Economic and Monetary Union. Senators may recall that on 4 December last, my predecessor, Deputy Quinn, set out the background to EMU and outlined the issues to be addressed at the Dublin European Council meeting which took place on 13 and 14 December 1996. In addition, he also gave a short summary of the report, Economic Implications for Ireland of EMU, published by the ESRI in July 1996.

I propose to concentrate on preparations for stage 3 of EMU which the Amsterdam European Council of June last reaffirmed will commence on 1 January 1999. I will outline progress towards stage 3 of EMU and Ireland's performance in terms of meeting the convergence criteria and briefly explain the national changeover plan for the introduction of the single currency, the euro.

Before addressing some of the consequences of EMU for Ireland, I would make the following points. First, the global economic environment is changing fast. This process will continue, and would continue even if EMU had never been thought of. It involves greater globalisation of activity, increasing intensification of competition among all the countries of the world, and increasing technological change. Second, the formation of EMU will mark a substantial change in the economic environment of the Union as a whole. This is true for all member states and it is true whether they join EMU. In other words, continuation of the status quo is not an option for any member state. EMU will change things even for member states that do not join it.

The report included detailed sectoral analyses of the impact of EMU on the tourism, retailing, agriculture, manufacturing industry and financial services sectors. The ESRI report concluded that EMU participation by Ireland would yield a net benefit to the Irish economy. This would be the case even if the United Kingdom were to remain outside the euro zone.

The principal benefit of EMU participation by Ireland identified in the report was the prospect of a lower trend in interest rates for Ireland within the single currency area, reflecting the elimination of the currency risk premium on Irish pound assets.

The ESRI report also examined potential but unquantifiable effects of EMU participation. They concluded that some of these, such as the increased attractiveness of Ireland as a destination for foreign direct investment, could be substantially positive and hence strengthened the case for Ireland's participation in EMU.

The Treaty sets out three stages for achieving EMU. The third and final stage will commence on 1 January 1999. The European Central Bank 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 the euro.

There has been much progress in terms of preparation for stage 3. Agreement has been reached on the establishment of an exchange rate mechanism in the third stage of EMU to be known as ERM 2. This will minimise real exchange-rate misalignments and excessive nominal exchange rate fluctuations between the euro and the other EU currencies. Participation in ERM 2 will be on a voluntary basis in accordance with the Treaty.

The euro will become the currency of the participating member states from 1 January 1999. A Council regulation has been adopted on the legal framework for the introduction of the euro to provide legal certainty for citizens and firms to enable them to prepare for the changeover. This text provides for one-to-one conversion between the ecu and the euro, and continuity of contracts as set out in the rules, including rounding rules, for conversion between the participating currencies and the euro.

The text of a second Council regulation was also agreed. This cannot be adopted until the participating member states are known but was published in the Official Journal of the European Communities on 2 August 1997 in order to aid preparations. This regulation will establish the euro as the currency of participating member states as from 1 January 1999 and will set out transitional and certain other arrangements for the introduction of the euro.

A stability and growth pact has been adopted based on the objective of sound Government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation. The pact provides both for prevention and deterrence of excessive deficits, and the strengthening of multilateral surveillance of budgetary and economic policies. Adherence to this budgetary objective will allow member states to deal with normal cyclical fluctuations while keeping the Government deficit within 3 per cent of GDP reference value. This will require a tighter underlying stance for member states' fiscal policy in order to achieve a structural budget close to balance and also continued reductions in the burden of public debt in the economy. This is a policy which in itself would make perfect sense even if EMU had never been proposed.

The decision on who will participate in the third stage of EMU is to be made around May next year in accordance with the procedures laid down in Article 109j of the Maastricht Treaty. The Council of Ministers, ECOFIN, will assess whether each member state fulfils the necessary conditions for the adoption of a single currency on the basis of convergence reports from the European Commission and the European Monetary Institute. On the basis of these reports, ECOFIN, acting by a qualified majority on a recommendation from the Commission, will recommend its findings to the Council, comprising the Heads of State or Government, who will, after receiving the opinion of the European Parliament, confirm which member states fulfil the conditions.

I expect that some Senators may raise the question of United Kingdom participation. This is a matter for the British Government. The UK has an opt-out from the Maastricht Treaty provisions on EMU. The UK Government has not yet said if and when it will join EMU. While the EMU debate in the UK has sounded a more positive note of late, it must be said that the UK position remains unclear, although many commentators feel that the UK will not be a member at the outset. While I would welcome a decision by the UK Government to enter EMU, the clear priority for Ireland is to ensure that whatever happens, Ireland qualifies for EMU.

In relation to our decision, I stress that when the Maastricht Treaty received the endorsement of the Irish people, it did so without qualification or any provision for Ireland to opt out from the provisions for economic and monetary union. Membership of EMU, irrespective of what the UK does, will on balance be of benefit for Ireland, according to both the Economic and Social Research Institute and the National Economic and Social Council in a report, "European Union: Integration and Enlargement", which was published in March this year.

Ireland at present meets all of the convergence criteria laid down in the Maastricht Treaty for qualification for EMU. Among most of our EU partners, there has also been very considerable progress in recent years towards meeting these criteria. Based on the EU wide measure, the harmonised index of consumer prices, Ireland's inflation rate is at 0.6 per cent, currently the lowest in the EU. Given our expected inflation figure of 1.4 per cent for 1997, we are comfortably within the likely reference figure.

Ireland's general Government deficit has been consistently below the reference figure of 3 per cent of GDP for the last eight years and this year our general Government position may be close to balance. Ireland's debt/GDP ratio is still above 60 per cent but because it has been falling significantly over the last ten years and a further significant improvement is in prospect this year, we meet the terms of the Treaty in so far as this measure is concerned. This ratio is expected to reach 68 per cent for 1997, which is below the average for the EU as a whole. Ireland meets the EMU exchange rate criterion, that the normal fluctuation margins of the exchange rate mechanism be observed for at least two years. Ireland is also on target to meet the EMU interest rate criterion that the average long-term interest rate should not be more than 2 per cent above that of the three best performing member states in terms of price stability.

According to the Autumn Economic Forecasts published by the EU Commission on Tuesday, the Commission view is that a majority of member states should be capable of meeting the necessary conditions to participate in the euro from 1 January 1999.

In relation to the rates at which participating currencies will convert to the euro, the September ECOFIN agreed that, at the same time as the participants of stage 3 of EMU are announced around May next year, there will be a preannouncement of the bilateral exchange rates of the currencies of the participating member states. These rates will become effective on 1 January 1999 and, in line with the Treaty on the European Union, the actual setting of the conversion rates against the euro can only take place on that date.

As regards the Irish pound, the Government's intention is that Ireland joins EMU at an exchange rate that meets the needs of the economy in the fullest sense of the term, and that between now and decision day we will be keeping the issue under active review.

Regarding the practical preparations which are being made for EMU and the changeover to the euro, when EMU was discussed in this House last December, several Senators emphasised the need for adequate planning and preparation for the changeover to the euro at a practical level. My Department has responsibility for co-ordinating the preparations of the Irish public administration and has a key role in helping the rest of the economy to prepare itself for the changeover. The following initiatives have been taken in this area.

In the public sector a single currency officers team, known as SCOT, was set up in Autumn 1995. SCOT consists of a representative from every Department as well as from the Revenue Commissioners, the Office of the Comptroller and Auditor General, the Central Statistics Office and the National Treasury Management Agency. Its remit is to co-ordinate preparations for the changeover to the euro in the public sector. As such, SCOT played a leading role in the preparation of the national changeover plan which was published on 29 May 1997.

The plan, which is based on the assumption that EMU will begin on 1 January 1999 and that Ireland will be part of it from the outset, outlines the arrangements which will be made by the Department of Finance, the Central Bank, the National Treasury Management Agency (NTMA), the Revenue Commissioners, the Department of Social Welfare and Government Departments generally, as well as by banks and building societies and the Irish Stock Exchange, in order to facilitate the use of the euro. This framework is designed to help economic agents to plan effectively and so facilitate a smooth and orderly changeover.

In summary, the main points of the plan are that from Ireland's entry into EMU Government Departments will accept payment in euro as well as in Irish pounds; Revenue will accept payment of tax in euro as well as in Irish pounds; Revenue will also accept returns and declarations in euro from companies and for self-assessed income tax, subject in the case of some taxes to an irrevocable election to adopt the euro as the reporting currency for that tax, for accounting periods which begin on or after 1 January 1999; companies may file their accounts with the Companies Registration Office in euro; banks and building societies will process lodgments and payments expressed in either Irish pounds or euro regardless of which of these the customer account is denominated in; any banking service required in euro will be available in Ireland.

The national changeover plan will be extended before the end of 1997 to include other parts of the public sector.

The private sector was centrally involved in the preparation of the plan through the euro changeover group, which was set up in 1996. This group includes representatives from the trade unions, business, consumers and farming sectors as well as from the Department of Finance and the Central Bank.

The group meets monthly to advise my Department on technical issues in the run up to the 1998 European Council decision on which member states qualify for EMU, and to help co-ordination of the changeover across the economy.

The national changeover plan states that assuming the European Council confirms in 1998 that Ireland fulfils the necessary conditions for entering EMU, a currency changeover board will be established, after the European Council's decision, in order to oversee the detailed implementation of the changeover, including in the areas of public and consumer information. The euro changeover group is expected to provide the nucleus of this board, which will of course be dissolved at the end of the changeover.

Preparations for the changeover in the public sector are ongoing. My Department has established a euro changeover team to help accelerate preparations in the public sector and to help the rest of the economy to prepare also. Further-more, the Government has recently approved arrangements to intensify public sector preparations: these involve requiring each Department to prepare a detailed changeover plan, designate a senior official to oversee its implementation and provide regular progress reports to my Department. On foot of these reports, my Department will in turn keep the Government regularly informed on how the changeover is progressing across the public sector.

Finally, I want to deal with the question of information about the changeover. Senators will be aware that a national information programme on EMU and the changeover to the euro was launched in December 1996. The first phase of the programme, to end 1997, consists mainly of a business awareness campaign which is being run by Forfás and aims to provide businesses with the information they need to prepare themselves for the changeover to the euro. The campaign has produced an information pack containing a set of leaflets, 18 in all, which provides background information on EMU and sets out the issues for business. The series is regularly added to and every leaflet is sent to all Members of the Oireachtas, thus Senators will recently have received copies of the two most recent leaflets on the national changeover plan and the design of the common face of euro coins.

A management committee, which is chaired by Forfás and includes representatives from the Department of Enterprise, Trade and Employment, my own Department and the Central Bank as well as from the private sector, meets regularly to direct the campaign.

A consultative committee advises the management committee. It draws on expertise from business and trade associations, professional bodies and the State agencies that deal directly with business. It provides both a channel for distributing information to enterprises and provides feedback on the preparations underway in the enterprise sector and the issues arising in the changeover process.

The Forfás campaign has already distributed some 25,000 copies of its information pack. It also distributes a quarterly newsletter, has a web site which provides campaign information both nationally and internationally and has organised regional meetings to bring the messages of the campaign to the enterprise sector in different parts of the country. It has set up working groups on information technology, training and the retail sector.

Following a recent survey of the campaign's effectiveness, further approaches are being developed to reach companies which have not yet received the information pack, especially those which are not members of business organisations. I should add that overall, the national information programme will be reviewed by end-year with a view to broadening its focus.

Practical preparations for the changeover to the euro are thus well underway on a number of fronts. Within the public sector, the work of the single currency officers team has continued apace and is set to intensify over the coming months. At the same time the interface between the public and private sector has developed in a very constructive way, in particular through the euro changeover group and the management and consultative committees of the Forfás business awareness campaign. I take this opportunity to thank all the bodies represented on these groups for their excellent co-operation with us, and for the work they are doing in their own areas to keep their members and clients well informed on EMU and the changeover.

The publication of the second edition of the national changeover plan will mark a further stage in the process of facilitating a smooth and orderly changeover to the euro in the Irish economy.

It is clear that stage 3 of EMU will commence on 1 January 1999. The EU Commission has expressed the view that a majority of member states should be capable of meeting the necessary conditions to participate in the euro from 1 January 1999. I, as Minister for Finance, am happy that Ireland approaches EMU from a position of considerable strength. Economic growth in 1997 is expected to be very similar to that of 1996 with GNP increasing by about 7 per cent. The outlook for 1998 and 1999 is favourable and GNP is expected to increase by an average of 5 per cent over the two years with inflation likely to remain moderate.

The outlook beyond the year 2000 is for sustained economic growth, although at a more moderate rate than that seen in recent years. Our priority now must be to continue to build on achievements in order to ensure that the Irish economy can fully exploit the benefits which a European single currency can bring. In doing so we will also be contributing fully to the work of building a strong European economy that will be ready to face all the challenges of the 21st century.

Mrs. Taylor-Quinn

I welcome the Minister, Deputy McCreevy, to the House and congratulate him on his appointment. It is a position he well deserves. Many across the country are pleased he has received this appointment because he has been somewhat in the political wings for a number of years and it is good to see a man of his capacity and calibre in such an important Department at a very important time in the development of this economy. I am sure given his professional background this is something he can sail through quite easily. It is evident that he has taken to this ministry like a duck to water. I wish the Minister the very best in the Department of Finance.

It is opportune that we are debating EMU. It is important because we are facing a major step forward in closer European union: economic and monetary union. It is important to recognise that the Irish economy is seen as one of the strongest economies within the European Union. This has come about as a result of a variety of factors but two in particular. When we joined the EMS we had an international discipline laid upon us which focused national policy in a very disciplined financial direction. In addition the criteria laid down for participation in EMU focused national thinking and policy in a particular direction. These two factors, combined with responsible government since the early 1980s and the Tallaght strategy adopted by the Opposition in 1997 have set us on a path of sound financial rectitude that has now produced a booming economy and a strong economic performance. We are now benefiting from the sacrifices made in the 1980s and the early 1990s.

Because we have such a buoyant economy and strong currency at this point, the question must be asked why should we join the EMU. It is important we recognise that we are a small economy within the European Union. That is one of the main reasons we must join EMU. Almost 40 per cent of our exports is to the EU. In joining EMU we will be protecting those exports and this is very important.

The downside to EMU is that between 27 to 30 per cent of our exports go to the UK. What will be Ireland's position if the UK does not join EMU? The Government must give serious consideration to this issue because, under the Maastricht Treaty, the UK has the right to avail of an opt out clause. If it exercises that right and does not participate in EMU, industries exporting primarily to Britain will encounter particular difficulties. There is a need to provide protection for companies facing that predicament. The Minister must elaborate on this issue in greater detail because people should be able to fully understand the position. The arguments put forward to date about the UK opting out do not placate or reassure those exporting to Britain. I hope the Minister will deal with this matter in greater detail when replying to the debate.

EMU will secure definite economic benefits and provide Ireland with a steady interest rate which will make it easier for us to trade with our EU partners. Equally, it will challenge us to show greater competitiveness. We will be obliged to be more aware of competitors within the EU and outside who could cause difficulties for us. Common interest rates among EU member states will be of greater assistance when trading with our partners. This should substantially deepen the single market and ensure that greater trade occurs within the EU. Once we enter EMU, the Government will not be in a position to devalue our currency because the punt will become part of the euro. All matters pertaining to currency valuation will be decided by the European Central Bank. The Government will no longer retain the right to devalue the punt and we must be aware that we will be unable to insulate our economy from any fluctuations which might occur, particularly in respect of the UK. This could provide an economic shock and we must address this issue as a matter of urgency.

It will be difficult for the UK to completely opt out of EMU. It is heartening that in recent days the British Prime Minister, Mr. Blair, seems to be more amenable towards joining EMU. We would welcome the UK joining EMU because our economy will be more secure than it would if the UK opted out.

The Minister referred to the preparatory work carried out in respect of EMU. I compliment Forfás and SFADCo on the business awareness campaign they are conducting, the information and leaflets they have circulated to businesses and the advice they have given to industry, particularly small and medium sized concerns. It is vitally important that small and medium sized industries are protected because they generated the greatest growth in employment in recent years. They need assistance and advice from the Government, the Department of Finance, the Central Bank, their representative organisations and professional bodies to ensure that growth continues and they should not incur major costs in securing such assistance.

There are three elements which will hopefully emerge from involvement in EMU. The single currency will secure the European economy in the future and the single monetary policy to be implemented by the European Central Bank will bring about a common monetary policy throughout Europe. This will apply to all member states and will provide assistance to their economies. When the budget is introduced next month we will begin to experience the co-ordination of the economic and budgetary policies of participating member states. We will take our first step in that direction when the budget is introduced in December. In the future it is hoped that a budget will be introduced on the same date each year to coincide with other member states.

It is good to realise that the convergence criteria are being met by the Irish economy. In recent years we have focused on meeting those criteria and we are now in a strong position. The rate of inflation is low, interest rates are below the ceiling set down by the EU, our currency is stable — the punt is performing well within the ERM — and our Government deficit is below 3 per cent of GDP, and has been since 1989.

The Irish economy is well positioned to participate in EMU. However, it is equally important that Irish businesses be well positioned and large, medium and small interests must put in place plans to prepare for the transfer to EMU. It is important that the specific elements of EMU relevant to business are addressed by everyone involved. This is essential because, as an island nation, we will incur additional transportation costs. I appeal to the Minister to address this issue because there is a need to provide some sort of structural cohesion funds. The Minister of State, Deputy Cullen, will agree with me in this regard because he has articulated the problem on many occasions. It is important that we procure additional support in respect of transporting goods by sea and air to mainland Europe.

I raised this matter with Commissioner Kinnock when he addressed the House last year. Unfortunately, I did not receive a satisfactory reply. Successive Governments will be obliged to pursue this issue until we are on a par with our competitors. At present, Irish exporters are being placed at a competitive disadvantage. It may not mean much now while the economy is strong, interest rates are low and the currency is performing well but, if the situation declines, this will become a key element with regard to the performance of the economy. I urge the Minister to raise this issue at future meetings on EMU.

The Minister did not deal specifically with the conversion of member states' currencies into euro notes and coins. Will the euro note be in full circulation in all member states by the year 2002? If the conversion takes place on time it will make communication and travel between member states much easier and people will not be forced to change their money from one currency to another. It would greatly enhance Ireland's position as a tourist destination if European visitors were not obliged to convert their currency to punts as they enter the country. I hope serious consideration is being given to this matter.

It is important to recognise that certain sectors of the economy will benefit from EMU. The construction industry should benefit substantially because interest rates will be low. The construction industry has experienced difficulties in the past due to interest rate uncertainty. However, manufacturing industry faces a different scenario because it imports many of its raw materials from the UK and exports many of its products to the UK. If the UK remains outside EMU this raises questions for the manufacturing sector. I hope the costs to that sector will be closely examined. If sterling devalues it could cause serious problems for Irish industry. It is a matter we have not considered in detail to date and we need to do so to ensure we do not act contrary to the interests of that sector.

There are also concerns in the farming community about the impact of EMU on agriculture. The CAP is the major policy instrument in that sector but EMU will impact on agriculture and the Departments of Finance and Agriculture and Food could provide greater information on what may be involved.

At present, businesses can raise loans in foreign currencies and switch between currencies depending on interest rates. The single currency may restrict businesses to fewer choices as to where they borrow. We must assess whether this will be good for business. Will we force business to raise loans in dollars and yen thus moving borrowing out of Europe?

Those opposed to EMU argue that we would place ourselves in an invidious position in EMU because an economic crash in Europe could lead us into a catastrophe similar to the Wall Street Crash. We must have more information on this possibility. It may be argued that having different currencies would protect states from being affected by the economic difficulties of others. However, in a common currency, if two or three of the major EU member states have economic collapses will they take the rest of the members with them? That is an important element in the overall assessment of the project and we should have more public debate on the matter. In EMU the Government will no longer be in a position to insulate the economy against external shocks, particularly from the UK, and we must address this matter. Our economy is greatly influenced by the world economy and to a large extent we are not the masters of our own destiny. However, it is important that the issues involved are considered.

It is good that the Irish economy is in a position to become part of EMU. All parties involved in the work done over the years to put the economy in such a strong position — politicians, social partners and citizens — deserve to be complimented. We are well in line with the convergence criteria and the difficult decisions taken in the past have put us in such a position. We should not forget the difficulties of the past and take our current strength for granted. We need to remain aware of increasing competitiveness. All things considered, we are better off in EMU than outside it. The issues I have raised need to be addressed publicly to inform the public of the details of the project.

Mr. Finneran

I welcome the Minister of State, Deputy Cullen, to the House. I remember serving with him here a few years ago. I wish him well.

I join with Senator Taylor-Quinn in complimenting those who took the difficult decisions over the last ten years to put the public finances in order. The process started in 1987 and decisions taken then and subsequently have put us in the strong economic position outlined by the Minister, from which we are well placed to join EMU at the outset. That is a compliment to all involved, including the social partners.

Economic and monetary union is a major economic and political project aimed at creating a single currency, the euro, for the EU. EMU aims at producing economic benefits for the participating member states, including the elimination of exchange rate uncertainty and transaction costs for trade, investment and tourism, the convergence of interest rates and the extension of the single market. On 1 January 1999 the exchange rates for the states joining EMU will be fixed and the euro will come into effect. National currencies will continue to be used up to 1 January 2002 at the latest and national coins and notes will be completely withdrawn by 1 July 2002 at the latest. The changeover to the euro will then be complete.

To become a member of EMU each state must satisfy convergence criteria set out in the Maastricht Treaty, showing that its economy has achieved certain targets on inflation, interest rates, Government debt and budget deficit. Other factors are taken into consideration, including how Central Bank legislation complied with the Treaty obligations, the balance of payments on the current account and the development of unit labour costs. This is part of what we must adhere to in order to gain membership of EMU.

As the deadline for the introduction of the common currency approaches, the question of the likely economic impact on Ireland of EMU membership becomes increasingly relevant. What changes will it mean for the environment in which Irish businesses operate and how can they best position themselves in the run up to EMU? As part of the preparation for economic and monetary union the former Minister for Finance commissioned the Economic and Social Research Institute to carry out an in-depth study of the likely economic implications for Ireland, with particular reference to employment. This study looked at the prospects for the overall operation of EMU, as well as the Irish economy's ability to respond. It identified several ways in which the effects on Ireland will be beneficial, as well as some which could present threats to individual sectors.

The common currency regime for members will be unlike the EMS in that there will be no escape valve through currency depreciation. This is very important because if costs get out of line with those of our competitors we will not have the luxury of devaluing. That means we have a responsibility to prevent costs drifting and we must keep in line with our competitors.

The lasting effects of EMU are expected to flow through three main channels. These are interest rates, competitiveness effects and the cost of foreign exchange transactions. The most obvious beneficial effect of EMU will be that firms and individuals will not have to incur costs when buying and selling currencies of other member states. This is very important. I have heard in the past of somebody leaving Dublin Airport with £100, changing it in every capital of the member states of the EU, arriving back two weeks later at Dublin Airport and finding that the £100 was worth just something in the region of £26. That shows the effect of the exchange rate and the cost to the individual. This is something that must be borne in mind at this time. The ESRI study notes, however, that the gain from that will be offset in the early years of EMU by the adverse effect this loss of business will have on employment and income in the financial sector. We must also be conscious of this.

Economic and monetary union will have far-reaching implications for all the citizens of Europe, not just Ireland and, not least, for the business, financial and agriculture sectors. Many other sectors will be affected also, notably the retail and tourism sectors. EMU will have substantial implications for Ireland. The global economic environment is changing fast. This process will continue, even if EMU had never been thought of. It involves greater globalisation of activity, increased intensification of competition among all the countries of the world and increasing technological change.

The formation of EMU will mark a substantial change in the economic environment of the European Union as a whole. This is true for all member states, and it is true regardless of whether they join EMU. In other words, continuation of the status quo is not an option for any member state. This must be borne in mind and I am sure Governments around Europe are conscious of this fact.

The six mark question for Ireland is the position of the United Kingdom. Most people think of sterling when they think of the exchange rate exposure involved in Ireland joining the single currency. It is, therefore, appropriate to say something about the position of the United Kingdom in relation to EMU. The UK has an opt-out clause under the Maastricht Treaty provisions on EMU. The UK Government has not yet said that it will exercise this opt-out clause but it has not said that it will never join EMU. It has only said it will decide closer to the starting date of 1 January 1999. While the EMU debate in the UK has sounded a more positive note of late, it must be said that the position remains unclear. There was recent media speculation on this matter but the new Government in the UK is a positive factor.

Our priority must be to ensure that Ireland qualifies for membership of EMU. I compliment the present and the former Ministers for Finance, and all those who have taken a position on this matter since 1987. This has resulted in our being in a position to join EMU on 1 January 1999.

The ESRI report considered the potential impact on Ireland of a 20 per cent fall in the value of sterling in two scenarios. It stated that in both cases such a fall in sterling would present problems for Ireland. The ESRI estimate that with both countries out of EMU there would be a loss of in the region of 16,000 jobs in Ireland, while with Ireland in EMU and the UK out the loss would rise to 28,000 jobs, a net difference of 12,000 jobs. These figures should be of concern to us all in deciding whether to join EMU. Clearly in either case such a sterling depreciation would present a significant challenge, particularly since the job losses would be concentrated in those sectors most exposed to competition. It is worth noting, however, that the ESRI report demonstrates that not being in EMU would give us total protection against such a shock. It should also be borne in mind that participation in EMU will remove the interest rate problem which created such difficulties for Irish industry during the currency crisis of 1991-3. We remember the issues the Minister for Finance had to confront at that time.

Ireland cannot escape significant competitive exposure to sterling fluctuations unless the UK also enters EMU. If the UK remains out, a substantial depreciation of sterling would have damaging effects, irrespective of whether Ireland joined EMU. With Ireland in EMU there will no longer be any risk of exchange rate movements between Ireland and other EMU countries. Thus the currency premium which has kept wholesale rates in Ireland above the German rates will be eliminated. It is important that with Ireland in EMU we will have that luxury which we did not have heretofore. The most favourable scenario would be if the UK joins EMU. That would minimise the exchange rate shocks and allow greater savings on currency costs.

Many sectors will be affected in different ways and it is believed that the construction industry will benefit substantially from EMU entry. That sector is particularly sensitive to interest rate effects while being relatively unaffected by competitive or foreign exchange transaction cost effects. The principal gainers from lower interest rates are those industries which primarily serve the domestic market, especially suppliers to the building sector, and those firms which are heavily indebted to the Irish banking system. The opportunity would seem to be there for the construction industry and that is welcome news. That industry is very much part and parcel of our economic life. It is an important sector in the economy.

The waters are somewhat muddier as regards agriculture, one of our main industries. It appears that agriculture is likely to be much more affected by changes in the common agricultural policy régime than by EMU. The trend is very worrying for the farming sector at present because the thinking is that prices will fall. Obviously there will be benefits in EMU as regards interests rates for the sector, but there is great concern among young farmers who have taken over farms and are just starting out; they see an uncertain future.

Any information that can be provided by the Department of Finance or the Department of Agriculture and Food should be made available now. Representatives of the Irish Farmers Association and other farming organisations should be involved in the discussions that are taking place on EMU because agriculture is one of the most important areas of economic life. In some people's eyes, it is the main industry as we are major exporters of agricultural produce. Some 85 per cent of all cattle raised here is exported. The agricultural sector is very dependent on exports so it is important that the industry is well protected within EMU. Any changes that need to be made should be discussed now rather than having a shock wave effect as we had in 1974 when agriculture was undermined. Confidence was lost during the 1970s because of what happened then.

We all remember that cattle prices fell at that time and cattle were abandoned at marts and fairs. Their owners did not even bring them home because they did not see any future in the industry. We must ensure that farmers' confidence is not broken.

The type of information that should be available to this sector is not available at the moment. The Minister of State should indicate what the Department of Finance and Department of Agriculture and Food intend to do about promoting debate on this area for the benefit of the farming community.

Tourism will gain modestly from a reduction in the cost and inconvenience of currency transactions and from a reduction in Irish interest rates. The effect of introducing the euro is being considered throughout the economy, including the financial services sector. In recent years we have seen Dublin establish itself as a significant provider of financial services to both domestic and international markets. We must compliment all those involved in the extension of those services in Dublin. It was an innovative move and has given a new focus on financial services. EMU will present greater opportunities for that sector, which hopefully will be in a position to avail of them.

However, the introduction of a single currency on 1 January 1999 will require the financial services sector to prepare for, and adapt to, one of the most historic European projects ever. Any project of this magnitude is not without its challenges. EMU will entail transition costs and will demand improved competitiveness and flexibility in the economy with increased competition and greater price transparency. With the introduction of the euro, changes currently under way in financial services can be expected to accelerate with an increasing degree of financial market integration between participating member states as a consequence of the removal of foreign exchange rate risk and centralised monetary policy pursued by the new European Central Bank.

The increased depth and liquidity of the European financial markets will permit the development and use of new financial instruments. As in any time of change, there will be great opportunities for those who can respond speedily and effectively to such changes. That applies to all sectors, but in the financial sector particularly we are better equipped to benefit as the necessary information appears to be more readily available than, for example, in the farming sector.

There is also some concern in the retail sector, among shops and other retail outlets, about the changeover. Many of us are reminded of the time decimalisation was introduced and we changed from 240p to 100p in the pound. Prices shot up then because people used the opportunity to increase them. If that were to happen on this occasion we would be in serious trouble with our competitors.

The cost to some retailers of changing over to the single currency, involving the adaptation of tills, is a matter of concern and they need a response from Government Departments. The Minister said there was a euro changeover group, but from the representations I have received it does not seem retail organisations are happy that everything that needs to be done is being done. The retail area should be examined by the Government. I am not talking about large chains but individual corner shops. We have a responsibility to maintain them in operation because over the years they have been the backbone of rural communities. Under the designated areas scheme we are providing an opportunity to set up new shopping complexes that put smaller shop owners out of business because they cannot compete. That is an unfortunate development and even though it may be inevitable, it is not in the best interests of maintaining the rural infrastructure of small towns and villages.

Our manufacturing industry is closely linked to the United Kingdom and there is concern about what the UK Government's attitude to EMU will mean for that country's manufacturing industry. It could affect exports or imports depending on the industry in which one is involved. Further debate is required concerning the effects of EMU on agriculture, manufacturing and the retail industry generally. If anything, the people in those three sectors are most worried at present.

The other day I read about an eminent American financial expert who dismissed the view that the euro could challenge the dollar after EMU. He identified the problem of regional recession under the euro as one of the areas where proper debate had not taken place. He explained this by stating that in the US there is an excepted movement of people. Up to 17 per cent of the US population move on an annual basis. He said that was not practical in the EU. There are borders and language barriers and there is no tradition of such movement. Whereas there is immigration and migration, movement does not occur to that extent. In the event of regional recession in the US people can move from one state to another. That could have devastating effects in a European context. For that reason the expert thought that Europe should address this particular matter and I agree with him. I do not think that matter has been agreed.

We have not examined the politics of EMU. We have examined the benefits of the euro and EMU as it would apply in financial and other sectors but we have not examined it on a political basis. Obviously, that is a sensitive question because if we do so, then we are talking to a great extent about a government of Europe which would make decisions which would affect all the people. We know that a short debate on security and defence can raise all sorts of objections and the air can become very heated in such a debate, so I can imagine a debate which would take a political view of how we should handle Europe in the event of a regional recession.

For the euro to play its role in the economic life of those countries which adopt it as well as in the larger global context, it will be necessary to harmonise budgetary policies. That cannot be done unless there is political will. This means harmonising fiscal policies on income. Are we prepared to do that? On the expenditure side, it means harmonising policies for town and country planning, social welfare provisions, and other forms of spending decided by public institutions in areas such as the environment, education and the future of State-owned companies. There is a great deal involved. Matters will have to be dealt with in the event of things not being exactly as we would hope. No doubt another opportunity will present itself for such a debate.

Mr. Quinn

I welcome Minister Jacob to the House. It was interesting to hear the speech of the Minister for Finance and to realise that there is a great deal of control in the Department of Finance. The fact that it is aware of what is happening puts our minds at rest.

A group of my heroes are the men who sat around a table in Philadelphia in 1782. They included people like Franklin, Jefferson and Madison. I am a great admirer of those men because the American Constitution has managed to thrive, admittedly with many amendments, for over 200 years. They designed the kind of United States they would create, and they had a number of choices. They could have decided to have 13 states, each with its own immigration, passport and currency policies.

Among the decisions that were made at the time was one to have a common currency for the future United States, the original 13 and the further 37 who joined them. We look back now and see the success of having one currency in the United States, which has a population of 250 million people. When one begins to think that through, one begins to understand better how Jean Monnet and others created the concept of a united Europe, recognising that this would not just stop war for all time in Europe but would also bring prosperity.

The correct meaning of EMU is economic and monetary union — I was corrected when I referred to it as European monetary union some time ago in this House. If one takes EMU into account and realises what is being achieved by this next stage, it is not a united states of Europe by any means but the hope to achieve some of the ambitious plans which have developed so well in the past 40 years and the 25 years which have almost passed since Ireland joined in January 1973.

If Pennsylvannia had decided to opt out of the new currency in the 1780s and keep its own currency and the other states had to decide whether to join, I suggest Pennsylvannia would have been left out of things. It is as far apart from Virginia as Ireland is from Italy and yet 200 years ago it agreed to this development.

I have always been an advocate of doing all we can to strive for a single European currency and I am happy to see that we are heading in that direction. However, I caution that we should only do so in our best long-term interests. My existing favourable attitude to EMU remains as it has been when we have spoken on this matter on different occasions over the past two or three years.

Ireland should join EMU in the first wave and I am delighted to see that Minister McCreevy, along with the previous Ministers for Finance, Deputies Ahern and Quinn, have all been saying the same thing and that policy in recent years has been heading in that direction. We should join in the first wave, irrespective of whether sterling joins now or at a later stage. The long-term interests of our country demand that we do so.

I am concerned about the apparent lack of awareness of EMU in this country and this has been spoken about this morning. I do not think the people, as a nation, understand the realities of EMU. The transition to the single currency and the first ten years under EMU will be a time of major adjustment for us, some of which will be quite painful. When I say that participation is in the interests of the country, I do not mean to suggest that there will not be costs. The point is that in the long term these costs will be outweighed by all the benefits we are likely to receive.

That is not the way the public sees it. There is an illuminating graph in the current issue of The Economist about the results of opinion polls on EMU in all the member states. In some countries the public is, on balance, hostile to EMU; in others, it seems broadly indifferent; and in a few countries, public attitude is strongly positive. According to this research, the Irish people are in the strongly positive camp. In Ireland, over 60 per cent of voters are in favour of EMU and only a tiny minority are against. That compares with an average positive balance across the EU of only 15 per cent. However, I do not take comfort from those figures. In a sense they are unhealthy because they are based not on a cool appraisal of reality but on a lack of knowledge of the real costs of EMU, which springs directly from the absence of public disagreement about entry.

I welcome this debate because we have not sufficiently discussed the issue. On the Order of Business we mentioned the concern that people have not taken an interest in the referendum on Cabinet confidentiality. The same was true of the bail referendum last year, and it is only now that people are beginning to realise what was agreed and to question it. I do not want that to happen to EMU — we should debate it as a nation and this is one step in that regard.

The position with the bail referendum was similar. I favoured it, as did almost everyone else, but as I said in the House at the time, the absence of disagreement was unhealthy because the issues were not properly addressed. The same is happening with EMU. All the political parties favour it, even Senator Dardis and the Progressive Democrats who were initially cautious. They may have taken this new position because they are now in Government.

EMU has become like motherhood — everyone favours it but no one talks about the realities. However, by ignoring the costs and difficulties which will arise, we are making life harder for ourselves. First, we ignore the opportunity to develop a timely strategy to mitigate the costs of EMU and the special difficulties Ireland will face in its trade with Britain — the Minister, Senator Finneran and Senator Taylor-Quinn all mentioned that today. Second, we risk a public backlash against EMU when people are eventually confronted with the costs they will have to pay. In five years' time the public may have the opposite view to the one expressed in the current issue of The Economist. If the people are taken by surprise they will focus on the unexpected costs we did not tell them about, and they will ignore the wider, long-term benefits to come. The political costs of such a switch in public opinion will be high. I hope the Government realises that the present public enthusiasm will turn around quickly if the people are surprised by the outcome. They will be quick to blame whoever is in power at the time.

The first cost of EMU will apply not only to Ireland but to those countries which adopt the single currency in the first wave — yesterday's newspapers indicate that there will be 11 such countries. This is the cost of the final phase of the transition as currently planned, when bank notes and coins are introduced and national currencies are finally withdrawn. The current date is 1 July 2002 but it is planned to draw out the transition from 1 January to 1 July of that year. This is a costly remedy for disaster and if we persist in this folly we will regret it for a long time.

I do not mean here the transition before the new bank notes appear, from 1 January 1999 until 2002. That first transition period, when all European accounting systems will adjust to the euro, will require a massive amount of work which cannot be done overnight. If anything, the three year transition period is rather tight. It was interesting to read recently that one German car company plans to change almost everything on 1 January 1999 whereas another plans to change on 1 July 2002. It is the second transition, however, which concerns me — when the accounting systems have changed but the economy has not. At some point national bank notes must be withdrawn and replaced with euros in all cash registers, wallets and purses.

I spoke to the EMU unit in AIB, a competent group headed by Ms Caitriona Murphy with support from Mr. John Begson, which has put much work into this area in the last two years. They told me that certain things have not yet been fixed, one of which is the date of 1 July 2002 which may be brought forward. The present suggestion is that the final transition will be phased in over six months, from 1 January to 1 July of that year. This has not been properly thought out and it will lead to unnecessary costs and, perhaps, to total chaos.

The only experience available in this area is the switch to decimalisation on 15 February 1971, mentioned by Senator Finneran. Every country which made that switch in this century did it overnight — the "big bang" approach. One day one uses the old money, the next day one uses the new. When we introduced decimalisation this aspect was carefully investigated. We were warned of the dangers of a long transition and wisely heeded that advice. That involved only two countries, Britain and Ireland. However, the same applies to this changeover and we should use that experience. On the assumption that the British do not join from the start, Ireland is the only European country with any experience of making such a change. The other member states and the bureaucrats in Brussels do not have that experience and we should share our experience with our partners in the single currency area.

It would result in nothing short of chaos if everyone who handles cash — including banks, shops, bus drivers and the public — has to cope with two currencies side by side for up to six months. That would place a particular burden on small businesses like shops; it would double their work and give rise to endless confusion. In case anyone thinks I am pushing a sectional interest because of my job, it is not only retailers and people on the money chain who will be affected, but everyone. It will create havoc for the public for that six month period, which will feel like an eternity. The final transition will not be gradual anyway, because most people will not make the final changeover until they have to, in other words, at the last minute. This will be particularly true of older people — a slow transition will be particularly difficult for them.

We are the only people who have experience of something like this but we have not made this case; we have nodded our heads to the bureaucrats in Brussels and have accepted something similar to the introduction of metrication. I am 166 centimetres tall, which makes me much taller than under the old measurements. Years ago I promised to metricate myself. Other people may still use imperial measurements but I believe in making a change on a single day rather than doing as we did with metrication. I urge the Government to tell Brussels to do as we did with decimalisation and make the change on one day.

If I am right about this and people postpone the changeover until the last minute, the high cost of the extended transmission, which will put a considerable strain on the economy, will be totally wasted because nothing will happen in that six months until the last day, so we might as well do it in one day. I hope the Government takes a lead on this in Europe. It is a real issue but it has been virtually ignored so far. People have assumed that Brussels knows best about this highly practical matter but that assumption is false. Ireland would do Europe a favour by exposing that falsity.

There are other European wide costs which can be mitigated if we develop the right strategy in time. The decimalisation experience provides us with a hint of some of these dangers. There was a belief that decimalisation had an inflationary effect because prices tended to be rounded up rather than down. Senator Finneran referred to that earlier. If that had been foreseen it could have been watched very carefully; perhaps, it could have been legislated against to some extent.

The change to EMU will be accompanied by a period of turbulence as regards prices. We should be aware of this and make plans to smooth that turbulence as much as possible.

However, there will also be costs specific to Ireland. They arise from the highly likely situation that when we will join EMU Britain will stay out. We have no plans for the worst case scenario. I warn against taking the latest crop of rumours too seriously. This is no time for wishful thinking. The fact is that the British are involved in window dressing as they prepare for their presidency of the EU in the first six months of next year, when the big decisions on the euro must be taken. I would not take the present rumours any more seriously than that. We must plan for the worst case scenario, and if it does not happen we will not have lost anything.

The worst case scenario is that we are locked into one currency while conducting about one third of our trade with a partner that has a different currency, one which is likely to fluctuate quite widely in both directions at very short notice because it will be free. With a single currency, the Irish economy will be forced to ride two horses at the one time. That will be a very costly experience and some businesses will go to the wall in the adjustment process, as was the case when we joined the EEC in 1973 when the realities of completely free trade began to bite.

I do not believe we are facing up to this new reality, rather we are almost trying to sweep it under the carpet. By doing that, we risk more costs and pain than we need to. If we face reality now, we can plan for the change and, with a proactive strategy, reduce its impact. I urge the Government to take this realistic stance. I do not underestimate the difficulties of so doing because the reluctance to face up to the realities of EMU is mirrored by a similar lack of reality in other matters. For example, we do not want to accept that the Celtic tiger has a price tag attached.

As Senator Taylor-Quinn said, we are the fastest growing economy in the developed world. Our standard of living is rapidly approaching the EU average. Within the foreseeable future, it will have passed out that of Britain, and in many respects it has already done so. We pat ourselves on the back, as we are very good at doing, and squabble over who will get a tax dividend from buoyant Government revenues while still expecting Brussels to continue to help us over the stile, as it has done in the past.

The reality is that we will be at the back of the queue in the next round of Structural Funds. The gravy train is over for us. I am pleased that is the case, in that the reason behind it is our income will soon be above the EU average.

The Common Agricultural Policy will also have to be drastically reformed before the EU can expand. That is not that far away but such reform will be at the expense of countries like Ireland.

Another reality is that, for all the huffing and puffing, duty free sales within the EU constitute a ridiculous anomaly. Ireland no longer has any special case to press for preserving them, although when one comes through Dublin Airport one can see how strongly that case is being made. It is impossible that it will be accepted there should be duty free sales in certain parts of an internal market but not in others.

The EU will also not easily tolerate a situation in the long term in which one prosperous country has a corporation tax rate three times lower than the European norm. We should, of course, make a very strong case to protect our interests in that regard but it will not be easily done.

Those are four of the realities we will have to face sooner or later. They can be summed up in this way — tigers cannot hold begging bowls. The sooner that message sinks in and we begin to apply our energies and imagination to coping with the new reality, the less costly and painful the transition will prove to be. We can start now by being more realistic about EMU.

I do not think we, as a nation, are prepared for EMU. AIB and others have held many seminars, which have tended to concentrate on the competitive issues of what EMU will mean for business. They pay great attention to the worthwhile point that EMU will create transparency in price differences. Every business has to ask itself whether EMU will be an advantage or disadvantage for it and whether it can survive in that new world. Only after they have answered those strategic long-term questions should they ask about the operational questions. I am told that is one of the big concerns.

I am also told, although I do not have evidence for this and will have to rely on those I asked, that the Central Bank is not as far advanced as it should be, not so much in its preparation but in drawing the nation's attention to what has to take place. It was interesting to hear from the Minister today that he seems to be happy with it, but is he sure his euro changeover team is actually achieving what it has to? It may be in terms of the preparation, but is it selling the attitude and changes which must take place?

For example, is the national information programme, to which the Minister referred, far enough advanced? I congratulate Forfás which produced 25,000 copies of the information pack. However, while the leaflets are very good, I am not sure they are being read. There is a need to sell this concern to the nation, and this debate is one small part of that.

I know the Minister has a number of concerns. I want to place competitiveness at the top of his list. With EMU we will lose control of our exchange rate. As a result, we will also lose control of our interest rate, which is 6.5 per cent at the moment, double the DM rate of 3.25 per cent.

Mr. Dardis

I would have thought Senator Quinn would be more concerned about the deposit rate.

Mr. Quinn

I wish I was. The Minister will have to take that into account, which is why the question of tax must arise.

I am one of the few Members who do not automatically seek a reduction when talking about tax. However, the Minister expressed his concern about inflation and the danger of stimulating domestic demand. I would like him to express concern about stimulating labour supply. Many Irish companies are having great difficulty in finding workers with the right skills. Part of the reason we cannot coax our best young graduates and others to stay in Ireland or coax emigrants back, is our unattractive tax rate. The Minister must take those concerns into account. The Financial Times today reports the chief executive of Rolls Royce, Mr. Rose, stating that under the single currency, different tax rates which give advantage to one section over another cannot be permitted. In view of this the Minister will have to fight hard to achieve his targets because the voices of protest will become louder when people are threatened by them.

The euro is a racing certainty. Germany is the key to the project and Italy will be included. It is due to commence in approximately 424 days time. Like Senator Dardis, I attended Newbridge College. We had a great rugby trainer, Fr. Hegarty, who one day referred to the attacking team and the defending team. I asked what he meant by the "attacking team". Did it mean the end of the field where the ball was located? He said that the attacking team was the team in possession of the ball even if it was on one's back line. I never forgot that. No matter how small we are in the EU, to get these steps right and grasp the opportunities afforded by the euro will be similar to grasping a rugby football. If we can do that we can win in the next couple of years provided we play the game right. Irrespective of whether we are in the back or the front line, the important thing is to be in possession of the ball.

I welcome the opportunity afforded to the Minister to share his views with the House on this issue. I also welcome the steps he is taking and I encourage him to take account of the concerns expressed by others here today.

Mr. Dardis

I welcome Deputy Jacob to the House and congratulate him on his appointment as Minister of State. I am sure he will have a successful term of office.

Senator Quinn and I approach this matter from the same perspective and I broadly agree with most of his remarks. Perhaps it is because we both attended the same alma mater.

We must operate on the assumption that we are participating in EMU on schedule and that it will take place according to the timetable. If the single currency is to have credibility it is important that the timetable set by the EU Commission and the Council of Ministers is maintained. I will return to the issue of credibility, which is central to the project.

Senator Quinn was right to point out that the Progressive Democrats had reservations. My party continues to hold them about certain aspects of EMU. Our principal reservation centres on participation by the UK and is based on the level and importance of the trade between the two islands. There would have to be concern if the UK stayed out of the system and we joined and the UK then exercised its capacity to engage in unilateral devaluation which would put us at a serious competitive disadvantage.

EMU is a logical conclusion to the single market, although the project began to be formulated before the single market was established. The Maastricht Treaty and the creation of a European Central Bank are part of that package and the so-called "train" to which Euro jargon refers. The train is on the tracks and it is important for us to keep it heading in the right direction, although I am intrigued to know how it can be changed around.

We must welcome the economic growth which has taken place in this country. It has been underlined by the reports of the ESRI and, most recently, by the positive report from the EU Commission. It is a tribute to successive Governments that we have maintained such a prudent management of the economy, including finances and fiscal policy.

It was probably to our advantage that the parameters set out in the convergence criteria in the Maastricht Treaty were imposed on us because it kept us within certain confines and required us to adhere to economic disciplines despite the temptations offered by economic growth. While we always had the capacity to ignore those parameters and self destruct, we have thankfully not done so. This has been hugely beneficial to us because it is unquestionable that without economic convergence between the EU member states it would be much more difficult to create economic and monetary union and the single currency. The timetable is predicated on that convergence.

The benefits that can accrue from EMU are self evident and have been explained in various reports. Overall, it would appear that they are long term while the difficulties are short term. As we progress into EMU the benefits will become clearer.

It is important that we enter on the first wave. There is the potential difficulty that we will create a two speed or even a three speed Europe which would make the exercise difficult. This is why convergence is important. In this context, enlargement is a factor. The accession of the central and eastern European countries will create difficulties for the system and put pressures on the budget. It is argued that, given growth in the European budget, it will be possible to fund enlargement. That is questionable. An increase in the budget may be required, but enlargement will be difficult in terms of EMU.

The advantages of a stable currency are self evident. Senator Finneran referred to the difficulties in agriculture. A single currency will significantly ease some of the difficulties which have taken place in terms of exports, including agricultural products. Much of the political argument between the Government and the farming organisations frequently occurs around the matter of compensation for devaluations or changes in the green currency. If the currency is locked to the ecu and finally the euro this difficulty will be removed.

Another aspect that will change is typified by those who travel throughout Europe — the Acting Chairman is still fortunate enough to tour Europe at her leisure and exchange her currency at every frontier — and return to Ireland with approximately one third of the money with which they commenced their journey, not having spent any of it except on exchange. The euro will benefit them. Interest rates will be forced downwards and this will help to sustain economic growth, which is to be welcomed. Senator Quinn referred to information.