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.