The reason for tabling this motion is to provide Seanad Éireann with an opportunity to discuss Ireland's prospective participation in economic and monetary union from the outset on 1 January 1999. EMU is one of the most significant economic events of this century and it is only proper that we should have the opportunity to discuss it again before the next major decisions are made at European level during the first weekend of May.
The people decided by referendum in 1992 that we should participate in EMU if we qualified and the Government is resolved to give effect to that decision. Following the Commission's recommendations, published on 25 March, we are very well placed to be confirmed as one of the countries which will be part of this most historic development in European integration on 1 January next.
In accordance with Article 109j(1) of the EC Treaty, the European Commission and the European Monetary Institute are required to report to Council on the progress made in the fulfilment by member states of their obligations regarding the achievement of economic and monetary union. On the basis of these reports, the Commission is required to submit separately to Council a recommendation as to which member states fulfil the necessary conditions for the adoption of the euro.
These reports examine whether there has been a high degree of sustainable convergence among member states and this is assessed primarily on the basis of progress made by member states in fulfilling each of the four convergence criteria of Article 109j(1), namely, price stability, Government budgetary position, observance of the normal fluctuation margins of the exchange rate mechanism and durability of convergence as reflected in long-term interest rates. In addition, the compatibility between national legislation, including the statutes of national central banks, and the treaty and the statute of the European System of Central Banks is examined. Senators will be aware that these two convergence reports together with the recommendations of the Commission were published on 25 March.
The publication of these reports and recommendations is the first step of the procedure set out in Article 109j which will lead to confirmation by the Council, meeting on 2 May 1998 in the composition of the Heads of State or Government, of which member states fulfil the necessary conditions for the adoption of the single currency. Based on the two convergence reports, the Commission's recommendations to the Council are that the following 11 member states are suitable to enter the third and final stage of EMU on 1 January 1999: Belgium, Germany, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland and, of course, Ireland. Denmark and the United Kingdom are exercising their opt-outs and Sweden and Greece are judged by the Commission not to have fulfilled all the relevant criteria. As the next step, the European Parliament, meeting on 29-30 April, will deliver an informal opinion to the ECOFIN Council based on the convergence reports and the Commission recommendations.
On the basis of these reports and on the recommendation of the Commission, the ECOFIN Council, meeting on 1 May, will assess for each member state the fulfilment of conditions for the adoption of the single currency and formulate its recommendations to the heads of state or government. The European Parliament, meeting on the morning of 2 May, will then deliver its formal opinion to the Heads of State or Government who will meet that afternoon to confirm which member states will participate in EMU from 1 January 1999.
In addition to having the Commission and EMI convergence reports, I considered it would be important to have an assessment of Ireland's convergence from the Central Bank of Ireland. This report was published on Tuesday, 31 March and on the same day it was laid before both Houses of the Oireachtas. The Central Bank's report also concludes that Ireland meets the four convergence criteria concerning price stability, Government budgetary position and exchange and interest rates. The bank states that membership of EMU offers Ireland the prospect of stable economic conditions based on price stability.
In terms of legal compatibility, the convergence reports of the EMI, subject to some comments about minor imperfections, and the EU Commission found that, following the enactment of the Central Bank Act, 1998, legislation in Ireland is compatible with the requirements of the treaty and the ESCB statute. The Central Bank convergence report also states that Central Bank legislation is now fully compatible with the requirements of the treaty.
As regards convergence among member states generally, the Commission recommends a total of 11 member states as fulfilling the necessary conditions for the adoption of the euro. In the words of the Commission, convergence is now an established fact in Europe. Member states have made great progress in bringing their economies closer together and have demonstrated a revitalised commitment to controlling inflation and placing public finances on a sounder footing.
The report from the Central Bank also acknowledges that substantial progress has been made on convergence and that this is true of all countries aspiring to participate in EMU from the beginning. The bank also states:
It is reasonable to anticipate greater convergence when the single currency is established. The single market and currency will promote further the process of integration and real convergence, and this should, over time, lessen the risk of major shocks affecting individual countries.
The Commission's convergence report includes a detailed assessment of the impact of the cyclical economic factors on the budgetary performance of all EU member states. The Commission concludes that Ireland's underlying or structural budget was in broad balance last year, in accordance with our own forecast. For 1998 it forecasts that our structural budget balance will be unchanged, indicating that the macroeconomic impact of last December's budget was broadly neutral. The EMI report draws attention to the significant underlying improvement in the Irish budgetary position in recent years which, in its opinion, may reflect a lasting structural move towards more balanced fiscal policies.
I recognise that concern has been expressed about the sustainability of the performance of some member states, a concern which is reflected in the views of the European Monetary Institute that further budgetary consolidation is warranted in some member states. However, it is the objective independent assessment of the European Commission, which is the guardian of the European treaties, that these 11 member states fulfil the necessary conditions in accordance with the treaty. That assessment is based on the convergence reports of the EMI and the Commission which, under the treaty, examine the achievement of a high degree of sustainable convergence. In the context of the decisions to be taken at the beginning of May, it is my intention, therefore, to support the Commission's recommendations.
Senators will be aware that the effects, both negative and positive, which EMU is likely to have on the Irish economy were analysed in detail by the ESRI in its study, The Economic Implications for Ireland of EMU, published in July 1996. This report concluded that membership of EMU would, on balance, be economically advantageous even were the UK to remain outside. The net benefit to the Irish economy from taking part in EMU, without the UK, was estimated by the ESRI to be an additional 0.4 per cent of GNP on an annual average basis over the medium term, allowing for possible shocks to Ireland arising from the United Kingdom's non-participation. The ESRI also looked at potential but unquantifiable effects of EMU participation. It concluded that some of these, such as the increased attractiveness of Ireland as a destination for foreign direct investment, could be substantial. The ESRI conclusion was endorsed by the National Economic and Social Council in its report, European Union: Integration and Enlargement. NESC found no reason to revise its long standing position that Ireland's strategic interest lay in full economic and monetary union.
One of the editors of the ESRI report, Terry Baker of the institute, recently examined the current situation in order to assess if the conclusions of the report could still be found to hold true. In relation to external shocks, Mr. Baker concluded that the risks are now thought to be considerably lower than they were in 1996 for three reasons — an increase in the number of prospective EMU participants, a massive appreciation of sterling and a fundamental policy shift by the UK Government in favour of eventual membership of EMU.
The use of interest and exchange rates as economic instruments to deal with shocks which are particular to Ireland will, however, no longer be available in EMU. This means that if there are any shocks in the future, which are particular to Ireland, the adjustment process will have to be assisted by a combination of fiscal policy, pay policy and structural reform. In this context, Mr. Baker points out that the room for manoeuvre has increased significantly with the further strengthening of the public finances since 1996. It might be useful if I quote Mr. Baker from the summary of his reflections:
The risks attached to EMU entry have diminished significantly since mid-1996, while some of the risks that would be faced had Ireland opted to delay entry to EMU have tended to increase. With hindsight, it appears that our 1996 assessment underestimated the advantages of initial entry. The balance of risks now seems to confer a clearcut and substantial benefit to Ireland from the decision to join EMU at the outset.
In relation to our long-term strategic interests, it is necessary to view EMU membership in the context both of past long-term economic performance in other member states and of the appropriate medium to long-term future strategy for Ireland while, at the same time, taking account of the short-term challenges that may arise. In summary, the case for Ireland joining EMU from the outset is now stronger than it ever was given the remarkable convergence that has occurred among the 11 potential EMU participants which is sustainable into the future, assuming that appropriate stability orientated policies are pursued by them. This is confirmed by the EMI, Commission and Central Bank convergence reports and the Commission recommendations. Taken with the economic assessments that have been made by the ESRI, together with the review by Mr. Baker and the NESC, it is clear that Ireland's long-term strategic interests lie in joining EMU from 1 January 1999.
However, EMU brings with it certain responsibilities to ensure that we can sustain our excellent economic performance into the future. Despite our low inflation to date, inflationary pressures in the economy, if left unchecked, could cause severe damage to our future potential. This is widely recognised in Ireland and is a concern I referred to in the past. It is also a concern at EU level and is reflected in the reports of the EMI, the Commission and the Central Bank of Ireland. It is important, therefore, that we act appropriately and prudently to ensure the future balanced and sustainable development of our economy. It is against this background that the recent revaluation of the ERM central rate of the Irish pound must be seen.
On 14 March 1998 it was agreed that the central rate of the Irish pound would be revalued by 3 per cent against other ERM currencies, from DM 2.41105 to DM 2.48338. The new central rate of the Irish pound is broadly in line with its recent market rate. This revaluation was agreed unanimously by our European partners who recognised the determination of the Irish Government to adopt the mix of economic policies best suited to ensuring price stability on a continuing basis.
The decision on the revaluation was taken with a view to ensuring that our economic success continues in a balanced and sustainable way. The communiqué issued in Brussels on 14 March refers to three elements of Ireland's economic and budgetary policy stance: the revaluation itself, our budgetary policy in 1998 and 1999 and the Central Bank's intention to continue its present monetary policy orientation which is aimed at price stability.
These three elements of policy taken together make up a coherent and prudent policy stance in view of the challenges facing the Irish economy. One of these challenges was the risk of a significant increase in inflation, particularly in 1999, because of our rapid economic growth, prospective lower interest rates in EMU and the overall currency depreciation of recent months, even in circumstances where the current strength of sterling is not sustained. We needed to avoid adding to these pressures by a further fall in the currency to our previous ERM central rate of DM 2.41. This was especially so because of the threat that significantly increased inflation would pose for the current Partnership 2000 agreement, as well as the negotiations on the next wage agreement.
Having considered the inflationary risks that lay ahead I decided the most prudent course of action was to bring the ERM central rate of the Irish pound broadly into line with its recent market rate. In making this decision, the needs of the whole economy were taken into consideration and I had to strike a balance between inflation concerns on the one hand and competitiveness considerations on the other. The short-term advantages for some sectors were balanced against the need to counter inflationary risks for the economy in general, including those sectors.
The new central rate broadly confirms the recent market level of the Irish pound against the Deutsche Mark. Therefore, assuming that ERM central rates form the basis for EMU entry rates, this new higher EMU entry rate for the Irish pound of DM 2.48338, when compared with the recent and current exchange rate situation in the market, will not result in a worsening of the Irish pound value of EU payments nor will it make our exports any more expensive. It should also be noted that Irish producers have received a gain in competitiveness from the depreciation of the currency over the last 12 months or so.
I accept, however, as a general statement that, again assuming ERM central rates will be the basis for EMU entry rates, the revaluation of the Irish pound's ERM will mean that when compared with the situation of entering EMU at DM 2.41105, the Irish pound value of EU payments, including agricultural payments, will be about 3 per cent lower and our exports will be 3 per cent more expensive. However, this negative impact on EU payments is just one of a wide set of foreign exchange flows which will be affected by the revaluation. Annual debt servicing costs, for example, will be lower in Irish pound terms than they would have been if there had been no revaluation. In any case, it should be remembered that any short-term gain in competitiveness that there might have been from entering EMU at DM 2.41 would have been eroded if the risk of higher inflation were to materialise.
Similarly, any gains to farmers and others could have been quickly eroded if the lower value of the Irish pound had resulted in higher inflation. It should also be remembered that both the exporting and agricultural sectors will, like the rest of the economy, also benefit from the convergence of interest rates across member states participating in EMU by the beginning of 1999.
It would be wrong to focus on what some see as the negative aspects of the revaluation in isolation from the benefits of a less inflationary environment from which those in receipt of EU payments will also gain. The purpose of the revaluation was to provide a more stable and balanced economic and business environment which would make the challenges ahead more manageable by lessening the threat of inflation. I am confident the recent revaluation was a balanced and appropriate response to the challenges that lie ahead. Taken together with the expressed intentions on domestic economic policy, it places Ireland in a strong position to participate successfully in EMU, and so will facilitate the continued sustainable development of the economy.
The communiqué that issued following the revaluation of the Irish pound signalled my decision to hold strictly to the tight expenditure targets set out in last December's budget and hence to allow the general government surplus — already pitched at 0.5 per cent of GDP — to increase in line with any unanticipated revenues this year. The communiqué also noted my resolve to propose a budget for 1999 having as its primary objective the continuation of low inflation in Ireland. This approach to budgetary policy will help secure the medium-term sustainability of Ireland's economic growth.
This decision regarding the conduct of budgetary policy in 1998 and 1999 is in accord with the commitment contained in the economic background to the budget last December to run budget surpluses when the economy is doing well. Prudent management of Ireland's public finances has helped underpin our strong economic performance. Low budget deficits and a rapidly declining debt ratio have helped secure the stable low inflation and interest rate environment which has proved so conducive to strong economic and employment growth in the economy.
Senators will be aware that the end-March Exchequer returns were released last Thursday, 2 April. Based on current receipts for the first quarter it is now anticipated that tax revenue for the year as a whole is likely to be about £500 million ahead of the budget target. I have already reiterated that these additional receipts will be used to increase the general government surplus rather than fund extra expenditure. Consequently, the outturn forecast for the general government surplus has been revised to 1.2 per cent of GDP for 1998.
The final decision on the pre-announcement of the bilateral exchange rates between the currencies that will participate in the euro area will, as I have said many times, not be taken until the first weekend in May. However, it is widely expected that these bilateral exchange rates will be based on the ERM central rates. These rates will become effective on 1 January 1999, at which date one euro will become equal to one ecu. In line with the Treaty on the European Union and because the ecu is a notional EU currency which contains elements of currencies which will not participate in the euro, actual setting of the conversion rates against the euro can only take place on 1 January 1999.
Ireland' s competitive position, which has been strong in recent years, stems from a strategic framework built upon inter alia the foundations of a consensus approach which brings the social partners into the national goal-setting arena, sound fiscal and economic policies pursued by successive Governments and a long-established investment in education. This is now translating into strong employment growth, a continuous decline in unemployment and increased national resources to tackle social priorities. Competitiveness is a multifaceted concept. While a purist might be inclined to list the many factors involved, as a man who prefers to home in on the core issues, I am indebted to the National Competitiveness Council for its succinct definition, namely that it boils down to “success in markets that delivers a better standard of living for all”.
The social partnership process is one of the strengths of the Irish economy in addressing the challenges of EMU. The preparation of the Irish economy for entry to and participation in EMU was a vital consideration for the social partners in the negotiation of Partnership 2000. The continuation of the social partnership process and the negotiation of an appropriate successor to Partnership 2000 will be essential in ensuring Ireland's successful participation in EMU. The competitive challenge of EMU will require an intensification of the flexibility and problem solving approach displayed by the Government and the social partners over the past decade. The Partnership 2000 agreement provides an explicit review mechanism in the case of a disturbance to Ireland's international competitiveness in EMU. In this regard, the Government, IBEC and ICTU have agreed to meet soon, in the context of Partnership 2000, to accelerate the preparation for the competitive impact of EMU.
The success of our response to any economic shocks will depend to a large extent on how well the Irish economy has been prepared in advance to cope with such an eventuality. Structural policies for the development of Ireland's competitiveness as well as prudent budgetary policy and appropriate pay developments will be critical to these preparations. The reduction in policy options in macroeconomic terms which EMU will bring will also heighten the importance of factors such as skills, costs, infrastructure and quality. The work of the National Competitiveness Council, established under Partnership 2000, will provide a basis for developing appropriate medium-term policies in this area. Also important are the maintenance of competition in product markets and the development of suitable infrastructure — both "hard" or physical infrastructure and "soft" infrastructure, such as public services and the skills and knowledge base.
A key concern of many Irish firms is how sterling will perform against the euro once our entry rate has been determined. The sterling issue is clearly important but we must be careful not to overstate its importance. When analysts talk about a "sterling shock", they are for the most part talking about a sharp fall in sterling from its equilibrium level. Sterling is currently well above what most commentators, including the Bank of England, consider to be its equilibrium level. Therefore, sterling would currently have to fall a very long way before it could be considered to represent an economic shock.
However, the Government is not ignoring the need to prepare for the possibility, no matter how remote, of problems for Irish industry as a consequence of sterling falling significantly below its equilibrium level. Consultants have been appointed by Forfás, under the auspices of the EMU Business Awareness Campaign, to examine the implications for Irish industry of the United Kingdom remaining outside EMU. I understand the consultants' report has been received by Forfás and that it identified a wide range of actions in the fields of finance, marketing, distribution, etc., that firms could consider as part of their contingency planning. These actions will be summarised in a document to be included in a Forfás information pack prepared as part of the EMU Business Awareness Campaign to be widely distributed in the next few weeks.
Monetary policy in EMU will be the responsibility of the European System of Central Banks which for this purpose brings together the central bank governors of the euro area member states and the executive board of the European Central Bank. The treaty guarantees the independence of the ESCB; it cannot receive any instructions from either member states or the European institutions. The primary objective of the ESCB is to maintain price stability, an important objective which will facilitate growth and employment generation in the years ahead. Without prejudice to the objective of price stability, the treaty requires that the ESCB shall support the general economic policies in the Union with a view to contributing to the objectives of the Union. In that regard, arrangements for dialogue between the ECB, the Council and the European Parliament are provided for under the treaty. The issues arising from the establishment of the European Central Bank have been debated at some length in the House recently in connection with the Central Bank Act, 1998. I propose, therefore, not to repeat them and instead to move on to the practical preparations which are being made for the changeover to the euro.
I am glad preparations are going well. 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. Private and public sector representatives were centrally involved in the preparation of the national changeover plan, the second edition of which I published in January. The plan outlines the arrangements which will be made across the public sector, by banks, building societies and by the Stock Exchange to facilitate the changeover. The plan also shows the designs for euro notes and coins, including the design for the Irish face of euro coins. An appendix to the plan describes the changeover work being done by various public bodies and trade and professional associations and lists contact points for further information. All Members of the Oireachtas received copies of the plan so I do not propose to describe it in detail. It is also available from my Department, from Forfás and on the Internet. I draw attention to the statement in the plan that, assuming the European Council confirms during the first weekend of May that Ireland fulfils the necessary conditions for entering EMU, a currency changeover board will be established after the European Council's decision to oversee the detailed implementation of the changeover, including the areas of public and consumer information. The Euro Changeover Group is expected to provide the nucleus of this board.
As regards information about the changeover, the EMU Business Awareness Campaign run by Forfás has been very successful in providing information for businesses about EMU and the changeover to the euro. The campaign has produced an excellent information pack, of which more than 30,000 copies have been circulated. The campaign has run two radio advertising campaigns and has also circulated a summary leaflet to employers in conjunction with the Revenue Commissioners. More than 140,000 copies of this leaflet have been distributed. Forfás has also drawn up a short leaflet specifically for small and medium enterprises and more than 60,000 copies of this leaflet have been distributed. Forfás will continue its activities for 1998 and it plans to issue further documents on issues such as information technology and a guide for retailers.
With the proximity of EMU, the national information programme will be extended to provide information on the introduction of the euro aimed at the needs of the general public. The objective of the public information programme is that all citizens will be made aware of and informed about the changeover and that they will be familiar with the timetable for EMU and the planned introduction of the notes and coins on 1 January 2002. It should reassure them that the change will be gradual and that they will be able to cope with it.
The Government recently approved the drafting of the Economic and Monetary Union (EMU) Bill, 1998, to cater for the other legislative changes necessary for the introduction of the euro from 1 January 1999. The purpose of the Bill is to ensure a clear and comprehensible framework in Irish monetary law following the introduction of the euro, to remove incompatibilities between Irish monetary law and the legal framework for the use of the euro and to give effect to enabling provisions within the legal framework, for example, in relation to the redenomination of outstanding debt. The Bill is also designed to facilitate companies which wish to redenominate and renominalise their capital structure in euro even before the final changeover to the euro on 1 January 2002. It is intended to have the Bill enacted by summer 1998. In preparing it, my Department is consulting with the European Monetary Institute, the European Commission and with interested parties in Ireland.
The establishment of the euro will yield significant benefits for the Irish economy as part of the wider European economy. A permanently fixed exchange rate will consolidate the gains already achieved through the Single Market. The euro will allow for the full advantages of the Single Market to be obtained due to higher price transparency and greater competition. EMU will enhance overall economic efficiency and stability within the euro area, boosting the sustainable rate of output and employment growth and creating a truly single market of some 288 million people.
Successful participation in EMU will require an intensification of the flexibility and problem solving approach displayed by the Government and the social partners over the past decade. Structural policies for the development of Ireland's competitiveness, as well as prudent budgetary policy and appropriate pay developments, will be critical. I am certain that the Irish people and their Government will face those challenges and opportunities imaginatively and successfully.
Ireland is well placed to participate in EMU from the outset as reflected by the positive recommendation from the Commission and I am, therefore, very pleased to commend this motion to the House.