Vol. 155 No. 1
I move:
That Seanad Éireann takes note of the recommendation from the Commission of the European Community, pursuant to Article 109j of the Treaty establishing the European Community done at Rome on the 25th day of March, 1957 (as amended by the Treaty on European Union done at Maastricht on the 7th day of February, 1992) concerning the fulfilment by Ireland of the necessary conditions for the adaptation of the single currency.
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.
I welcome the Minister to the House. I may not utilise all the time allocated to me as I am standing in for a colleague. I will keep going while I have ammunition and I will sit down when I run out of ideas.
There are three main channels of benefits which will accrue from membership of EMU — competitiveness, the exchange rate and the cost of transition. The Irish economy has always been subject to fluctuations in interest rates. The construction industry was one of the industries which suffered badly from this. When interest rates rose, the construction industry ground to a halt and when they dropped the boom started. In the past few years we have seen great development in the industry, mainly due to the low cost of money. If the EMU works, this area will be greatly beneficial to the Irish economy.
One area where we believe EMU will work is in the cost of foreign exchange transactions. Companies will no longer have to pay for changing money from one currency to another, which will have major benefits for the economy. As the Minister said, the ESRI report which examined all the possibilities of our entry came up with mainly positive conclusions. However, in the field of competitiveness, the report found that with EMU, Irish firms will continue to be subject to a variety of shocks which will damage their competitiveness and the Government will no longer be able to insulate the economy from the effect of such shocks through exchange rate adjustments.
We all know that sterling is causing the main problem. A massive depreciation of sterling would result in serious problems for Ireland. I have yet to hear anyone state why England is so loath to join EMU. If it joins, it will eliminate the few areas of worry as regards our joining. Sterling is high at the moment and our exporters are doing extremely well while importers are suffering badly. If the case is reversed and sterling depreciates, it will be far more serious for the Irish economy as more than half of our exports go to the English market. I do not know what adjustments the Government can make to prevent this.
Many other areas will benefit from EMU, such as tourism. Tourists will no longer have to change their money from francs to deutschmarks to sterling to punts. They will come to Ireland, have an idea of what they will spend and they will spend it. I anticipate there will be massive improvements in the tourism industry.
Agriculture will be more affected by CAP reform than by EMU. Farmers and farming organisations are worried that CAP reform is going against them and Partnership 2000 is setting a new agenda which is not to their benefit. Unless there is a major trade-off as regards compensation, I do not see how farming will continue to improve.
There are other practical problems which will arise. Our retail sector will be affected and retailers will have to reinvest. There will be a great deal of redundant hardware such as cash registers and vending machines. Computer software and hardware will have to be replaced. There is a great deal of cost inbuilt in the changeover. Is the Government looking at any way of compensating industry and business for the massive costs which will be incurred? This also includes training costs as staff and customers will have to adjust to the new currency.
There is a major problem with educating the public. We are used to the punt — people recognise its value and have an instinctive feel for it. There will be a psychological problem in adjusting to the new currency as people will have difficulty in valuing their assets and money. Someone knows when he or she owns a house to the value of £100,000 and he or she will find it extremely difficult to get a concept of the new value. The Government and the Minister need to look at the area of education. It may seem farfetched but it is extremely important that the public readjusts and that people have a sense of their wealth and assets. Everyone remembers when decimal currency was introduced and that change was nothing in comparison to that which is about to take place. People found it extremely difficult and some never adjusted to the new currency as they could not get a sense of its value. It was only a minor change compared to what faces us now, but I am sure the Government and the Minister will iron out those problems.
The buying and selling of foreign currency is one of the areas from which the most beneficial effects are supposed to emanate upon joining. There will be substantial job losses because foreign exchange creates many jobs and that will cease following the three year transition period after Ireland joins EMU. This will have to be looked at and I hope compensation will more than offset losses in this regard. We are not sure in terms of competitiveness and interest rates whether there will be benefits.
Ireland was lucky enough to meet the criteria to join and one of the major benefits should be a degree of stability in interest rates which we have not had for many years. I recall in the mid-1980s when interest rates stood at 22 per cent and if one was unfortunate enough to have surcharges on that one paid 25 per cent. Those charges were colossal and they dampened the expansion of the economy. No economy could thrive with such interest rates and those in business had to endure them to survive. Many businesses, unfortunately, did not and went to the wall as a result of those penal interest rates and we do not want a return to that. EMU should stabilise interest rates for the foreseeable future and allow people to plan and expand. People borrowed money in the 1980s at a 10 per cent interest rate and ended up paying 25 per cent for the same money five years later. No business could thrive in such an environment and it led to the stagnation of the economy for many years. Everyone is looking forward to the levelling off of interest rates.
Britain will not be a member of EMU even though it has stated it may join at the last moment. Its absence is a cause of worry because we will have no control over how sterling performs during the next few years. The indications are that it will continue to appreciate. If it does, it will still have considerable impact in Ireland because importers will be faced with substantially rising costs annually while exporters will do extremely well. The balance will not be right.
Will the Minister consider compensating business for the costs it will incur during the transition period? The commercial sector will be saddled with a massive re-education programme and reequipping of businesses which will impose a considerable strain. However, I welcome the broad thrust of the Minister's contribution. He stated we are living more in hope in terms of joining and are relying on expert opinion and interpretation on how Ireland will fare when it joins. We are entering financially uncharted waters and I hope there are no hidden icebergs. We have had enough of them in the past, but I hope everything works out according to expert opinion.
The best opinion is that Ireland would be better off in than out. We must go along with that scenario and hope the economists and experts have got it right on this occasion.
I welcome the Minister of State at the Department of Finance, Deputy Cullen, to the House. I am pleased the Minister has afforded us the opportunity to debate EMU and analyse the most forward step any Government has taken in recent times. It is larger than any other we have taken towards European integration and Ireland will be in the unique position of being the only English-speaking nation which will be a member of EMU.
Great tribute must be paid to the management of the country by successive Governments as Ireland finds itself easily fulfilling the conditions for first phase entry into the single currency. Governments over the past ten years have played their part in bringing Ireland to a state of readiness for entry. Bearing in mind the new currency needs to be strong and will stand alone, certain criteria for entry were laid down — low inflation, interest rates and borrowing, a stable exchange rate within the European monetary system and an independent central bank. Ireland has lived up easily to these achievements in the sense that the vital signs of the economy are excellent. Successive Governments and Ministers for Finance, starting with the tough decisions taken by Ray MacSharry in 1987, have contributed to the situation in which we find ourselves. Our European experience has been overwhelmingly positive in terms of what we have gained from membership. One only has to look at the infrastructure now in place: agriculture, roads, communications and our standard of living have been transformed since we entered the EU. Ireland has gained in stature and economic independence and now provides a standard of living equal to almost anywhere in Europe. Our convergence has been dramatic and this is why we are one of the first countries eligible for membership of the euro.
Historically Ireland has a proud record of bringing great benefits to Europe. During the Dark Ages after the fall of the Roman Empire, Irish missionaries played a central role in the reintroduction of Christianity and classical learning. That is there for everyone to see. The contribution of the Irish in far flung fields is a great tribute to those who came from this peripheral island.
To some extent Europe has now repaid us and we must ensure we are able to take full advantage of the single market and the euro. As a result of our meeting the convergence criteria, Ireland will form part of the first wave of full economic and monetary union on 1 January 1999. Exchange rates will be fixed and transactions will begin in the euro from that date. Due to an obvious degree of confusion which may arise in the public, it is good that the euro notes and coins will not come into circulation until 1 January 2002. National currencies will continue to be used until phased out later that year. It is incumbent on all public representatives to reassure and convince the public, wherever possible, that the advent of a single currency and the accompanying Amsterdam Treaty will bring overwhelming benefits to Ireland. It is our duty to ensure the benefits of the euro are clearly transmitted to the public.
The single market will have a currency which will be one of the strongest in the world; competing favourably with the yen and the dollar. The currency turbulence which has damaged trade between member states will be a thing of the past. Such instability had a major negative effect on jobs and growth, most recently in 1995 when EU growth was cut by 2 per cent and 1.5 million jobs were lost.
Under the euro the cost of doing business will be considerably cheaper. There will be no need to handle several currencies, leading to better competitiveness and resulting in benefits which can be passed on to the consumer. Perhaps most critically and crucially, a stable and strong single currency, coupled with the continued sound management of public finances by this Government, will lead to even lower interest rates which will stimulate investment and be good for jobs, borrowers and home owners with a mortgage.
The gradual disappearance of the punt and the pre-eminence of a European Central Bank should not be viewed as a dissolution of our independence and distinctiveness as Irish people. In joining the euro we will enjoy the full anticipated advantages of a confident Europe with a bright future on the eve of the 21st century. It is historic that we are entering unchartered waters to some extent, but our preparation and the evaluation and investigation by our agencies have shown, on balance, that the advantages far outweigh the disadvantages. The Minister reiterated this point in his speech. This will be the case even if the UK does not enter. I was pleased the Minister stated that the Government's consultants have indicated that they are more confident than they were in 1996 that the advantages far outweigh the disadvantages even if the UK does not join. It was consoling to hear the Minister state that it is believed that sterling is at a higher rate than it should be and would have to depreciate significantly before it caused shocks inside our economy. This is the type of comment we wish to hear from the Minister for Finance. The recent Central Bank report was also very positive and welcome.
After almost two weeks of public debate about bank scandals, the commercial banking system and the failure of the Central Bank to oversee that system, it is heartening that we can move forward and debate the important issue that this country has taken a decision to join the single currency, that the European Commission and member states have decided that we have met the criteria to join the first phase of the euro and that the Irish people are in favour of such a development. The approach of the Irish people to Europe over the years has been extraordinary. Irish people are pro-Europe and outward looking. We do not have an insular approach. I sometimes read with awe some of the comments made about Ireland's approach to Europe. In a UK newspaper last Sunday I read a comment by Norman Tebbitt criticising the Taoiseach. However, this was a veiled criticism in so far as he was really criticising the Irish nation which, he claimed, had a begging bowl approach, that Germany and the UK were contributing to Ireland and that we were not contributing anything. I disagree totally with that view. Figures produced by independent analysts indicate that we contribute in the region of £2 billion of fish to the European economies. When we joined the EEC we gave up control of our seas. The vast potential and resources of those seas and the economic benefit which they have brought to Europe are seldom calculated and put forward as an Irish contribution to the EU. Such comments from people such as Norman Tebbitt are unhelpful. It also shows ignorance of the facts; it was a political statement rather than an economic fact. I hope the Minister for Finance, the Taoiseach or the Government will issue a suitable response.
There are some worries concerning the euro, particularly for those who remember the introduction of decimalisation. At that time it was felt that prices were rounded up. The consumer was the loser. Business generally availed of the opportunity of the changeover to hike prices and to cream off extra profits from the consumer. I hope that will not happen on this occasion. I urge the Minister and the Department to be very conscious of what happened in the past and to ensure, in so far as it is possible to do so, that the same does not happen again.
I could see that some concerns might arise in regard to our Border regions. A unique situation will develop in Northern Ireland and along the Border as people there will be dealing with the euro, punt and pound sterling between 1 January 1999 and 1 January 2002. I wonder what consultation, if any, has taken place in regard to that matter. I asked the Governor of the Central Bank the same question at a meeting of the Committee on Finance and the Public Service recently. He stated that the matter had been discussed but I believe further discussion should take place. I believe this issue can, and will, cause some problems.
In the initial report received from the ESRI, we read that massive job and other losses could ensue from the fact that the UK would not enter the first phase of monetary union. That concern seems to have waned somewhat. The Minister's statement seems to clarify the situation in that regard and people are more confident now that the knock-on effects will not be as great as originally expected. That is reassuring for Irish business people.
I appreciate the point made by a Member of the Opposition in regard to the possible appreciation of the pound sterling. He stated that if it were to appreciate greatly it would be beneficial to exporters but would have a penalising effect on importers. We would certainly have to be conscious of that. The mushroom industry has benefited greatly from the appreciation of the pound sterling, as have other exporters to the UK market. That will continue to be the case if appreciation occurs but the Minister pointed out that if the pound sterling were to depreciate sharply, shocks could result in the Irish economy.
I was very pleased to hear the Minister state that surpluses would be available to assist Ireland's economic growth and that we would not squander extra tax revenue. What will happen to any Central Bank surpluses at the time of the changeover or what moneys are expected to be left there? What is the intention of the Minister and the Government in regard to such moneys? Will they be used to reduce Ireland's national debt or will they be channelled into infrastructural development? Will they be held for the rainy day when we might have to contend with some shock in the economy?
I welcome the opportunity to debate this matter in the House. It is desirable that matters of such importance to Ireland are debated. I wish the debate on the euro was carried further than the Houses of the Oireachtas into our businesses, schools and so on. The public should be involved in a debate on the euro. I am aware there will be an information campaign prior to the referendum on the Treaty of Amsterdam. However, due to the constraints on Government in regard to spending on elections and referenda, it may not be in a position to carry out an information campaign.
I feel that people are still somewhat in awe of the euro, what it entails and what its knock-on effects will be. A ruling of the Supreme Court prohibits the Government from spending money on referenda campaigns. Would it not be important in the national interest that a very extensive national information campaign should be launched by the Government on the issue of the single currency? The national interest is at stake here and, in those circumstances, no prohibition should be placed on the Government to prevent it spending a reasonable amount to inform the people of all aspects and implications of the single currency. The people should be informed when they cast their vote on the Amsterdam Treaty.
I thank the Minister for attending this debate and I am pleased to support the motion.
I found the Minister's speech very interesting as it covered a number of areas. Senators Caffrey and Finneran have covered quite a range of topics. I hope this debate will serve as a reality check because I believe that is what we need. There has been far too little public debate on the difficulties which Ireland will face in EMU. Neither has there been much evidence of serious advance planning to prepare ourselves and our economy for the new challenges which we will meet.
I met someone today who showed me a bank statement from a French bank. Banks in France are already issuing such statements in francs and euros. Perhaps that is also being done in Ireland. Some of us involved in the supermarket business did it for one week last year to demonstrate the impact of euro pricing, but I have not come across such a measure in Irish banks.
Much preparation remains to be done in regard to the euro. It is not that far away at this stage. I believe the decision to enter EMU is the right one for Ireland, even though the circumstances under which we are doing so could hardly be less favourable. I remain convinced that, in the long run, this is the right course for Ireland, though I believe equally strongly that the degree of success we will experience within EMU will depend on how effectively we plan our response to the difficulties which it presents.
In recent weeks, opposition to Ireland's entry into EMU has become more vocal, particularly from what I would describe as the "UCD school of economists". I say that in spite of the fact they are my electors. Although I disagree with the conclusion they reach, I firmly agree with their diagnosis. They are carrying out a public service by promoting a debate and discussion on this vitally important subject. Until now there has been a virtual conspiracy of silence in regard to the issues surrounding EMU. Because of this, we will be less prepared than we should be.
Opposition to our entry to EMU can centre round one or both of two main issues. The first relates to our position in regard to the United Kingdom. The argument could be made that because our economy is so interlinked with that of Britain, we cannot afford to step out of line with it. The second issue relates to the fact that our economic cycle is out of step with that which prevails in other EMU countries. As a result, the monetary conditions imposed by EMU will be precisely the wrong ones for Ireland. By joining we will surrender a large part of our control of the future direction of our economy. These are both real issues and a pro-active policy is required to deal with them effectively.
Britain remains our most important trading partner even after 25 years in the EU. More than a quarter of our exports go to Britain. This figure is somewhat misleading because a much greater proportion of the exports from Irish owned companies goes to Britain. It is an obvious market for companies to begin their exporting experience in and, for that reason, many small companies see it as their only export market. As we have found time and again since we broke the link with sterling in 1979, having a different currency from Britain is a major problem for exporters. From one month to another they are subject to fluctuations in the price they must charge to their British customers. These fluctuations can cause a change from a situation in which large windfall profits can be made to the other extreme where products have to be sold at a loss. All of this occurs without any change in the basic price in the Irish currency.
This situation is, however, manageable provided exporting companies adopt the right strategy. In the past too many companies based their existence on the British market on the basis of a favourable exchange rate. When the rate moved against them, as it invariably does from time to time, they got into trouble. Theirs was a fair weather strategy. They had no means of coping when the storms came.
I was reminded of this during the past week when I read that the chief executive of the Irish Exporters Association, Mr. Colum MacDonnell, has been appealing to Irish companies to take advantage of the current exchange rates to enter the British market at this stage. I agree, but only if companies who enter the British market do so in the full knowledge that the present exchange rates will not stay that way for all time. Sterling is bound to go up and down against the punt as it always has done in the past. Companies should base their strategy on an exchange rate much less favourable than it is at the moment and take the present rate as a windfall profit. They should plan on the basis that they can still be profitable at a much less favourable exchange rate than at present. A strategy of this kind is quite possible for Irish exporters. I also think it is necessary as a permanent approach because with every passing month I become less convinced that the British will ever go into EMU. Present trends in Britain are pushing interest rates upward. This will draw even more hot money into Britain and allow them to run a balance of payments deficit as well as enjoying the pleasures of cheap imports. Eventually the damage that a high exchange rate is doing to British manufacturing industry may force a correction, but this is likely to leave the UK permanently at the opposite end of the business cycle from most of the rest of Europe. In other words, it is extremely unlikely that the conditions will ever be right for the UK to join and that of course is the condition that is attached by the present British government's provisional support for entry.
Our national strategy should be based on that assumption. As I have already suggested, exporters can cope with that situation. We should expect and encourage them to do so and we should not listen to them, down the road, if they find themselves in trouble when the exchange rate turns against them. When that happens, it will not be an unforeseen disaster. It will be an event as inevitable as night follows day and one that should be allowed for in any prudent business plan. Nobody should be encouraged to export to Britain if the viability of doing so depends on the present exchange rate.
Similarly, we need a national strategy on imports from the UK. I know this topic is exercising the mind of the Minister for Finance. This is even more important, because our biggest potential enemy at the moment is inflation. It can come from two sources. It can be generated internally, by pushing up wages and prices, or it can be imported by buying in more expensive goods from abroad.
In importing, the UK is also our most important trading partner, accounting for at least a quarter of our imports. This is why a sharp fall in the punt vis-à-vis sterling, such as we have seen over the past 15 months, is potentially very dangerous from an inflation viewpoint. Compared to the end of 1996, the punt is now worth 25 per cent less in sterling terms. If this is so, why has inflation remained so low? This is something that has puzzled economists who are never so unhappy as when the statistics refuse to do their bidding.
I am sure that many forces have been at work at keeping inflation down so far and some of them may be once off factors that we cannot depend on to continue. Inflation is like walking along a clifftop. For a while you seem to do all right, then suddenly you fall off the cliff and the speed of your descent is totally outside your control.
However, there is one factor which I have noticed at work in my own business and which perhaps points to what should be our national strategy in the matter. Many of the international brands we sell, which were once sourced in Britain, are now being sourced by our importers in other European countries. These would be products of multinational companies with manufacturing capability in several European countries. They can switch the source of the products at will and they have done so because they found that the price of the product, when billed to us in sterling, was uncompetitive in this market. Producing the same product at a factory in Holland, for instance, suddenly becomes more competitive in terms of the Irish market because our currency has kept in step, broadly speaking, with the currency in that country. This trend has been largely invisible to the customer on the shop floor, because the brand name remains the same and the product remains the same. If you look closely, you would probably notice that the small print on the package is now not just in English but in at least one other language as well. So far, this is a response that has been open only to multinational companies selling European or global brands into Ireland, but it offers us a path to the future. In the EMU context, it should be our national strategy to reduce our dependence on imports from the UK to an absolute minimum.
I am not, of course, suggesting that we should discriminate in any way against British goods. That is unthinkable and highly undesirable in the free-market context that is at the very heart of Ireland's trading ethos.
What I am suggesting is that we should not let inertia or plain laziness lull us into paying higher prices for goods whose names we are familiar and comfortable with when equally good products are available at much lower prices from European sources. If we remain creatures of habit and blindly go on doing what we have done in the past, we will end up taking the easy way out and import inflation through buying British goods when the price is not right and suitable alternatives are available on the Continent. If, on the other hand, we become increasingly open to buying goods from other sources, then we have a much better chance of containing inflation on a continuing basis.
Importers and retailers have a role to play in this. Customers, above all, have a role because in the end they are the ones who decide what to buy. The Government also has a role in making these issues clear to people. Senator Finneran made this point when he called for greater publicity for the EMU debate. The Government has more at stake than anyone else in keeping inflation down. It has a role, therefore, in informing public opinion about the ways in which inflation can be kept down so that the public can make their buying decisions from a position of knowledge.
The UK problem is quite manageable on the import and export front. However, it will not manage itself. We have to be pro-active. In the belief that we can and will be pro-active, I believe we should not be deflected from taking part in EMU by the situation in Britain or by the state of the sterling/punt exchange rate. One of our main motivations for joining the European Economic Community 25 years ago was to overcome our overwhelming dependence on Britain and on the British market. To turn our back on EMU and throw in our lot with Britain would be to reverse that process. It would be to embrace a future even more dangerous and full of uncertainty than the one facing us in EMU. In a real sense we simply have no choice in this matter and I agree with the steps the Minister has taken. We must join EMU and, once part of it, we must make the best possible fist of the position we find ourselves in. We should make no mistake about it, life under EMU is not going to be easy — I have been saying that all along. Perhaps now our entry is certain, the time has come when we can draw back the veil that has carefully concealed the realities of life under EMU.
We are already seeing signs of the dilemma we will face on a daily basis in EMU. The economy is overheating, which means that there is a danger of stoking up inflationary forces within the economy itself. It would be a tragedy if we succeeded in keeping imported inflation at bay but still allowed inflation to take root within the economy. However, as we are already seeing, being part of EMU greatly restricts our ability to respond. For instance, one of the things we should be doing is raising interest rates — that is the classic response to an overheating economy. We cannot do that and because of EMU the medium-term trend of our interest rates will be down, not up.
I have thought up an analogy suitable for the Minister — what has happened is that one of the clubs in our golf bag has been taken away. This is more important than it sounds, since in this game our golf bag consists of only three clubs — the Minister is a keen golfer but he would not relish having so few options. Our position is that of a player who has to play in a higher league than he has ever been used to, and as he arrives on the first tee he finds he must play with only two-thirds of his clubs because one has been taken away. Our future reality is that instead of using interest rates to control our economy, we will often be faced with interest rates that are the opposite to what we want. That is also the case at present — we want higher interest rates but the rest of Europe tells us we have no choice, we must have lower rates. Let nobody think this is a transitional problem — it will be a permanent fact of life under EMU.
This makes it all the more important that we use carefully the remaining clubs in our bag. Let us remind ourselves what those clubs are. The first is budgetary policy — what is raised in taxes and what the Government spends. One can control overheating with this club by raising taxes and reducing public spending; one adds to the overheating by reducing taxes and/or increasing public spending. In other words, our current budgetary policy is adding to the overheating, not playing a part in controlling it. This is a reality the Irish people will have to face sooner or later and the later it comes, the more painful it will be.
The remaining club in the bag is wage flexibility. When one is part of a wider economy, as we will be in EMU, the real danger of inflation is the risk of letting one's wage costs get out of line. This is how a country becomes uncompetitive and it can happen overnight. As I said, it is easy to switch the sourcing of products from one country to another when the sums do not add up. EMU will cost Ireland many thousands of jobs unless we are ready to be considerably more flexible on wages than we have been in the past. This is why recent talk by the unions of tearing up the current national agreement if inflation takes hold is unrealistic. A wage spiral would be a quick way to economic suicide — I speak not as an employer, but as a realist. I was delighted to hear the Minister state:
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.
The Minister recognises the dangers ahead of us but do we as a nation?
Equally, the moves towards a national minimum wage are sending the wrong signals about the realities we are about to face. If we lock ourselves into unsustainable costs, we will quickly destroy our competitiveness. Even in the service industries which do not compete internationally, we need to be careful about the risk of destroying what I call "optional" jobs, which can exist only at a certain rate and would simply be abolished if they were much more expensive. EMU has already taken away one third of our golf clubs. We need to be careful not to throw away the other two thirds as well.
Considerations like these have led some people to suggest we should stay out of EMU altogether. I do not agree, although it would be in Ireland's interest if the starting date of next January was postponed for a year, while keeping the final crunch date of 2002 still in place. EMU provides this country with the toughest economic challenges we have had to face since the foundation of the State, but we should face them, not run away from them. Still less should we pretend that these challenges do not exist. If we do that, we will soon find there are animals in the jungle capable of gobbling up even Celtic tigers.
Although this is a debate on EMU I wish to make a further point, touched on by Senator Finneran, relating to the six month currency transition period between 1 January and 30 June 2002. As Senator Caffrey said, we are the only nation in EMU which experienced a currency change, on 15 February 1971, so we know the change should be short and snappy rather than spread over six months. I spoke a couple of weeks ago about the difficulties for bus drivers in handling two currencies for six months — sometimes giving change in euros, sometimes in Irish pounds. I urge the Minister to consider doing what we did in 1971 and make the change on one day — have Irish currency up to that point and from then on give change in euros. We can still pay in Irish currency for months after that but we should only give change in euros from then on. It is called the "big bang" approach and if we follow it the public will understand it and costs will be considerably reduced for businesspeople and consumers.
I thank the Minister for paying attention and thank the House for giving time to this matter because it is a worthy debate.
I welcome the Minister of State, Deputy Cullen, and commend the words of the Minister for Finance. This is an important discussion but the debate as to whether we should enter is well and truly over. Senator Quinn mentioned the UCD school of economists — or pessimists or however they would like to describe themselves — many of whom have only intervened at the later stages of the debate, when it would have been more telling and appropriate to contribute at an earlier point. However, that may have much to do with the reluctance of newspapers to cover these issues until the day is upon us. We are confronted with the ECOFIN meeting on 1 May at which the initial locking of rates will take place and we wish the Minister for Finance well at that event. Although the debate on entry may be over, the debate on what we do after we join EMU and introduce a single currency is only beginning.
Participation in EMU will be beneficial to the economy and there are many reports, such as that of the ESRI, which analyse in great detail what the effects will be. We can look forward to lower interest rates, reduced transaction costs and easier access to the Single European Market. All of that will be beneficial and reduced transaction costs in particular will be of benefit to travellers within the Union. This is part of the consolidation of the single market and it is a product of the Maastricht Treaty. The Amsterdam Treaty has only a peripheral application in our consideration of these issues.
We must accept that joining EMU will deprive the Government of two traditional and principal economic levers which have been used to good effect here, namely, the control of interest and exchange rates. As a result, we will have to be more skilful in our use of the other levers remaining under our control. The Central Bank Bill, which deals with the diminution of that institutions sovereignty, had an easy passage through both Houses. In the context of the controversies which affected the associated banks, would that legislation have gained such an easy passage if it had been introduced after the events at National Irish Bank and other financial institutions came to light?
Last year I started out on the side of the Euro sceptics on whether we should enter EMU. I had serious concerns about our vulnerability to a unilateral shift in the exchange rate of sterling vis-à-vis the punt and the euro. Several speakers referred to trade statistics and the degree to which domestic Irish companies depend on the UK market in terms of trade. However, I have gained confidence in our ability to deal with a change in the sterling rate. This is likely to be less dramatic than it was in the past because when we devalue or revalue our currency against the euro we will be dealing with a much larger mass than the Irish punt. There will be benefits from this, particularly in terms of the raids that took place on the punt in the past — which led to wide fluctuations and, on one occasion, to an overnight increase in interbank rates of between 25 per cent to 30 per cent. There is less likelihood of that happening as a result of our being tied to a European currency than there would be if the Irish punt remained outside that currency.
The Minister must be congratulated on his handling of this matter, particularly in respect of the rate at which we will enter the exchange rate mechanism — ERM. He has consistently employed a "vow of silence" which was prudent because when it came to dealing with revaluation the central market rate was applied. This aspect of joining EMU had the potential to be difficult and damaging and the Minister dealt with it admirably. It is important that the House recognise the role he played.
To return to how we will deal with our economic situation when responsibility for the exchange and interest rate mechanisms is taken out of our hands, we must consider what might be the nature of those mechanisms. In that context, we are concerned because the economy is expanding and our performance has been good in recent years. When we join EMU and the exchange rates are locked, will we lose control over the way we manage our economy and will our capacity to manage economic growth be removed? The answer is "no". If we can manage our economy having lost the two levers to which I referred earlier, we will retain our capacity to maintain economic growth and confer prosperity on our citizens at a differential rate compared to other European countries. That is the key issue. If growth slows down in France or Germany, there is no reason it should slow down in Ireland or that our economy should enter recession.
The Minister stated — his point was reiterated by Senator Quinn that the new situation would demand "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." That is a succinct and accurate summary of this issue, which involves competitiveness and how it can be maintained through wages, infrastructure, the tax environment — including capital tax and income tax — the social consensus which has been critical in developing the Celtic tiger and control of public spending.
The Minister made a significant statement in referring to the growth of £500 million ahead of budgetary targets in revenue from tax earnings. He said "I have already reiterated that these additional receipts will be used to increase the general government surplus rather than fund extra expenditure." That is critical and we must adhere to the Minister's advice if we are to ensure that some of the benefits to be accrued are not thrown away. There are things we can do within our remit to ensure that economic growth is maintained as we look forward to joining the single currency. There will be a smaller threat of inflation if these things are done properly.
We need a clear and coherent economic strategy to maintain and enhance our competitiveness within EMU. The basic economic prescription must follow that which has been part of my party's advocacy since its foundation 13 years ago. Essentially this will mean liberalising our economy on a range of fronts, beginning with privatisation — the Labour Party describes it as strategic alliance — which should be returned to the political agenda. The State should be the regulatory body for industries but it should not be responsible for their operation. That regulation should be designed to protect the interests of the consumer not, as in the past, those of the utilities involved.
I am glad the Government has decided to float Telecom Éireann on the stock exchange next year. That move is long overdue. Everyone seems to be in favour of privatisation but it is remarkable that it only occurs when the Progressive Democrats and Fianna Fáil are in Government. Deregulation is also essential. We should promote competition, not prevent it. For almost a decade, Telecom Éireann has been allowed to frustrate the development of real competition in telecommunications through its control of Cablelink. That company should be completely demerged from Telecom Éireann and sold to an independent operator. The new owner could invest in upgrading the Cablelink infrastructure and offer real competition to Telecom Éireann.
I understand the Government intends to move in this direction in the near future and that Cablelink will split from Telecom Éireann. If that happens it will be one of the best economic decisions made by an Irish Government and the benefits to be derived from it could be enormous. It is obvious that we need to create more jobs, which must be of high quality and offer good wages and prospects. If we want to create those jobs, we must develop a modern efficient telecommunications market which is cost effective by international standards. We do not have such a market at present and we are paying the price for it. Major investment projects are being lost because of our failure to take these issues seriously.
Competition for mobile international investment has never been more intense. The countries of central and eastern Europe will be able to undercut us in terms of wages. We must ensure that no one is in a position to undercut us on the quality or cost of key services such as telecommunications or energy, which we have had success providing and which are becoming increasingly significant factors in attracting mobile international investment.
Public private partnerships must also feature in Irish public policy. We have a major infrastructural deficit and our road network falls short of what is necessary in a modern exporting economy. There are also major gaps in areas such as sewage and water treatment which have had detrimental effects on the environment. They in turn can deter inward international investment which seeks a clean environment in which to locate.
Continued investment in these areas is essential if we are to sustain economic growth, but we must be aware that there will be a fall off in EU support, which will make investment more difficult to find. We can argue, as we did on the Order of Business, about whether the whole country or only the west should be an objective 1 region. However, that argument will be overtaken by an overall diminution in our net take from EU supports. There is a role for the private sector in these circumstances.
Private sector provision of public infrastructure is common in other countries. There have been no such efforts in this country since the opening of the east-link and west-link bridges in Dublin. The Government should now look at the possibility of similar initiatives. The concept of public and private partnership must be revived and encouraged.
In the struggle for competitive advantage inside EMU, taxation will be a key battleground. We need lower tax rates across the board and I am glad to see the Government has made an excellent start. By the time this Administration completes its term of office capital taxes will be 20 per cent, the standard rate of corporation tax will be nearer 20 per cent and falling rapidly towards the target rate of 12.5 per cent and personal income tax rates will be at 20 per cent and 40 per cent. Not many European countries will be able to match that kind of enterprise environment by the turn of the century.
Few countries have been so successful at exploiting the incentive of low taxation as Ireland. The special 10 per cent manufacturing rate has been the cornerstone of our economic success over the past 20 years. It stands to reason that we can benefit enormously by applying low rate taxes to other areas.
Social partnership has served us well for several years and it is vital that the partnership model is retained until we join EMU. The next partnership deal will have to address the issue of flexibility, to which the Minister referred. It will especially have to address the issue of how Irish companies in the exposed sector of the economy will be able to cope with a sharp fall in the value of sterling. I am confident the Government, the unions and the employers will be able to come up with new models to enable us cope with the challenges of EMU. Irish companies must have the flexibility of response to enable them reduce costs when times are tough and to share the benefits with their work forces when times are good.
Membership of the EU has been enormously beneficial to Ireland in terms of the Structural Funds, agricultural transfers and free access to the European market. The more enthusiastically we have embraced Europe the more we have benefited. Being a founder member of EMU will keep us in the European fast track. Staying outside EMU will raise serious questions about our commitment to Europe and to the tight fiscal discipline inherent in EMU. That would send a negative signal to foreign investors on whom we are heavily reliant.
Our commitment to fiscal discipline is one of the benefits which the convergence criteria of the Maastricht Treaty brought to us and which we have adhered to in all but one respect. There are still difficulties regarding our debt. While the debt to GNP ratio has headed in the right direction, which will enable us to enter EMU, we must continue to be concerned about the level of debt. In this regard, I spoke earlier about the need to curtail Government spending.
Entry to EMU will be one of the biggest challenges ever experienced by the Irish economy. For us to prosper, workers, business and the Government will have to respond to the challenge in an innovative and imaginative way. I am confident that will be done. I wish the Minister well when he attends the ECOFIN meeting at the beginning of May and I am sure he and the Government will continue to protect the interests of producers, workers and taxpayers in the months and years ahead and that the benefit we expect to accrue from EMU will be shared throughout society.
I wish to share my time with Deputy Coghlan.
Is that agreed? Agreed.
This country benefited enormously from entry to the EEC in 1973. Nobody at the time could have anticipated the prosperity which membership would bring. We owe a great deal to Europe for the way in which the country has prospered and the way in which the people of Europe have invested money here over the past 25 years.
During this period we have seen the difference which high and low interest rates have made to the economy. For many years, the country was ravaged by high interest rates which proved disastrous for business, farmers and home owners. However, in recent years we have seen the benefits of low interest rates. Property values have increased, the country has boomed and employment growth has been enormous.
Few can disagree with our entry to EMU because it will provide a strong single currency. It will ensure that, unlike on previous occasions, we will not be vulnerable to currency speculation. However, there are concerns. Some take the view that changing to the euro will have the same impact as the change to decimalisation, when we moved from having 240p to the pound to 100p. The Minister should allay their fears that our currency will be worth much less.
People are also worried that property prices which have soared in recent years, will soar even higher because we will be part of a strong currency with low inflation and low interest rates. There is a fear that prices will go beyond the reach of young people, which would be disastrous. It is bad enough at present for young couples who are attempting to buy a house to start up a home.
When negotiating the next round of Structural Funds, the Government should ensure that Objective One status is given to the western region, which has performed poorly in recent years. Structural funding should also be matched by Exchequer funding. The economy has grown considerably. We now have one of the strongest economies in Europe. In view of this, Exchequer funding should be directed at poorer areas.
At what rate should our currency enter EMU? Would it be advantageous to have a strong or a weak currency? At present our currency is much weaker than sterling. While this has advantages for exporters it has disadvantages for importers. Where should our currency be on the day of reckoning? Nobody in financial circles seems to be able to say whether we should have a weak or strong currency on that date.
I favour Ireland's entry into EMU. It will bring benefits in terms of a stronger currency and lower rates of interest. It will also put pressure on the banks. There has been a great deal of talk about our financial institutions in recent weeks. One would think, given the number of financial institutions that there would be more competition. Towns the size of Castlebar have about 12 lending institutions. The competition provided by such institutions should result in very low interest rates but that has not been the case. We will see much lower interest rates with the advent of EMU when German and other banks can put real pressure on Irish banks.
I am delighted the Government has decided to enter EMU. However, will the Minister tell us at what rate our currency should be on the day of reckoning?
I accept what the Minister, Deputy McCreevy, said at the beginning of this debate about how Ireland is well placed to participate in EMU from the outset. We have always been pro Europe and pro EMU, despite our reservations. EMU involves a certain loss of independence but we believe the advantages far outweigh the disadvantages. The ESRI has continually been strongly in favour of EMU, which has been a source of great comfort to us.
A case for remaining outside, at least until Britain decides to join, has existed but we have overruled it. Everyone accepts Britain will join but it wants to time its entry in terms of its best interests and other issues. We are heading into the unknown and Members referred to uncharted waters today. Our entry to EMU involves an act of faith but we have done the calculations as best we can.
EMU begins on 1 January 1999 with the launch of the euro and the irrevocable fixing of the conversion rates of the various currencies. D-day is next month and, no doubt, there will be nervousness. It is intended that Ireland will join at an exchange rate which meets the best needs of our economy. This is not an easy call, as the Minister has readily admitted. There will be major changes and EMU will be irreversible. Nevertheless, the common currency will make trade and travel between states much easier. Once people acclimatise to the new position they will not want to return to the old ways, in terms of the costs, hassle and time wasting associated with changing currencies when one is travelling.
Britain's intentions remain the big imponderable for us. Will Britain seek competitive advantage through its currency policy or will it quickly adopt a tracking mechanism with a view to easing its membership in due course? The latter option would assist stability from the perspective of the other member states. Our biggest fear is that sterling will be volatile against the euro. If sterling were to fluctuate wildly much of our industry would be very exposed. We are repeatedly told that sterling is overvalued and well above what the Bank of England considers to be its equilibrium level.
Given our continuing level of trade with Britain, one occasionally wonders if it was wise for us to ever break from sterling. If we had not done so it would be much easier now to remain outside EMU until both countries reached a common position on joining the single currency together. That, however, is not on the menu.
However, we can take comfort from the ESRI report. The Minister cited the conclusion of Terry Baker of the institute that the risks of external shocks 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. We all concur with those views.
Preparing for EMU has been a good disciplinary measure for Ireland. The policies pursued by successive Governments have greatly strengthened our economy. One of the primary objectives of the ESCB will be to maintain price stability, as well as implementing the single monetary policy. Experts tell us Ireland is well qualified for entry to EMU and we have been accepted with flying colours. This is because of our growth levels, per capita income, employment increases, low inflation and low budget deficits.
We are tying ourselves to Europe irrevocably and, therefore, we must make it work. We have already shown over the years that we have a great capacity to make European matters work. There is a large element of trust involved for us in EMU but, on balance, I very much believe it is the right course.
Senator Coghlan referred to the break with sterling. Varying economic opinions were expressed publicly at that time on the wisdom of that move. Many commentators cast doubt on our ability as a small island to manage our currency effectively and productively in the interests of the country. History has shown it was a very progressive, courageous and correct move and one which, despite the Senator's comments, has contributed to our economic planning and success in recent decades particularly the last one.
Those who succeeded in winning our independence made many sacrifices in the early years of the State so that we could have a real independent economy. We can cast our minds back to the tremendous deprivation caused by the economic war of the 1930s.
Neither the Senator nor I were around at that time.
We were not but I am sure the Senator is as close a student of modern Irish history as I am and I do not think he will disagree with what I am saying. Those people would be very proud of the economic achievements of this State.
This is another step in asserting our independence. Some would say it is somewhat analogous in that we broke with sterling to have our own currency in the late 1970s and we are now joining a broader European currency. We have been enthusiastic members of the EU. I listened with interest to Senator Finneran's comments regarding some recent intemperate utterances by former Tory Minister, Norman Tebbit. We should make allowances for such comments which are understandable in the context of the tremendous power Britain had in the early 20th century. In the mid-century the boast was that the sun never set on the British Empire. Currently the sun shines on the empire for a couple of hours each day at most. I see why this change is regretted and why it inhibits people's vision regarding the very progressive developments throughout continental Europe in which we have been a significant player over the past 40 years, particularly since our accession to the Community in 1973.
Management of our currency was an important component in managing our economy. Certain disciplines and instruments could be applied in the past in order to control, direct or influence economic events. Once we join EMU we will find ourselves involved in a different level of discipline and different skills will be required. Our experience over the years in ERM, in which we have successfully managed our currency, will stand us in good stead and provide confidence in the knowledge that we can successfully manage it to the advantage of the people.
Ireland has made a historic and honourable contribution to Europe over the years. Its contribution in the early Christian days was significant. There has been a fair amount of reciprocity for that investment many centuries ago through convergence and the various funds which have been available and which have had a major impact in ensuring that the level and standard of development, quality of infrastructure and competitiveness of the economy have been brought almost to the level of the EU. It is significant, and perhaps the most compelling response to those such as Norman Tebbit, that the standard of living here has surpassed that of Northern Ireland; we are about to surpass the standard of living of Britain, something which was undreamed of a number of decades ago. I have no doubt we will also play our part in the same constructive spirit of unselfishness which fired those of many centuries ago as we approach the position of being net contributors to the EU budget with other economies lagging behind the EU norm being assisted.
We must ensure the competitiveness of the economy and the discipline to meet the convergence criteria are safeguarded by the current and successive Governments. In this context we should recall events which occurred under recent Governments, particularly that led by Garret FitzGerald from 1982-7. The profligacy of that Government almost ruined the economy. Entry to EMU will ensure such irresponsible Governments will not be possible in future. We must recognise the disciplines and respond in the manner desired by the people so that those who follow the current generation of politicians can be proud of the mark and decisions we have made and that they will look back with incredulity to the time when there was a plethora of currencies in the EU.
I thank Senators for their participation in the debate and their many interesting and constructive comments. While the decision as to whether Ireland will be part of this next step in European development was made by the people in 1992, it is important that public representatives engage in debate in order that the issues are aired and to ensure public awareness is raised.
The movement of Europe towards full economic and monetary union and the adoption of a single currency, the euro, is not simply a question of how a particular country or interest can gain an immediate benefit or how they would be affected by an immediate cost. It is a quantum leap in the construction of a European Community based on peace and prosperity.
I reiterate the long-term strategic economic rationale for Ireland's long standing commitment to European integration. It is clear that when the majority of EU member states come together to create an economic and monetary union covering nearly 300 million people, Ireland should take part and not remain a bystander. On examining the progress and potential of Ireland as a member of the European Community and the relative long-term economic performance of the countries forming EMU, it is clear that any attempt to disengage from our involvement in Europe, such as an ambivalent or negative attitude to EMU, could only be damaging to the interests of the people who decided on EMU participation in a referendum where the vote in favour was 70 per cent.
EMU will mark a substantial change in the economic environment of the EU. This is true for all member states, whether they join EMU. Continuation of the status quo is not an option for any member state. EMU will change things, even for member states which do not join. Nobody is pretending there will not be challenges, but we must think of these in the context of what life would be like for a member state which remained outside EMU, particularly a small country such as Ireland, the prosperity and growth of which fundamentally depend on trade and access to overseas markets.
The Minister has already pointed out that sterling is well above what most commentators, including the Bank of England, consider to be its equilibrium level. Therefore, sterling would have to fall a long way before it could be considered to represent an economic shock. As the Minister pointed out we should not be complacent about preparing for this possibility, no matter how remote. Information contained in the Forfás information pack will, I hope, be helpful in this regard.
It should be noted that an economic shock that affects the EMU area as a whole will be dealt with jointly by member states and the relevant Community institutions, including the ECB. However, a successful response to a shock which affects Ireland in particular will depend to a large extent on how well the Irish economy has been prepared in advance to cope with such an eventuality. As the Minister said, the use of interest and exchange rates as economic instruments to deal with shocks which are particular to Ireland will no longer be available in EMU. This means that the adjustment process in the case of future shocks which are particular to Ireland will have to be assisted through a combination of fiscal and pay policy and structural reform.
The terms of the stability and growth pact, requiring the Government to achieve a budgetary position of close to balance or surplus in normal economic conditions, can allow fiscal policy to help stabilise the economy following an economic shock. One of the main objectives of the pact is to help ensure that, by making provision in the good times, sufficient flexibility will hopefully exist in the bad times to allow fiscal policy be used to cope with the problems which might then exist. A medium-term budgetary objective of being close to balance or in surplus will, however, require the adoption of prudent policies in relation to the rate of growth in public expenditure and appropriate tax policy within the overall framework of Partnership 2000.
Enhanced competitiveness has an important role to play in the economy's capacity to successfully accommodate economic shocks. Provided we maintain our competitiveness, disturbances can be absorbed more readily by appropriate adjustment to domestic costs and prices. The social partnership arrangements are important in that regard in providing a framework for both long-term competitive labour cost development and for strategic and dynamic responses to shocks, such as the provision for review under Partnership 2000. Also important are the maintenance of competition in product markets and the development of suitable infrastructure — both hard, that is, physical infrastructure, and soft, that is, social infrastructure such as public services and the regulatory framework, the skills and knowledge base and information management.
There are those who say we should wait and see, expressing fears that in various ways Ireland is not ready to be part of economic and monetary union. In that respect, I refer to the views of the European Commission. One of the fundamental roles of the Commission is guardian of the European treaties and it is a role that is not taken lightly. It is the recommendation of the Commission that Ireland fulfils the necessary conditions for the adoption of the single currency, a recommendation based on both its convergence report and on the report prepared by the EMI.
More particularly in Ireland's case, the convergence reports show clearly that we are ready. We are among the best performing member states on several criteria, including price stability and the budgetary position. As indicated by the EMI, we are on track to fulfil the requirements of the stability and growth pact and of having a medium-term budgetary position of close to balance or in surplus. Perhaps as important is our position on those areas of structural economic policy which may present challenges to other governments' performance in EMU, such as unemployment, demographic trends and high public debt. In each of these areas, Ireland is well placed to perform well in EMU. Unemployment is falling and is already below the EU average, our demographic position is favourable, our pension provisions are much better than those in most of our EMU partners and our debt is forecast by the EMI and the Commission to fall below the 60 per cent GDP reference value later this year.
Irish business is well placed to compete in the euro zone. The performance of Irish firms on European and international markets is clear proof of that. We must continue to build on our achievements. We may be fit but we must strive to be fitter. The social partnership framework — and particularly the work of the National Competitiveness Council established under Partnership 2000 — provides the basis for ongoing improvements to our competitiveness. That framework of partnership is a significant comparative advantage for Ireland.
There has been some comment about possible surplus reserves of European central banks, including the Central Bank of Ireland, following the establishment of the ECB. I note Senator Finneran's comments in this regard. The ECB is empowered under its statutes to call from participating national central banks up to 50,000 million euro in foreign exchange reserves — that is, assets in currencies other than the euro. Each national central bank's contribution will be in proportion to its shareholding in the European Central Bank which, in turn, will be in proportion to each member state's share of the euro area's GDP and population — like shareholdings in the EMI at present. In addition, the Central Bank will be subscribing to the capital of the ECB, which is to total 5,000 million euro. The Irish subscription is likely to be around £35 million.
These will remain assets on the balance sheet of the Central Bank, although they will not be under the control of the bank. However, it should be noted that both the foreign reserves contribution and the capital shareholding will earn income for the Central Bank and thus indirectly for the Exchequer, as the participating national central banks will share the profits of the ECB among themselves. This will leave a substantial amount of assets, both domestic euro assets and foreign non-euro assets, with the Central Bank. However, just because they are not needed as official external reserves does not make them surplus. Certain commentators on this issue, speaking of billions of surplus reserves, appear to have forgotten that the Central Bank's balance sheet includes liabilities as well as assets. These include deposits from financial institutions, the Exchequer deposit and legal tender notes. It is not possible at this time to assess whether the Central Bank will have assets in EMU which are surplus to its requirements. However, the Minister will keep the situation under review as the shape of EMU unfolds.
As regards the practical preparations for the changeover to the euro, the Minister has already outlined the arrangements the Government is putting in place to ensure that the changeover to the euro proceeds smoothly, both in the public administration and across the board. The establishment of the euro changeover board of Ireland will drive arrangements for the detailed implementation of the changeover, including the areas of public and consumer information. The successful EMU business awareness campaign being run by Forfás will be complemented by the rest of the national information programme aimed at the needs of the public.
As already indicated, Forfás has a specific campaign aimed at small and medium sized enterprises. I also agree that there is a big job to be done in terms of educating the public prior to the introduction of euro notes and coins on 1 January 2002. My Department will give this aspect of preparation a high priority over the period leading up to 1 January 2002.
I thank Senators for their constructive participation in this debate. We are on the threshold of one of the most momentous changes in the Irish and European economies. Our participation has received support across a range of Irish opinion, including the social partners, the vast majority of public representatives and, most importantly, the people. Our priority now is to ensure that we respond to the challenges and make the most of the opportunities opened up to us. The recommendations of the European Commission are that we are ready, a view which is widely shared in Ireland and elsewhere. That view is also endorsed by the Government. I ask this House to respond by supporting this motion.
When is it proposed to sit again?
At 2.30 p.m. tomorrow.
