I understand Deputy O'Kennedy is in possession.
Statements on the Economy (Resumed).
I understand we have an arrangement for the sharing of time. I propose speaking for ten minutes.
I think there are approximately 25 minutes remaining between the two Deputies.
The European Community has shamefully failed its citizens in the continuing currency crisis. Not only has it failed to protect their interests but by its inertia it has been, in fact, the root cause of the crushing individual and business problems in every part of the Community. Nowhere is this more evident than in Ireland where homeowners, business people, farmers, employers and employees have become the innocent victims of the Community's isolation, dereliction of responsibility and surrender to ruthless speculators and money dealers. The disunity and discord at the highest political level contrasts sharply with the proclaimed "European Union" statements of Maastricht. The much vaunted "cohesion" and "subsidiarity" statements of Maastricht are taking on a new meaning.
The well-being of the individual is subsidiary — that is where subsidiary enters in now — to the greed of the speculator. Cohesion, if it is evident, is evident only in the shared sense of alienation towards Europe, towards the Commission and institutions of the European Community, which is felt throughout by the peoples of Europe at present and is evident in public opinion responses throughout that community.
The main purpose of the ERM and of the EMS which preceded it was to underpin currency stability throughout Europe in the interests of the individual citizens of Europe and to ensure there would be mechanisms for regulating currency fluctuations within the European Community. This could be achieved only through common action and fiscal discipline on the part of the member states and of the regulating and co-ordinating bodies.
It is simply not acceptable that Ireland, which has adhered consistently to the disciplines, some of which were painful for our people, should now find itself and its citizens punished and penalised for the failure of others to do the same. Those countries that failed to act within the disciplines and constraints required by the ERM in reducing their budget deficits, bringing down their inflation rates and adjusting their balance of payments — now floating outside the ERM system — have actually gained a sharp competitive advantage in internal European trade over Ireland which has adhered to all of those disciplines.
The Government are to be commended on their firm stance and their successful defence of our currency throughout the recent turmoil, which in no way was of their making. They must also be commended on their package of measures to help industry and the enterprise sector cope with the consequences of the sterling depreciation outside the ERM. Clearly there is a limit to the unilateral action that can be taken by the Government. There is a limit to their capacity to alleviate the problems caused by the currency chaos throughout Europe.
Our European partners, if partners we can call them at this point, the Commission in particular, should be reminded of the fact that in December 1978, when we joined the European monetary system — I attended that European Council meeting myself; Britain choose to stay outside — we were able to rely on European Community action to help us participate in the system. Then the Economic and Monetary Committee, through consistent co-ordination and common action, the European Investment Bank, through subsidised loans, the Commission, through the application of the famous Ortoli facility, the ECOFIN Council and General Council of Ministers, through common political action and, above all, the European Council, through solidarity and immediate action, agreed at that time to make available a package of financial measures, in grants and loans, worth more than £225 million to Ireland to enable us participate in the system and cope with the competitive disadvantage which the anticipated depreciation of sterling via-à-vis the EMS would cause for our exporters. In passing it must be said that that disadvantage never actually accrued as sterling appreciated rather than depreciated against the EMS currencies because of the discovery of North Sea oil.
If Ireland in 1978 was entitled to financial support and solidarity from the European Community how much more are we entitled to it now because of the critical problem caused us by the lack of control or co-ordination within the ERM and by the lack of effective action by individual member states who have floated outside the system at this point?
I welcome not only the action of the Government to date but also the Taoiseach's reaffirmation that our policy is and will continue to be the maintenance of a firm exchange rate within the narrow band of the ERM. Our Government have certainly adhered to a consistent policy since 1987. I should stress that it was not always easy. Our people had to accept the consequences of reductions in public expenditure to reduce our budget deficit and bring down inflation. We did as we were required to do. The same cannot be said of the European Community and its institutions in recent months. It is simply unacceptable that those of us who have been constant and consistent, and our citizens, should now be punished for the inability and inconsistency of the European Community and its institutions. The Commission simply must not be allowed to insulate itself in comfortable isolation in the Berlaymont from the crushing problems of the citizens of Ireland and elsewhere. The Berlaymont can be a very comfortable place, a splendidly isolated place, but they must not be allowed to isolate and insulate themselves from the reality of our homeowners, farmers or small business people and the reality of the impact on our economy of what they have allowed happen through lack of control. We cannot be expected to shoulder this burden alone. We can be expected to act in a disciplined fashion.
In my view the very credibility, the very relevance of the European Community is at stake here. That is what the people expect from a Community of common purpose.
Deputy Roche is entitled to remain in possession until 4.10 p.m.
There can be no doubt at all that the Irish and other economies of Europe have entered an era of unprecedented challenge. Though we can wring our hands and say that this challenge has been wrought on us by mindless speculation and a variety of other factors outside our control the reality is that, for whatever reason, we have entered an era of unprecedented challenge. We have entered a period in which the economic well being of this nation, and indeed of our partner nations in Europe, is under greater threat possibly than at any time since the great depression of the early thirties. One of the lessons that should have been learned from that earlier depression was the importance of cohesive, coherent, trans-national action.
There is no doubt that we, as a nation, as well as being a member of the EC, are at a very important crossroads in terms of our development. In a sense the economic and financial difficulties we faced in the late eighties pale into relative insignificance in comparison with the problems we now face. Of course, there is a difference in that the difficulties we faced at that time were long term whereas the current ones are not. There was another difference, that is that the difficulties we faced at that time were home grown whereas the current ones are not. Because the problems are so great, because the stakes are so high, it is vital that we respond to the current challenges in a calculated and calm manner. If we lose our heads now we will lose a great deal more.
Over the past two weeks I have felt a sense of admiration for trade unionists and industrial leaders who, by recognising the gravity of the current position while in no way seeking to devalue the challenge we face, have held a common and sensible line. There has been a common and sensible thread in statements from a whole range of groups — the small firms association, the CII, the CIF, major banks, serious economists from all sides — who have generally reached conclusions that existing policies and Government responses are best; that in spite of some considerable short term pain, we must stick with the ERM and, above all, not consider devaluation. It would be churlish of me if I did not commend spokespersons of the Opposition parties, particularly Deputy Michael Noonan of the main Opposition party, who from time to time I chide in this House, for also holding what I would regard as a generally sensible and rational approach.
However, I have to say I have less admiration, indeed something approaching contempt, for some of the glib commentators who, from the side — motivated either by a sense of mischief, a desire to illustrate just how clever they are with the pen or word processor, or who simply seek self-publicity — have been touting policies which to my mind border on economic subversion. Some prime examples of this gross irresponsibility were to be found in the columns of last Sunday's edition of the Sunday Independent. On the front page we had Senator Shane Ross, no longer putting himself forward as an Independent Senator, lashing what he chose to portray as the high cost of Ireland's devotion to the Deutsche Mark. This Senator scorned the idea that the present solution was short term and he dismissed the idea that a positive trade surplus could have any beneficial impact on the life and livelihood of the averge citizen. He dismissed, too, an inflation rate of 2.8 per cent as being of importance in the economic debate. He chose not to mention the positive state of the public finances or the fact that public sector borrowing has been brought under control. These fundamentals of the good sound economy he chose to dismiss as being of no relevance; at best, they were entitled to his scorn.
I do not suggest that those maverick views are the views of the main Opposition Party. I would be very shocked if they were. Those views can only be blamed on the author of the article. The logical extension of the rubbish in that article and elsewhere in the same newspaper's columns last Sunday is that we should abandon existing policies in favour of re-establishing our link with sterling and ultimately in favour of devaluation. Nothing could be more wide of the mark or more calculated to damage the interest of every Irish citizen. The argument put forward by Senator Ross and by a small rump who favour the devaluation route is based on the view that such a course of action would help to counter the loss of competitiveness suffered by our producers who are competing either on the UK market or with British goods on other markets, including the home market.
To my mind any thoughts of devaluation are not just subversive, they are close to lunatic. A devaluation, no matter what its superficial attractions, is not a choice for this nation at this time. The extent of our dependence on trade would mean that higher import prices resulting from devaluation would creep very quickly into domestic cost and price increases. Those arguing for devaluation also ignore the interesting point that, while the UK accounts for over 30 per cent of our exports, it also accounts for about 40 per cent of our trade imports. Devaluation or a re-link with sterling would have a very immediate impact on the latter, a point ignored by Senator Ross and people who take the same line. If we were to devalue, it would not be long before any beneficial effects — and they are doubtful — would be eroded, leaving us with higher prices.
In this context I would draw attention to developments in the UK which merit some observation. There has been a significant devaluation of sterling in relation to the dollar, the Deutsche Mark and other currencies continuously since the mid sixties and this does not appear to have done any long term good to the economy of the UK. Re-linking our economy with the UK and our currency with sterling would be something akin to clambering on board the Titanic. Secondly, the effect of devaluation on domestic and foreign confidence in our ability to manage our affairs would be shattering. Capital would flee from the country, not only causing interest rates to rise but also putting further pressure on Government finances and on our currency. The result would be a spiral of depreciation. Facing these prospects, the endurance by us of temporary but necessary increases in interest rates is certainly the lesser of two evils.
This is not to say that I in any way ignore the extraordinary impact that interest rate rises are having on home owners, small industry, farmers and across the community. But it is by far the lesser of the evils we face. No matter how hard the more lunatic commentators try, they cannot dismiss the very real economic achievements of this nation, nor can they deny that we as a nation, because of the hard work that has gone into creating a sane, economic structure, have created thereby an economy which is well prepared to weather these storms.
Earlier today Deputy John Bruton in his speech made reference to a speech given earlier this week by a leading banker at a meeting of the IMI. I wish to refer to some elements in that speech. The speech was in line with quite a few that have gone before and quite a few comments that have been made in the press and media. One of the conclusions of that speech was that high interest rates in Ireland would remain "into 1993". This has been widely misinterpreted by sections of the media, particularly the broadcast media, as meaning that high interest rates will exist until the end of 1993. At best, this is a misinterpretation, but if it were not so it would be wrong headed in the extreme to suggest that we should expect current abnormally high interest rates to exist for any more than a matter of months.
The second conclusion in the speech in question was that growth would be adversely affected this year and next year. I would suggest that this is perhaps a dismal conclusion which has been reached before we know all the impacts of the current economic situation. There is no doubt that what is and has been happening will not in any way help growth, but the reality we should keep in mind is that growth in 1992 and in earlier years has generally been very good. I look forward, particularly in the early part of 1993, to a return to growth policies.
The central part of the speech concerned exchange rates and the policies which should be adopted by the Government at this time. The speaker came to the unequivocal conclusion, as so many other sane speakers and commentators have done, that the present exchange rate policy must and should be adhered to. In the longer term and in the short term it is the only hope for us as a nation. The question posed is what should policy makers address and whether we should devalue our currency. This commentator came to the unequivocal view, which is shared by virtually all commentators and by me, that certainly we should not on this matter give a centimetre. The first step in getting interest rates down is to maintain existing exchange rate policies.
The Government will clearly have to address the various pressure points in the economy and the various problems in the economy which will emerge over the next two or three months. The approach being adopted by the Government is the only sane one, the only one which has anything to recommend it.
I conclude by supporting some of the comments made by Deputy O'Kennedy. It is a fact that the Commission of the European Community and the institutions of the EC have allowed a gulf to grow between them and the people of Europe. The people of this nation have undergone a great deal of pain and hardship to bring our economy into line with the better European economies in the past few years. We have the right to expect full support from our European partners and in particular from the strong economies of Europe. I believe our future lies within Europe.
If there has ever been a proof of the eloquent need for more comprehensive development of European cohesion and policies, it has been the events of the past few weeks. If we had had a central European bank over the last four or five weeks, in which Irish, French, German, Dutch and the other member states could have had a say, the extraordinary unpatriotic behaviour of people who have made hay on the exchange markets would not have been allowed to happen and the economic turmoil which we have undergone would certainly have been less likely to occur.
The Chair appreciates the Deputy's regard to the time. Deputy Blaney, and there are 20 minutes remaining.
I would like my colleague, Deputy Garland, to have at least the last five minutes.
Agreed? Agreed.
I had thought that a debate such as this would have ensured a full House. I also thought that we would have had a two day debate. It is stupid, to say the least, that today we adjourn at 5 p.m. when we could have sat until 8 p.m. without keeping anybody out of bed, and yet we will be back here at 10.30 a.m. tomorrow morning. It does not make sense.
I have listened with great interest to various contributors, particularly those from the Government side. I commend the Government without reservation for, in a very difficult time, setting their face against devaluation. I qualify that by saying that that is fine, provided they take steps to try to help the people worst hit by the amazing change between the value of our currency and that of our nearest neighbour, whatever about other currencies such as the lira and the pesata. Our big problem is with the UK, not only because of the change in the value and the rapid change of up to 20 per cent over two or three weeks, but because of the position in which it has put many of our small and not so small industries. I commend the Government for providing a substantial sum, which I hope they will apply with alacrity to those who are in trouble on the British market and elsewhere, particularly those who are operating almost exclusively on Irish raw materials where there is no benefit accruing by way of imports at the lower cost of sterling. Against a background of calamitous unemployment it would be extreme madness for us to visualise anything further in that direction. Such a scenario would entirely change my mind about the Government's stand on devaluation.
It is extraordinary how those who supported the Maastricht agreement and portrayed it as the answer to all our ills are now indicating that it has let them down, that further union in Europe and a common currency and all that goes with it, which some of us opposed for very good reasons, are not likely to be such a great thing now and that they feel very let down by their colleagues in the Community. Without exception the major parties supported Maastricht even though the electorate were not terribly well informed as to what it was about. Before we sign we should make sure that in the months ahead and from 1993 onwards we will not be let down by the things about which we feel let down today, as expressed particularly by Deputy O'Kennedy. This is our last chance before signing to sort out some of the difficulties which were not foreseen by those who supported Maastricht. Now is the time to get assurances and insurance from our colleagues against the worst features of Maastricht. Without those assurances and insurance we should not sign despite the fact that on a 55 per cent poll we had a 70 per cent "yes" vote for the Maastricht agreement, which was presented on the blind and accepted on the blind by the vast majority of our electorate who voted. Almost half of the electorate stayed at home and that is a fair comment in itself.
Deputy Leonard made an appeal for the mushroom growers centered around Monaghan. There is no question but that they have been hard hit. The mushrooms are growing at the moment and we cannot wait until next month to assist mushroom growers. Without assistance they will be in a very desperate situation on the British market and in some other markets. There is a similar problem with fish products, including farm fish, which will be competing with the Norwegian supported products in Scotland. Some of the biggest fish farms here are Norwegian as well, and more is the pity, but they are at grave risk. The fish are maturing and are coming to the market; they cannot wait. Immediate support should be considered.
Another aspect relates to farmers, particularly sheep farmers. Deputies referred to the situation in Wicklow and a reduction in ewe premiums and so forth. It goes far deeper than that. Sheep and lamb prices have been disastrous all through this season. The prices are suffering still further. People are competing in the British market against British production and the French market is being swiped from under our feet, even with the bad prices that obtained three weeks ago. We just cannot compete at the moment and there are no MCAs which apply to other agricultural produce. There is no support other than these premiums and the premium is cut at the moment by £6 per head, not that that would make up for the loss that has been sustained over recent months. The double loss that will occur in the weeks ahead should be considered in a special way by the Government and the Department and the Minister responsible for the administration of this aid to producers.
I would ask those politicians who talk inside and outside of this House not to make a virtue out of necessity. We are being told that if it were not for our strong economy, starting with 1987, we would have worse problems. It is rather significant that we should talk about from 1987 onwards. We should remember how we got into the mess we were in 1987. We should remember the rake's progress from 1972 onwards, the borrowing ad lib and the elections by auction which took place year in and year out when we had elections from 1973 right up to 1987, including 1987. We got ourselves into the mess.
Let us not start clapping ourselves on the back for doing a great job since 1987, because the people in Government and in Opposition today, jointly and severally, in the various Governments since 1972 onwards were responsible for £26 billion of debt from which we have never recovered and which we have not repaid or reduced by one penny. The people who are paying for all of this are the 300,000 unemployed and the 3,000 to 5,000 people who have had to emigrate. Those are the people to whom we charge the bill for putting our economy in a state that left us able to stand up in the present chaotic world of finance and say that we can decide for ourselves, that we will not devalue and make things even worse. Let the Government not congratulate themselves on having done something wonderful since 1987. The Government helped to get us into the mess and it is only right that they should not claim any credit for getting us out of it, particularly when it is the unemployed and the emigrants who have had to pay.
We are all too prone to talk about the unemployed. Recently £100 million was set aside for job creation and we have received many millions of pounds from the EC for training schemes in FÁS and so forth. But what are we doing? We have no houses for our people at the moment and we will not have houses in the future unless we pull up our socks and get our people back to work in the construction industry because when the construction industry is on its knees the country is on its knees. That scenario has been repeated. It happened in 1965, when we had a depression, and in 1955, when there was also a depression. I will not go back any further because there were no ordinary times before that.
Why can we not devote this £100 million to the construction industry? Why can we not reinstitute attractive grants for house building? What is the matter with us at the moment? Ten years ago, when the depression was showing itself and we began to run down the house construction industry, I said we might even reach the point where our emigrants would come back and there would be jobs for them, but no roof to put over their heads. I am saying this once again. Over the next year to 18 months the construction industry could absorb, in public and private housing, with grants supplemented by the earnings of our people, anything up to 60,000 of our construction workers who have either emigrated or are on the dole. Houses would be produced rather than paying dole, which produces nothing and costs a lot to administer and which is, broadly speaking, money down the drain.
I am very much a believer that one cannot idle one's way out of difficulty. We ought to work our way out of difficulty where we have useful work to do. Who can say that house building is not useful work? It is essential and will cost us a lot more in the future than it does now. Private enterprise, encouraged by grants, would put more into the economy than would be taken out by way of grants. Through servicing the 60,000 thus employed, up to a further 1000,000 people could be put to work. What a change that would make to all of us and to the economy in general.
There is one other aspect which has been neglected over the years since we made the fisheries agreement. That agreement was daft, to say the least; it was done in ignorance and was not intended to have the disastrous results it is having today. If we could double our fish quotas, which we would be entitled to since we have 16 per cent of all of the fish stocks in the entire Community, we could employ up to 30,000 people along the west coast processing the fish not required for the fresh market. I urge the Government again to put the boot in in regard to our fisheries. We have an unanswerable case. The fact that we made mistakes is not a good reason for everybody from around the Community and outside to come along and scoop the one resource we have on our doorstep while our fishing industry is not allowed to expand and is in fact contracting. I will say no more about that as I want to allow my colleague, Deputy Garland, to say a few words.
My thanks to Deputy Blaney for allowing me in for a few minutes.
I would like to refer to some points made by the Taoiseach this morning. He spoke about the economy being sound, about the sustained balance of payments surplus, about the rate of inflation being among the lowest in the world and about a budget deficit which is ever decreasing. I agree that these are all very important objectives. However, the Taoiseach does not explain why we are running this sustained and large balance of payments surplus. The reason for that was outlined by Deputy Blaney when he talked about the £26 billion that has been borrowed and mis-spent in this country by successive Governments since 1972. I will not gild the lily by repeating in detail what Deputy Blaney has said. I totally agree with him. The fact that we have to run this huge balance of payments surplus is responsible for many of the problems here and that should and must be acknowledged.
Let me also make a passing reference to the Maastricht Treaty, to which the Taoiseach referred. Again he showed an alarming degree of complacency. He seems to be totally out of touch with what is happening. The fact is that the Maastricht Treaty as we know it is dead, and thanks be to goodness for that. If and when it ever rears its ugly head again it will have to be renegotiated and I hope that we will have the sense to insist on a proper Protocol on neutrality. The main reason the Danes rejected the Maastricht Treaty was because they were unhappy about neutrality. Yet in this country anyone who mentioned neutrality was told it was irrelevant, that it was a red herring. The Danish people did not think so and the French people who voted only by a very narrow majority in favour of the Maastricht Treaty did not think so. There is a serious problem there and the Government are not facing up to it. It seems that we will get a second bite of the cherry and I hope that the Government do not let this opportunity slip to do something about that and have Irish neutrality copperfastened in the Treaty if it is to proceed.
One thing I disagree with Deputy Blaney about is the sheep industry. It is important that we retain as many people as possible on the land and many people derive their livelihood from sheep. I would question whether or not the ewe headage payment is the best way to do that. These payments have resulted in gross overstocking with consequent overgrazing of many areas, perhaps not so much in Donegal but certainly in Mayo and Galway. I have talked to many sheep farmers who have admitted openly and honestly that they are flogging this thing for all it is worth, that in five or ten years' time huge mountain areas will be totally denuded of vegetation. We all know what will happen then. When there are excessive periods of rain the topsoil will be washed away and we will be left with a desert, as has happened in the Himalayan regions. What we need is a system such as they have in Great Britain where they have headage payments for lambs. This would be a much more sensible system. Better still, we could have a headage payment for people because it is the people we want to keep there, not the sheep.
There will be adequate time tomorrow, I hope, to deal with the catastrophic unemployment problem when we are debating the report of the Dáil Committee on Employment. I will therefore not deal with that today except to say that I regard the Taoiseach's efforts to underplay the employment crisis as being absolutely deplorable; nor has the contribution from the Opposition been in any way constructive in this area. What is needed is a new approach to the unemployment problem. If I am given an opportunity to speak tomorrow I will outline Green ideas in this area.
The recent currency crisis was not of our making. I think this should be understood clearly by all at the outset. For several years, the Irish authorities have pursued a consistent line in regard to our exchange rate policy. Our aim has been, and continues to be, a firm and stable exchange rate within the narrow band of the EMS. Our capability to sustain this position has been recognised consistently by our Community partners and has been reflected in the increasing interest on the part of foreign investors in Irish Government securities in recent years. Earlier this year, following a rigorous examination of the Irish economy, the Council of Economic and Finance Ministers unanimously endorsed our position and paid tribute to the good management of the Irish economy.
The recent turmoil on the markets was caused by a number of complex factors. The speculative pressure built up on a number of currencies, primarily the lira and sterling, because of the persistent belief in the markets that the economic performances of Italy and the United Kingdom could not support their exchange rates. At the same time, the impact of German unification and the cost of rehabilitation of the economies of central and eastern Europe put enormous strains on European capital markets. The situation was exacerbated by the decline in the US dollar and the consequent flow of funds into the Deutsche Mark. Further difficulty was caused by Denmark's narrow "No" vote on the Maastricht Treaty and by uncertainty surrounding the outcome of the impending referendum in France. All these factors created tension within the European Monetary System which, once triggered, led to speculative attacks on the EMS currencies on a scale unheard of previously. The withdrawal of sterling and the lira from the Exchange Rate Mechanism of the EMS and the devaluation of the peseta created further fears in the market that the EMS might break up, thereby fuelling further speculation against the Irish pound as well as other EMS currencies.
There is no merit now in speculating on what might have happened if the Community authorities had acted with greater urgency in addressing the problems earlier and more decisively. The disputes about inappropriate public statements and inactivity are not our concern. Our priority from the beginning has been to see stability restored as quickly as possible and to stay on course for economic and monetary union.
Only massive intervention by the central banks of the member states, utilising also the mutual support provisions of the Exchange Rate Mechanism, prevented the dissolution of the EMS. By withstanding this extraordinary pressure the mechanism of the EMS has proved itself. All member countries were deeply involved in the defensive process that was without precedent, and the degree of co-operation is a tribute to the progress that has been made towards greater integration of Community currencies.
At this point, I want to refer briefly to the speculators who appeared for a time to have a free hand in dictating the future of currencies to an extraordinary extent. We had a situation, in fact, where a country's existing and prospective economic performance was dismissed by the markets as totally irrelevant to the value of its currency.
We were subjected to some criticism because we acted promptly to stop entirely unwarranted speculation against our currency. We were in the process of "being taken-out"— to use market phraseology. There were no good financial or economic reasons for this, and freedom of markets can never be equated with deliberate and unjustified undermining of a currency for huge and immediate speculative gains.
Our currency is continuing to experience the pressures arising from sterling's weakness. Some commentators and market players still appear to doubt our ability to maintain our present parities. This may be due to comments by people who have a vested interest in uncertainty, since trading in currencies thrives on uncertainty and movements. These people do no service to our country. Abroad, a few commentators who seem ignorant of our economy and policies also cast doubt on our ability to cope with the recent upheaval.
In the face of the whirlwind on European markets, the options open to us were to stand our ground or to devalue the currency immediately. There was no middle ground for us or indeed for any other member of the Exchange Rate Mechanism. Standing our ground involved very difficult decisions that have difficult consequences for many of our people, but it is well to reflect on the consequences if we had chosen the alternative. We would have damaged beyond repair, for a long time ahead, the confidence that we have painstakingly built up over recent years. Our case for entry into full economic and monetary union on schedule would probably be in ruins. Those who are naturally worried about the temporary steep increase in interest rates should be aware that devaluation would not provide a solution. I will return to this question of interest rates later. Of course, we would be rapidly plunged into an inflationary cycle such as that which caused so much damage in the early eighties and our track record in reducing the national debt as a proportion of GNP would be placed at risk. We have gained respect in the market place for our stand in the face of extremely difficult odds and this will be of great benefit to us in the longer term.
Our external reserves have been consistently strong for a considerable time and this has helped us to withstand the recent assault. We have had to cope with large outflows of capital with a consequent loss of reserves. We continue to have adequate reserves to support our exchange rate and we can also call on the resources available through the EMS for this purpose. Recent outflows can be attributed to two main factors — forward purchases of sterling and disinvestment from Government securities by outside investors. I should add it has not been one way traffic and there have been significant inflows.
To help replace the reserves lost through outflows from Government securities, the National Treasury Management Agency have been raising funds externally at very competitive rates. This is a sensible approach and it is the approach that is being followed by other countries experiencing similar market pressures. This borrowing will not add to the national debt. It is a substitution for borrowing in Irish pounds, not additional borrowing. The money borrowed abroad will fund the Government's deficit. This deficit is determined by the gap between Government expenditure and Government revenue. It is not affected by the substitution of foreign currency debt for Irish pound debt.
The feeling that our economic achievements from 1987 onwards are in some way illusory has been a feature of the recent events. This is untrue. For a number of years after we joined the EMS in 1979 we did indeed lose competitiveness. In the period 1979 to 1986, measured in terms of changes in relative hourly earnings in common currency, our costs rose 23.5 per cent faster than in the EMS narrow-band group of countries, 13.5 per cent faster than those of our main trading partners and 6 per cent above UK levels. Meanwhile, the Irish pound fell in value against the Deutsche Mark, sterling, the dollar and the yen, and our effective exchange rate fell by over 13.5 per cent. This was a period characterised by high inflation, falling employment and low growth — with declining output in some years.
Since 1987 however, our commitment to "sound money" has borne fruit. A firm exchange rate policy, backed by appropriate restraint in the public finances and in wage and other cost developments, has lowered perceptions of risk — and interest rates — and underpinned substantial growth in investment, employment and living standards. Non-agricultural jobs increased by some 54,000 between 1986 and 1991. In the period 1987 to 1991 competitiveness, measured in relative hourly earnings in common currency, showed substantial gains against our trading partners. Of particular note is the fact that we gained over 15 per cent against the UK.
Thus the reality is that the Irish economy has prospered and gained competitive advantage over the UK and other economies. This should be a source of pride to us. These gains should not be thrown away for the sake of some short term relief.
In other areas, too, we have made substantial progress. Our Exchequer borrowing requirement which stood at almost 13 per cent of GNP in 1986 has now been reduced to well under 2.5 per cent. Recent Exchequer returns indicate that the EBR target for 1992 will be achieved. Against a difficult economic background, this is a tremendous achievement.
Inflation has declined from almost 4 per cent in 1986 to a current level of 2.8 per cent. Indeed, our trade balance shows a healthy surplus this year and is projected to be 10.5 per cent of GNP. This compares to a trade surplus of 4.5 per cent of GNP in 1986.
I might add that this improved performance has continued in the face of the prevailing slowdown in international economic activity. The House will recall that economic developments and prospects for the year were set out recently in my Department's Economic Review and Outlook 1992 published in August, suggesting GDP growth for this year of about 2.5 per cent. This forecast was not by any means over-optimistic. In fact, it compared with GDP growth forecasts of 3.5 per cent and even 4 per cent published by the Central Bank and the ESRI respectively in September. Economic growth in Ireland this year will be well ahead of the EC Commission's forecast of 1.75 per cent GDP growth in the Community as a whole.
As I predicted at budget time, we are seeing a modest recovery in domestic demand which is growing broadly in line with the rise in real disposable incomes. Retail sales so far this year are up by about 3 per cent in volume over the corresponding period of 1991. Notwithstanding continued weakness on Ireland's external markets, the volume of merchandise exports in the first seven months was up by an estimated 12 per cent year-on-year; we expect growth for the year as a whole of at least 10 per cent. Employment appears generally to be holding its own. The Economic Review and Outlook projected growth in total employment of about 2,000 compared with last year. Up to the end of September, receipts from the training and employment levy show a rise of 7.5 per cent year-on-year which, taking account of incomes developments, is an encouraging pointer on this. Unfortunately, however, despite employment growth, the continuing international down-turn has seen registered unemployment rising significantly this year.
I want to return now to interest rates. Let me say at the outset that devaluation does not guarantee lower interest rates even in the short term. We need only look back to 1986 to get a clear example of that. Reductions in interest rates following the 1986 devaluation were very short-lived indeed. Ireland devalued by 8 per cent in August 1986 and by October of same year, just two months later, building societies announced that mortgage rates would have to be increased by 3 percentage points. At the same time other retail borrowers had their interest rates increased by between 2 and 4½ percentage points. The background to the market pressure in 1986 was very similar to the present situation, at least to the extent that the immediate cause of the market turbulence in 1986 was also a weakening sterling exchange rate and a weak US dollar.
Devaluation did not help the gilt market in 1986 any more than it helped the retail borrower. This was despite the fact that we were far less reliant on nonresident gilt holders at that stage. For example, at end-June 1986, non-residents held around £1.1 billion of Irish gilts whereas at end-June this year the figure was about £4.1 billion. In 1986, a higher proportion of the non-residents would have been matching liabilities in Irish pounds and in any event they only accounted for around 10 per cent of the market compared to about 30 per cent at end June last. Therefore, in 1986 the Irish gilt market was much more a domestic matter than it is now. Moreover, in 1986, with tight restrictions on capital movements in place, most domestic investors had far fewer investment options than they do now. Despite all this, the August 1986 devaluation of the Irish pound was followed by sharply higher gilt yields; medium and long term gilt yields increased from about 9 per cent in the first half of 1986 to over 13½ per cent during October 1986.
A firm exchange rate policy within the narrow band of the European exchange rate mechanism is the only policy that will ensure that, when the present temporary period of market turbulence comes to an end, we can move back to interest rates close to those of Germany. It is the only policy that will leave us in a position to profit fully from any reductions in German interest rates. The alternative policy will leave us with a large premium over German interest rates for many years to come. I believe that premium could be of the order of 3 percentage points over what rates will be under our existing exchange rate policy. One clear reason for this is the adverse impact a devaluation would have on our non-resident gilt holders and other foreign investors. Clearly, as far as interest rates and gilt yields are concerned, devaluation would be very bad news indeed.
For an example of the ongoing cost of higher interest rates we have to look no further than the mortgage rate. I am well aware of the difficulties created by higher mortgage rates; that is one of the reasons I am determined to maintain our existing exchange rate policy. It is the only way we can secure and sustain lower interest rates. A 3 percentage point premium from a devaluation would cost mortgage holders dearly over the life of their mortgages. A person on a £30,000 mortgage would end up paying £63 per month more than what they might expect to pay under our existing exchange rate policy. Devaluation would maintain this additional burden for years to come.
The Exchequer itself, and through it the taxpayer, would also lose heavily if the Irish pound were to be devalued. At present the Exchequer has about £8,900 million of foreign currency debt and a devaluation of the Irish pound would immediately increase this by about £89 million for each 1 per cent of devaluation.
If I am correct in believing that devaluation would have interest rates 3 percentage points higher over an extended period, then the cost of servicing the total national debt, and therefore taxation levels, would be up to £150 million higher each year than they would otherwise be. On the other hand, our existing exchange rate policy allows the National Treasury Management Agency avoid the excessively high cost of borrowing Irish pounds just now. The confidence we have in our exchange rate allows it to borrow instead in foreign currencies, with lower interest rates.
Ireland is not the only EMS country which has experienced high interest rates due to speculation against its currency in recent weeks. The outflow of funds associated with this speculation has led to considerable increases in short term money market rates in France and Denmark, two countries which have strong economic fundamentals. In our case, the key one month Irish interbank interest rate which was at around 10½ per cent on Friday 11 September was quoted at well over 20 per cent at times during the following couple of weeks. The Irish gilt market has also suffered as a result of the recent disruption. For example, yields on Irish ten year bonds have risen by about one percentage point since 11 September, and yields rose even more on shorter dated stocks.
Against that background the increase of 3 percentage points in the Central Bank's key short term facility interest rate, on 28 September, was a moderate reponse to the turbulence on the domestic money market and should be seen as a necessary short term measure to help restore order to the market. Similar action was taken by the French when they raised a key intrest rate by 2½ percentage points in the previous week, in their absolute determination to defend the value of their currency. I would now like to take this opportunity to pay tribute to those financial institutions, who took whatever steps were open to them, to limit the increases in interest rates for small business and who made arrangements to minimise the impact of the current turmoil on mortgage holders.
The increases in official and retail interest rates were delayed as long as possible but they were the inevitable consequence of the disruption in the wholesale markets. I expect that these increases will be temporary. Last week, there were rumours to the effect that our retail rates would go still higher. There was no basis for these rumours. Already, wholesale interest rates are well below their peak. I cannot say when rates will come down, but I am confident that, in a few months at most, retail rates can fall again to previous levels. The factors that will determine this will be the restoration of stability in the EMS and of normal currency flows. The prospects are also improving — the German authorities will soon be in a position to further reduce their interest rates and this will help ease pressure throughout the Community.
Internationally, much work needs to be done to analyse the crisis and see what lessons can be learned from it. Unlike other crises in the past, the ability of the markets to transfer vast sums of money between countries was a particularly significant feature of the recent disruption of the EMS. This era of full freedom of capital movements is a new factor in assessing how markets operate in times of crisis. It is noteworthy that this is a matter which is exercising concern in many countries and that, lately, the US Treasury secretary proposed that a study of the impact of capital flows on the global economy should be undertaken.
In our own case, the existence of certain controls, which still remain prior to full liberalisation at the end of this year, was of help in stemming the initial bout of speculation. There was a lot of uninformed and damaging media comment about our use of these restrictions — that we had re-introduced the controls, that this action was in contravention of Community law, and other such comments. I would like to emphasise, in the strongest possible terms, that these were restrictions which we already had in place and which, under Community legislation, we are entitled to retain up to the end of this year. We thus did nothing that was exceptional or that was contrary either to the spirit or letter of our international obligations.
However, capital controls cannot be, of themselves, an answer to the problem. The Community is committed to ending restrictions on capital movements to enable the Single Market operate efficiently. Indeed, this is enshrined in the Maastricht Treaty. On our part we have been liberalising capital movements since 1988 on a phased basis and are committed to their abolition within the rules prescribed by the European Community.
A return to exchange control regulation is not the answer to supporting a currency. The best backing a currency can have is a sound economy. This is what all parties have striven to achieve. We have, since 1987, made enormous progress in putting the economy on the right path. It would be disastrous now to attempt to change this policy because of short term difficulties faced by sterling in particular. We are no longer attached to sterling. Our future remains in the narrow band of the EMS whose members now constitute the biggest export market for our goods. To follow sterling down would not only be a reversal of policy, but it would also mean attaching ourselves to a floating currency. This would only add to instability for our traders and businesses.
Our goal remains the achievement of economic and monetary union within the framework of the Maastricht Treaty and in accordance with the schedule laid down in it. There has been much comment about a fast-track approach to European Monetary Union. Finance Ministers have re-affirmed last week that there should be no two speed Europe. This reality has been emphasised repeatedly in recent days by the highest authorities and I expect that the Heads of State and Government will confirm this position at next week's meeting in Birmingham. There can be no doubt about our ability to fulfil the criteria for European Monetary Union. Based on our inflation rate, our strong balance of payments position, our control of the budget deficit at a low level and our declining debt/GNP ratio, we already are one of those countries which can be considered to be ready for the final stage. This is not just my viewpoint — it is a reality that has been endorsed by several spokespersons from other member states of the Community and by the Council of Economic and Finance Ministers.
The immediate period ahead will be difficult for all members of the Community. We are in a period when rumour feeds upon rumour and it is in all our interests that the clear Community position should be spelt out without delay. Do not underestimate the will and determination of Community members to go forward together and to restore stability to a currency system that has served us well up to now. The disruption of recent weeks surely underlines the value of a single currency managed by a European Central Bank, as provided for in the Maastricht Treaty. I believe that when the dust has settled this experience will actually strengthen the commitment to full economic and monetary union.
I accept, however, that all this offers little consolation to those businesses, and their workers, whose jobs are largely dependent on exports to the UK or are open to serious threat from UK-sourced imports. As announced on Tuesday last, the Government decided to establish a market development fund of £50 million for the period up to the end of March 1993 to assist firms which have been seriously affected by the recent turmoil in exchange rates.
The Government took their decision after their consideration of the report of the inter-departmental working group established last week to look at the nature and extent of the problem and to make recommendations. The working group had indicated that many manufacturing firms could not only be faced with serious problems in maintaining positive margins on sales in the UK market but also in those parts of the domestic market and certain major overseas markets which are subject to strong price competition from UK firms. The Government recognise that such a situation could pose a threat to many jobs unless the firms concerned take immediate action to improve their competitiveness in existing markets and to actively pursue opportunities in alternative markets.
As announced, the establishment and management of the fund will be supervised and directed by the management board, which will comprise the managing directors and chief executives of An Bord Tráchtála, FÁS and IDA, together with representatives from the Departments of Agriculture and Food, Finance, Industry and Commerce, Labour and the Marine, and representatives from the industry and employer bodies and ICTU. The fund will be administered by a special team drawn from the relevant State agencies.
The assistance is being targeted at firms which face temporary difficulty in maintaining employment and in adjusting to the recent changes in the market place arising from the depreciation of sterling. Operational criteria for support under the fund will be worked out in the next few days. The Government envisage that the scheme, which will be monitored regularly, will continue for about six months. There will be a formal review at the end of this year.
In the Government's view, however, it is crucial that the fall in sterling which will reduce the prices of many imports will be reflected in domestic prices. There should be no question of businesses which have their costs reduced in this way taking windfall increases in profits. Instead it is vital that they fully pass on lower import prices so that they feed through into lower inflation and lower costs.
I spent a number of hours listening to this debate and I may not have picked up all the questions, but I will do my best. Deputy Barry referred to the market development fund. Application forms and guidelines will be available later tomorrow from the headquarters of the fund, An Bord Tráchtála, and in the regional offices of the IDA and SFADCo from next Monday morning. Since the Government decision was taken on Tuesday afternoon this is a wholly satisfactory response and indicates the speed and urgency with which we attended to the matter. In drawing up the guidelines the agencies are in close touch with the needs of the firms most affected and they will therefore reflect and respond to those needs. There will also be need to maintain normal accountability for the considerable amount of public money being made available, but I am confident that this will not impose any great difficulties for firms who apply for support under the fund.
We cannot implement Deputy John Bruton's proposal that we should underwrite the exchange rate risk for foreign investors in Irish Government bonds. I have said this on a number of occasions outside the House. All holders of Irish Government stock are entitled to expect the same terms and such a proposal would be the equivalent, from the point of view of the State, of borrowing in Deutsche Marks at the higher pound interest rates, which does not make sense from a financial point of view. Our excellent credit rating means that we can borrow Deutsche Marks without difficulty at Deutsche Mark interest rates and there is therefore no reason for paying Irish £ rates for what could effectively be the Deutsche Mark debt. I have said this five or six times outside the House, but I wanted to make it clear in the House.
Deputy Spring and Deputy John Bruton suggested that by engaging in foreign currency borrowing at an earlier time we might have helped to defuse the currency crisis as it affected us. I have answered this question outside the House, but I will repeat it here. It must be remembered that the scale of the currency crisis in the middle of the month affected European currencies; it was unprecedented and if we had borrowed in the early days it would have been interpreted by the markets as a panic response. We correctly avoided doing that, because a too quick recourse to foreign borrowing in the days following the events of 16 and 17 September would have promoted unwarranted fears regarding the strength of external reserves and given rise to even greater speculation. It would have been a wrong thing to do. We had to wait until there was stability in the marketplace to move, which we did at the first opportunity last week.
Deputy John Bruton spoke at length about the special savings accounts. I will not go into all the arguments in relation to them because I do not have time. He seemed to think that these accounts are now in operation but they do not start until the final exchange controls are lifted. As I said several times in the House over the last six months, at that stage I will have addressed the issue of special investment accounts in the Finance (No. 2) Bill.
Deputy John Bruton also referred to the question of EC funding for the activities of the new county enterprise partnership boards. On 25 September the EC Commission announced an allocation of 10 million ECUs, £7.4 million, by way of a global grant from EC Structural Funds for local development in Ireland for 1992-93. This new allocation is geared towards assisting enterprise creation and development training and education, operational costs and technical assistance. Deputy John Bruton's point was that we had not applied; however, the money has already been granted. Some examples of the types of activities covered by the allocations are: assistance for small enterprises, provision of training and enterprise skills, improving job prospects for the unemployed, helping to build local organisations to enable them to participate in development programmes and assisting local groups with feasibility activities.
That was not Deputy Bruton's point.
He said that we have not applied for the money which we can use in the operation of the fund.
The Minister says he will use EC funds but they have already been spent.
Money from Structural Funds in place of the present employment scheme funds?
Yes.
The money for the special employment schemes which has already been granted for employment was part of my budget last January.
The Minister referred to a sum of £100 million and he said that £50 million was from the EC but there is no record of the Government having applied for change of use.
A change of use from the ESF Funds?
Yes.
As I understand it, the Minister for Labour some weeks ago discussed the use of that money because it is an ESF allocation.
Up to last Tuesday the Commission knew nothing about it. It is all done with mirrors.
A number of suggestions were made today regarding mortgage interest relief. It has been suggested that full mortgage interest relief should be restored and that the ceiling should be raised to £5,000. The first point which should be made in response to this proposal is that mortgage interest relief currently costs the Exchequer £184 million per year in terms of tax foregone. This is a huge cost and any proposal whereby the Government would add to this cost would not be in the national interest. The Revenue Commissioners have also advised that the restoration of the relief to 90 per cent of the current £4,000 ceiling would cost £25 million in the tax year and that restoration to 100 per cent of the current ceiling would cost £50 million. Some of the proposals made today would be very costly. For example, Deputy Spring's proposal would cost £70 million in the current tax year.
While the events that have given rise to the recent increases are outside our control, the pursuit of a consistent budgetary policy by the Government is crucial to investor confidence. If concessions of the magnitude referred to were conceded they would have to be funded by increased taxation generally, by expenditure cuts or by increased borrowing which would not help the public.
The recent events in foreign exchange markets have been dramatic. As a whole, our currency system has, like others, been affected. Indeed, our whole currency system was shaken to its foundations. We responded immediately and decisively to protect our currency. We promptly introduced a range of measures to help businesses put in great difficulty by the sharp decline in the value of sterling. I pay tribute to all who have been involved in our co-ordinated effort, which has been a truly national effort. I am encouraged by the support and advice that has come from so many sources and by the actions that people have taken on their own inititative. I am particularly encouraged by the responses that have come from so many business people who have experienced severe short term problems as a result of a situation that was entirely outside of all our control. We have shown a new maturity in trying to handle the problems and will continue to do so.
Debate adjourned.