(Limerick East): A Leas-Cheann Comhairle, I would like, first, to congratulate you on your election and to welcome you to the Chair. In the year 351 BC, if we go back a long way, Demosthenes, in his first Philippic, took consolation at a further set-back in Athenian policy at the hands of Philip of Macedon in the following words:
First, then we should not be downhearted at the present situation however regrettable it seems. The worst feature of it in the past is the best hope for the future. What feature? The fact that it is plain dereliction of duty which has brought us to this position. If it followed a period of exemplary action there would be no hope for improvement.
That the quotation is apt because, as was the case 2,000 years ago in Athens, the only consolation we can hope for, after the recent ignominious and dismal collapse of Government policy, is that we can learn from the dereliction of duty and the lack of exemplary action so that we can never be so humiliated again.
The gross dereliction of duty to which I referred has principally been by the Taoiseach and the Minister for Finance, who throughout the period, in four different colours of Government, held the positions which they hold today. First, I intend briefly to catalogue the relevant events since the currency crisis commenced in September, then I will give an inventory of the losses suffered by the country. However, I will dedicate the major portion of my remarks to what I believe are the main policy considerations which must now be addressed to ensure that a débâcle like this never happens again. I believe there are three such policy considerations. First, there is the exchange rate policy itself. Second, there is the failure to recognise that we did not have the support of the German authorities in the course of the crisis. Third, there is the lack of accountability of the agencies and persons involved to the Houses of the Oireachtas and in particular the lack of accountability by the Central Bank to anybody, it seems for its activities.
I would like to go briefly through the sequence of events which is familiar to many people. In September, following an intense period of instability in international currency markets, sterling, the lire, the peseta and the escudo devalued. Without any policy decision being made by the Irish authorities, the punt increased in value and on a trade weighted basis this revaluation settled at about 5 per cent. There was nothing in the fundamentals of the Irish economy to justify this increase and over the succeeding five months the Government did nothing to justify the new value of the punt. They could have cut the cost base to industry to restore competitiveness. They did not. They decided to defend the punt by Central Bank intervention in the markets and by raising interest rates. Wholesale rates soared and retail rates, including mortgage rates, went up by 3 per cent.
The Government of the time was totally preoccupied by the tensions between Fianna Fáil and the Progressive Democrats. Deputy O'Malley had already given evidence at the Beef Tribunal and the Taoiseach, Deputy Reynolds, was rehearsing his rebuttal of Deputy O'Malley's charges. The participants in Government were so immersed in the internal powerplay that the vital interests of the country were neglected and no measures were taken which would permanently restore competitiveness and enable industry, particularly those sectors of it trading into the United Kingdom, to survive. This was the only strategy which would have worked. I consistently stated so since September and, in its absence, a devaluation was inevitable.
The Taoiseach's evidence at the Beef Tribunal blew the Government apart in early November and since then, I believe, Fianna Fáil's main concern was to avoid the political blame for a devaluation while at the same time being unwilling to risk unpopular action to defend the punt. This continued through the election campaign, after the election, when they operated as a caretaker Government, and during their negotiations with the Labour Party. Fianna Fáil were not prepared to act until they could share the blame with a new partner in Government. Consequently, right through the period from November until last week, policy was dictated by party political considerations rather than by considerations of the Government's duty and the national interest.
Towards the end of the election campaign some of the Baltic countries, led by Sweden, devalued and the punt came under pressure. As sterling weakened in December and January, the punt came under pressure on a number of occasions and the Minister for Finance announced to a press conference that we could not stagger along indefinitely. The punt again came under pressure. During all this period the only instruments of defence were direct intervention by the Central Bank and higher interest rates. The Government took no action at any time which would have indicated, both internationally and domestically, that it was prepared to take hard policy decisions to defend the punt. It would not fight and it could not run, so nothing was done. When the final collapse came, it was inevitable. It was as inevitable as it was humiliating, and the principal culprits were the Taoiseach and the Minister for Finance, who held those offices right through the five months in question.
I would like now to look briefly at the costs, which have been enormous. The Central Bank has used up all the nation's external reserves. It has used the swops arranged with the commercial banks, it has incurred significant liabilities to those central banks, who, under the terms of the ERM, came to the defence of the punt. The total effect on the Central Bank's balance sheet cannot be less than £300 million and could be considerably more by the time the reserves have been fully replaced.
The Treasury Management Agency has incurred very significant losses as a result of substituting D-mark borrowing for Irish pound borrowing. The national debt has gone up by £800 million, according to the Minister's figure. Interest rates are still at the higher level in Europe and at one of the highest levels since the foundation of this State, and these levels include the mortgage rates. They have soared as the economy has plunged into recession, businessess have closed down and thousands of jobs have been lost without hope of recovery. And all for what? To protect the reputation of Fianna Fáil and in particular to ensure the continuance in office of the Taoiseach and of the Minister for Finance.
I now turn to the implications for exchange rate policy. I believe the Government now has an absolute obligation to clarify Irish exchange rate policy. I do not think the Minister did so today in his speech which opened this debate. Claims such as have been made by the Government that Ireland is still on course to participate with the Benelux countries, Denmark, France and Germany in some kind of exclusive hard currency club and that the devaluation of the punt is merely a slight temporary setback in our steady progress towards a single European currency are quite clearly untrue. The fact that the Bundesbank was prepared to cut interest rates to protect the Danish krone within one week of failing to take action to protect the punt clearly illustrates that Germany does not see us as appropriate members of this hard currency club. The fact that the central banks of other EMS countries only intervened to protect the punt strictly in accordance with their ERM obligations, while they went well beyond their obligations to protect the krone, indicates that other hard currency countries also regards us as ineligible for membership.
We are now being pulled in two directions. Our exchange rate policy pulls us towards Germany, our export trade pulls us towards the United Kingdom, and as long as sterling floats outside the ERM this tension will continue. Some commentators have advocated that we establish a link with sterling; others argue that we should move from the narrow to the wider ERM band; others again suggest that we should allow the punt to float. I believe that to pursue any of these strategies would be extraordinarily difficult and would be no more than a shot in the dark, the outcome of which would be quite uncertain. The best course of action probably is to stay within the narrow band, but to approach our policy with a willingness to demand, and insist on, frequent realignments within the ERM if domestic or international circumstances warrant such realignments.
It is vital that we protect our national interest. The only strategy that will succeed in maintaining growth in the economy and in putting people back to work is one which enables Ireland to produce more goods and services and sell them competitively. Because our home market is so small, it is a prerequisite of this strategy to export competively. Unless our exporters can trade into the United Kingdom on competitive terms, with relatively stable exchange rates, businesses will close down and thousands of jobs will be put at risk.
We should remember that statistics frequently hide the true picture. We have been told, right through the five months in question, that 30 per cent of our exports go to the United Kingdom — and this is true — but 65 per cent of the exports from indigenous Irish industry go into the UK. That is the sector which is most at risk — two thirds of their product is dependent on sales in the UK market.
It is not possible to quantify the number of jobs lost through the dereliction of duty by this Government. It is, however, clear that if a devaluation had not taken place the country was possibly facing at least 30,000 redundancies in the export sector of the economy over the next 12 months or so. Policy failures always give one an opportunity to reflect on the future course which policy should follow.
I believe now is the appropriate time to question whether the present exchange rate value of the Irish pound is consistent with the level of unemployment of over 300,000. If the main strategy for job creation is to produce more goods and services and sell these goods and services abroad, then it surely follows that an undervalued pound rather than an over-valued pound would be much more appropriate to our employment needs. There is an increasing view among economists, and especially among younger economists, that the main reason our unemployment levels are double the European average is that our currency is overvalued and has been overvalued for most of the decade.
There is no absolute measure of the value of a currency. The Government claims that the value of the Irish pound is consistent with the fundamentals of the Irish economy. It is absolutely ridiculous to speak of the fundamentals of the Irish economy and ignore the fact that 23 per cent of our people who are looking for work cannot get a job. I am well aware of the many benefits which a hard currency bestows. I believe, however, that in the current crisis of policy, where the incoming Government have no idea how to respond to the unemployment catastrophe, this House has an obligation to examine all elements of policy, and there should be no sacred cows. If the price of prosperity for some is conditional on the poverty of others, then policy should change. If the exposed trade sector of the economy must wither to benefit the sheltered sector, such policy is only viable in the immediate short-term and will collapse in the medium-term, to the grief of both the exposed and the sheltered sectors. If employment is a Government priority, as it stated this week, then the Government had better examine its exchange rate policy, because that which it has pursued, if continued, will cost rather than create jobs.
I turn briefly to the question of accountability. In the course of the preliminary discussions on the formation of Government, the Leader of Fine Gael, Deputy John Bruton and I, in common with other party leaders and Finance spokesmen, were briefed on the budgetary situation by officials in the Department of Finance. In the course of this briefing the currency issue was briefly discussed. I have no doubt that those highly respected, reputable officials were intellectually convinced that the course of action which they were following was in the national interest. I presume that officials of the National Debt Management Agency and officials of the Central Bank were equally convinced. I do not know if they remain convinced of the rightness of the course that we were pursuing through December and January; but it is clear that in computing the losses incurred as a consequence of devaluation, the loss of reputation of those involved at official level must also be taken into account. I do not know whether the Department of Finance, the Central Bank and the NDMA succeeded in imposing their views on the Government, or whether they were simply carrying out political instructions. We presume the latter is the case and that the Minister for Finance will accept responsibility on behalf of everybody.
The Central Bank, however, is independent in the exercise of its functions. The losses incurred by the strategy it pursued would be enormous by any standards and I believe that there should be some level of direct accountability by the Central Bank to the Oireachtas. It is necessary, so that we avoid mistakes in the future, to establish what actually happened; and I believe that an appropriate committee of the Houses of the Oireachtas should be empowered to hear the views of the Governor of the Central Bank. The Governor of the Bank of England reports through a committee of the House of Commons to the members of the House. The head of the Federal Reserve in the United States is accountable to a committee of Congress. I understand there is a reporting mechanism between the Bundesbank and the Bundestag. If the Taoiseach is seriously interested in letting in the light, perhaps he might start with letting some light into the activities of the Central Bank and make some committee of this House responsible for the accountability of the bank for what they do. I do not believe that the Minister should be the fount of all wisdom and should be expected, whether he is to blame or not, to carry the responsibility for everybody who advised him on this occasion.
A number of public statements have been made recently by former employees of the Central Bank which are very critical of the bank. This is a matter of great concern, especially when charges have been made that appropriate economic advice has been ignored when policy has been formulated by the bank. I believe the Minister for Finance and the new Government have an obligation to consider the accountability of the Central Bank to the Houses of the Oireachtas and I would strongly recommend that they would set an appropriate structure in place. This is a very opportune time to consider this as the Government are in the course of setting up a series of committees of the House.
One of the most striking features of this whole affair is the lack of input by the Department of Foreign Affairs. Ireland's exchange rate policy, though primarily a matter for the Department of Finance, cannot be pursued with effect without a Department of Foreign Affairs which is in tune with the mood and aware of the views of decision makers and opinion makers in other EMS countries, especially in Germany. This is particularly so when one of the main weapons in the defence of the punt was supposed to be a diplomatic démarche to convince our EMS partners that our currency was appropriately valued and that they should come to its defence. I believe that the apparent absence of a Foreign Affairs view — if there was such a view it was not taken into account — is profoundly disturbing.
It is worth recording some of the facts. The "war cabinet", which made the day-to-day decisions on the defence of the punt, consisted of the Minister for Finance, the secretary of the Department of Finance, the Governor of the Central Bank and the chief executive of the NTMA. In circumstances where diplomacy was conceived as one of the main weapons of defence, it was surprising that the secretary of the Department of Foreign Affairs was not a member of this group. I had personal experience of the Department of Foreign Affairs during the negotiations which led to the signing of the Anglo-Irish agreement and again when, as Minister for Justice, I attended the early conferences with the then Minister for Foreign Affairs, Deputy Peter Barry. I learned very quickly to appreciate the effectiveness of the Department and in particular their capacity to establish and report the views of a wide range of significant people both in Northern Ireland and in the United Kingdom. I have no doubt that they had the capacity to do the same in respect of Germany and our principle EMS partners. I wish to ask why they failed to do so and, if they actually carried out the diplomatic work, why the information provided was not taken into account by the Government.
Public opinion in Germany has changed significantly since reunification. German views on a single currency and their views on obligations to weaker European countries such as Ireland, and indeed on Germany's role in the new Europe which is now emerging, have changed quite dramatically. The Fine Gael Party through its relationships with the German Christian Democrats is in a position to know the views of German decision-makers better than other parties in this House, and we are fortunate in that respect. Our party frequently sends delegations to Germany. I was a member of one such delegation last October to the former GDR and frankly it was a most profoundly depressing experience.
Unemployment in former East Germany is about 65 per cent. This is disguised in the official statistics by early retirement schemes and training schemes. But of a workforce of nine million approximately before the wall came down, there is now a workforce of slightly under three million. Those are the facts. The industrial base of whole towns has been closed down as former State companies can no longer compete in the free market. I was in one town on the German-Polish border where 12,000 industrial jobs in three industries had been lost and virtually nobody except a handful of public servants was at work. The confidence of ordinary people has been severely dented. Their morale is low. They are suspicious of foreigners, afraid of inflation and resentful of grandiose EC schemes for which, they believe, the German taxpayer will have to pick up the bill. In the former West Germany, Germans at all levels of society are deeply worried as they fear that the price of unity may be a long period of recession. With so many problems at home they are not really receptive to begging bowl approaches by other member states such as Ireland. They are becoming increasingly hostile to the idea of a single currency and they regard the Deutsche Mark as their principal badge of sovereignty, their ultimate symbol of unity, the basis of their wealth. They certainly do not want it contaminated by weaker currencies. This mood in Germany was quite apparent to my colleagues and me last October. I would be very surprised if it were not fully recorded in the diplomatic despatches from our embassy in Bonn to Iveagh House. I would be equally surprised if our diplomats in Germany had not clearly indicated that the Germans were in no mood to do any more that was strictly required by their obligations under the ERM to defend the pound.
There is a strong belief that the German authorities advised the Irish authorities in November that a negotiated realignment within the ERM was more appropriate than continuing to defend the punt and that this advice was rejected. Whatever the truth of this, it became blindingly obvious in the week after develuation that the Germans believed that the Irish pound was over-valued, when they did for the Danes what they would not do for the Irish. It was quite clear that the German authorities were not committed to the defence of the punt. Why was this not communicated by the Department of Foreign Affairs to the Department of Finance in good time and, if it was, why was the advice ignored?
One of the principle legacies of the former Taoiseach, Mr. Haughey, to public administration has been the diminution of the role of the Department of Foreign Affairs. Mr. Haughey was suspicious of Iveagh House, particularly with regard to Anglo-Irish relations and Northern Irish policy. He suspected them of revisionism and he suspected them also of too close a relationship with his rival of the day, Dr. Garret FitzGerald. He reduced the role of Foreign Affairs by transferring much of the real decision making of the Department to the Department of the Taoiseach. Its power has been further reduced by the dominance of the Department of Finance over all other Government Departments, especially since Fianna Fáil returned to office in 1987. I believe that the insignificant role played by the Department of Foreign Affairs in the defence of the currency was the principal reason the strategy was continued well beyond the point when it had lost credibility. If we are to learn anything from this sorry mess it is the absolute necessity to restore the Department of Foreign Affairs to its rightful role in the formation and execution of any policy involving relationships with other states.
Another lesson which we can learn from this entire tragic affair is that Government Departments operating entirely within rigid departmental boundaries, as if they lived in distinct universes, is an inadequate response to complex political and economic affairs. The fact is that the financial and diplomatic businesses of Government are interwoven threads in the fabric of our national interest. All Departments and agencies of State should be mobilised to serve the national interest and they should be accountable to the Houses of the Oireachtas for the decisions they make.
I will leave the Taoiseach with a mystery. In the course of his reply he may deal with it. How is it that the Belgians, where all the fundamentals of the economy seemed to be wrong, came under no pressure at any time in the course of the currency crisis? What magic formula did they use to defend the Belgian franc which was different from the strategies taken by everybody else whose economic fundamentals seemed far stronger?