Charlie McCreevy
Ceist:5 Mr. McCreevy asked the Minister for Finance when precisely the punt/euro exchange rate will be irrevocably fixed; and if he will make a statement on the matter. [3998/97]
Ceisteanna—Questions. Oral Answers. - Economic and Monetary Union.
The European Council in Madrid in December 1995, and the subsequent European Councils in Florence and Dublin, confirmed that the starting date for the third stage of economic and monetary union — European Monetary Union — will be 1 January 1999, the latest date envisaged in the Treaty on European Union. It is Government policy that Ireland should qualify for participation in European Monetary Union from the outset.
Article 109L4 of the treaty provides that, at the starting date of the third stage and by unanimity of the member states participating in European Monetary Union, the Council of Ministers, on a proposal from the Commission and after consulting the European Central Bank, will adopt the conversion rates at which participating currencies will be irrevocably fixed against the euro.
We had this debate on previous occasions and the Minister is aware of my views on setting a date. It will lead to an inordinate amount of currency speculation in the preceding period. I stated my view in the Select Committee on Finance and General Affairs, of which Deputy McDowell is also a member.
There is a certain amount of volatility in exchange rates at present and I predicted this some months ago, as Deputy McDowell will recall. Is it the view of the Minister and the Government that a date can be set so far in advance and met without large speculative movements against currencies taking place in the preceding period? Will a small country such as Ireland, whose currency is not traded extensively in international terms, not be seriously disadvantaged if the "big boys" start to position themselves in the knowledge that the commencement date is 1 January 1999? It will be a combination of luck and an act of God if Ireland joins the exchange rate mechanism at favourable exchange rates. The Minister must give consideration to this issue. I predict the situation will deteriorate in the coming months.
I take issue with the Deputy in terms of the premise on which his argument is based. As we move closer to 1 January 1999 there has been increased currency volatility.
There will be.
The Deputy referred to the present position. There has been less currency volatility up to the recent surge in the value of sterling, which is largely attributed to an anticipated increase in interest rates. It is generally conceded by most specialist commentators that if the British, like other member states in the EU, had an independent central bank, as we have, the speculation about an increase in interest rates in Britain would not exist because the decision would have been taken previously. From published comments by the Governor of the Bank of England, an extra 0.5 per cent would have been put on sterling, which would have dampened speculation. Part of the increase in the value of sterling — these are multi-factorial issues — is attributed to speculation because interest rates in Britain are fixed for political considerations exclusively rather than for economic considerations.
The second change in relative currency values in recent times relates to the German currency which has been driven down in value by the Bundesbank to accommodate the economic concerns of the German economy. I do not accept that current volatility in currency, which causes difficulties for exporters to continental Europe, relates to anticipation of 1 January 1999. There is need to find a formula in which to fix irrevocably the exchange rates as against the Euro of participating countries in such a manner as to minimise the possibility for speculative turbulence and disruption — I am acutely conscious of that, as, not surprisingly, is every other Minister for Finance in ECOFIN. The manner in which rates are to be fixed and the announcement is to be made are related issues of concern, and active, positive and constructive consideration is being given to that issue.
In that context I take it consideration is being given by the Government to support some mechanism which would entail averaging exchange rates over a period. Consideration is also being given to the proposition that a date for all exchange rates to be fixed would not be set but that there would be an option over a period of time so that speculators could not count on any particular timeframe to make a quick killing and put pressure on the Irish pound.
I share the concerns of both Deputies. There are two issues involved. First, we must ensure the rates at which national currencies are fixed irrevocably against the Euro relate realistically to the value of the currency in the medium to long-term rather than to a particular point on a particular day. That leads to the logic of ensuring that economies participating in the single currency are truly convergent in every sense of the world. The five criteria in the Maastricht Treaty are simply a measure, but not the total measure of such convergence.
The second concern is that exchange rates must be fixed in such a way as to minimise any window of speculative opportunity for substantial currency trading. We are not talking about caricatured sole traders of the kind we read about from time to time. Every pension fund in the world participates in this kind of activity. The volume of speculative money is of such a size that not a single central bank or combination of central banks could sustain a massive onslaught. Following the surge in the autumn of 1992, there is a body of experience — not necessarily a body of knowledge — that wants to minimise and avoid that. It would be irresponsible of me to openly discuss the way in which that might be done. The risk is understood and measures are being considered to minimise the possibility referred to by Deputies McDowell and McCreevy.
This matter should be dealt with by announcing fixed rates. Not enough thought has been given to this matter by the Irish Government or all countries in Europe. They fail to recognise that men and women all over the world managing pension funds to the best of their ability spot these things. I advised a long time ago that a date cannot be set and I am glad the Minister has given some credence to that aspect today.
The debate on sterling in recent months has reinforced the message that other markets perceive the Irish pound as a sterling clone currency. The Minister said the Bank of England should be an independent central bank, but his colleague, Ken Clark, said on television recently that he has ignored the advice of Mr. George, and he ignored it before. Mr. Clark said that in the last year he was more correct than the Governor of the Bank of England. The Irish pound is at the top of the grid as against the French franc and approaching a level where something will have to be done by the Central Bank. That is a result of sterling following the dollar and the Irish pound being perceived as a sterling clone currency. Does that not highlight the difficulties that will face the Irish currency if the UK stays outside economic and monetary union?
I do not have the precise dictionary definition to hand but I believe that a clone is a body or entity that mimics the behaviour of the body to which it is cloned. If that were the case we would be much higher up the band on the ERM than we currently are. Taking that definition, it is wrong to say the Irish pound is a clone of sterling. The sterling market will, for the foreseeable future, remain the most important market. Sterling has come down significantly since the period prior to 1973, but considering that there are five million people in Ireland and 57 million or 58 million in Britain, it will certainly remain a significant market. Our dependent relationship with that market will have a significant impact on the value of the Irish pound. We are correctly perceived as having a strong relationship with the sterling market, but it would be wrong to say the Irish pound is a clone of sterling. The facts do not suggest that.
The difficulties have been well outlined. When we reach the stage of fixing the currency, those who stay outside economic and monetary union — I speak of the UK — will have inside knowledge that could suit them in terms of the rate of sterling as against the Euro. Is it the case that when the decision is made in principle about those who will form monetary union, the decision of how and when will remain with those who are in as opposed to those who have decided to opt out? It would be grossly wrong if those who are inside but not partaking were aware of everything taking place. Inside knowledge could give them a competitive advantage, having taken the decision to stay out in the first place. Is that prospect being considered?
Yes. There are only two countries who have an opt-out clause as regards currency, Britain and Denmark. We have to form a view as to the likely attitude of the UK Government, which will probably change after the next general election.
I do not think its policy will.
We will have another debate on that in due course. It is a matter for the sovereign British people to decide.
The remaining 13 states do not have opt-out clauses. All of them, including the United Kingdom, are obliged under the existing treaty provisions to manage their currency having regard to the impact on other member states. I do not foresee, for example, as regards the kind of discussion which would take place at ECOFIN, the UK authorities inside the EU but outside the currency zone having access to market sensitive information which would enable them to take competitive advantage.
The board of the European Central Bank is distinct from the board of the ESCB which embraces all 15 member states. The operation board of the ECB will only be comprised of those member states who participate in the single currency. They would not have formal access to market sensitive information. They are obliged by the treaty to manage their currency in a manner that has regard to its impact on their neighbours.
When it is decided who meets the criteria the movement towards the formation of the central bank will begin. That group will take the decision and I presume that those who either for their own reasons decide to opt out or are not able to proceed, will not form part of it.
That is correct.
Do the present difficulties regarding exchange rates vis-à-vis the Irish pound, sterling and franc highlight the need for exceptionally tight rules as regards the relationship between those who are out and those who are in. We will be faced with an unusual circumstance where interest rates may be forced to fall as a result of the Central Bank intervening, at a time when that would be the totally wrong fiscal stance for Irish economic policy. This is increasingly likely to be the case if the UK remains outside and we stay in. Strict rules would have to be enforced for those outside and inside the bloc. I predict that in the next few weeks we might see a decision on interest rates which will not necessarily be in the best interests of the Irish economy. It is a result of our relationship with sterling.
All this debate points to the necessity of a single currency sooner rather than later.
With everybody included.
Yes. Everything I have read to date emanating from across the water indicates that the objective economic logic of the situation will compel the UK authorities to join the single currency in the best interests of their economy. Everything I have read, with the exception of an extreme group of English nationalists, whose agenda is much wider than the question of single currency, leads me to believe that later if not sooner, Britain will join the single currency. It will be in the best interests of the British economy. Today, Neil Fitzgerald, the chief executive of Unilever has all but stated this, following the footsteps of the president of Toyota.