JOINT COMMITTEE ON EUROPEAN AFFAIRS díospóireacht -
Wednesday, 12 Feb 2003

Vol. 1 No. 10

Euro Changeover: Presentation.

Chairman

I am tempted to say we are running on British Rail time as we are a little late. I welcome Mr. John McFall MP, chairman of the UK treasury committee, Sir George Mudie MP, Ms Angela Eagle MP, Mr. James Plaskitt MP, Mr. Nigel Beard MP and Mr. David Ruffley MP. The Oireachtas Members present are Senator Don Lydon, Deputy Barry Andrews, Deputy Pat Carey, Deputy Michael Mulcahy, Senator Ann Ormonde, Deputy Jim O'Keeffe, Senator Derek McDowell, Deputy Marian Harkin, Senator Fergal Quinn and Deputy Sean Haughey, vice-chairman of the committee. We tend to favour joint committees with Members from either House although we also have select committees.

I welcome the delegation. I understand it wishes to discuss our experience with the introduction of the euro. We are happy to have this exchange and to provide the delegation with any information we can. I invite the chairman, Mr. McFall, to lead off.

Mr. John McFall MP

The treasury committee is currently undertaking an inquiry into the euro with regard to the UK. As the committee will know, the Chancellor has set down five economic tests, which he will assess, with the Prime Minister, and he will announce the results of that assessment in June next. My committee has decided to undertake the inquiry with regard to the five tests and to include the stability and growth pact and the ECB. We have heard extensive evidence at Westminster but wanted also to look at the regional dimension. To that end, we have this week visited Scotland, Northern Ireland and now Ireland. The discussions here have centred on the Irish changeover and what that involved economically and politically. We have had a wide-ranging discussion but, from a political point of view, would like to find out the experiences of the committee.

We have already heard that the Irish decision was very much a political one whereas we are to make an economic decision that will then be followed by the politics, if and when a referendum takes place. My committee hopes to provide a balanced, informed report that could act as a template for the debate, if and when that takes place. We are not undertaking a running commentary on the five tests and will not assess whether they have been passed. We will ask fundamental questions and, I hope, translate the answers into simplified language to assist the debate at a later stage. I thank the committee for its invitation to contribute.

Chairman

There were economic implications for Ireland and an issue of particular importance, on which I wrote a report for the committee some years ago, was the level of employment in indigenous industry which related to the British market. Irish exports to Britain are now a much smaller part of our total exports because we export more products to the European Union. However, the number of jobs in small indigenous industry dependent on exports to Britain is sizeable and that was a major question for us when joining the euro.

Most members present grew up with British coins in one pocket and Irish coins in the other. However, the 1979 decision to join the exchange rate mechanism and the EMF was the start of our commitment to Europe. We considered the fact that the European Union is a market of 340 million people and, with enlargement that will become about 500 million people. Ireland is a small State behind a large Britain and for most of its existence was dominated by British interests. If Britain devalued its currency, we did so immediately and if British interest rates changed, we got 20 minutes notice and changed also.

In many ways, we did not have sovereignty over our currency whereas having a representative on the executive of the European Central Bank meant we had at least some input. European interests had to be taken into account and not just the interests of the German deutschmark, sterling or other currencies. The single currency had attractions for us as it promised long-term low interest rates, which gave certainty. It also presented an opportunity for transparency in pricing, so one could see the relative cost of items when importing or exporting, or making purchases in other member states.

Colleagues will relate their personal experiences, but the general experience has been good. House prices have increased because our dependency ratio has greatly decreased. More money is available as a result of long-term fixed interest rates and growth in incomes. Greater numbers of people are chasing a similar number of homes. Homes are being bought to house smaller units of people. The euro has contributed to the increase in property prices.

When we changed to a decimal currency in the 1970s, there was a degree of inflation. However, studies by people such as Dr. Garret FitzGerald suggested that the currency change did not contribute greatly to that inflation. We thought, nevertheless, that joining the euro would give rise to high inflation, but that was not the case, with some exceptions. The report of the Euro Changeover Board of Ireland contains further information on the matter. In the main, the euro did not cause inflation.

One of the great benefits of the euro is that one does not need to change currencies when one goes to Brussels or many other European cities. People coming to Ireland from Luxembourg or Italy can use the same coins on the buses here that they use at home. The euro has increased transparency and I suspect it has been good for tourism. One can directly measure the difference in prices in different countries. I understand that some major firms in the United Kingdom provide their contract prices in euro only, thereby facilitating transparency. They might transact business in sterling, however. Perhaps members of the UK committee will be able to tell us more about this.

The changeover has been beneficial for Ireland so far. The issue of the fixed exchange rate needs to be addressed by the UK Government, but Ireland did not have that freedom. We were tied to sterling and stayed in the ERM after the UK pulled out. Members of the joint committee are welcome to discuss other aspects of this country's experience.

Senator Quinn

I welcome members of the UK committee, with whom I am very happy to exchange ideas. I am involved in the supermarket business as well as being a Senator. I am keen to relate to our British colleagues details of difficulties that were experienced during the changeover. I disagree with the Chairman, who may have hinted that some unscrupulous retailers may have used "decimalisation" and the introduction of the euro to increase prices and thereby cause inflation. We will debate that matter on another occasion.

A lovely Irish seanfhocal, or proverb, says "éist le fuaim na habhann mar gheobhaidh tú iasc" - listen to the sound of the river if you want to catch a fish. The Euro Changeover Board of Ireland listened carefully to the sounds, particularly of citizens and those involved in trade and business, to ensure that the changeover went smoothly. One of the reasons the board was so successful was that it listened to business people, to a greater extent than did the relevant people in other European countries. An example of an issue that may arise if the UK joins is that the punt was of a higher value than the euro - Ireland was the only one of the 12 countries to be in such a position. Prices went up here, meaning that something sold for £1 suddenly cost €1.27. It seemed to those buying houses or cars that prices had increased. We were aware of this matter in advance. Something being sold for 2,000 liras in Italy seemed to decrease in price to €1. The week after the changeover, a customer in a restaurant in Italy paid €650 for a cup of coffee and thought that it was the correct price. He did not realise that there was such a difference between euro and lira prices. I realise that I am skipping over the UK's decision, but I emphasise the importance of planning in advance in the event that the UK adopts the currency. A number of steps have to be taken in the UK, but if it joins, advance planning will help to make the euro more readily accepted by the public.

The Chairman mentioned price comparability across Europe, which is one of the benefits of joining the euro. It is beneficial for customers to be able to say that a given product is cheaper or more expensive in Spain, Italy or Germany. Such comparability has the added benefit of placing a certain amount of pressure on the Minister for Finance - the Chancellor of the Exchequer in the UK - if he has placed a specific tax or excise duty on specific products. One of the reasons wine or other alcoholic products are more expensive in Ireland is nothing to do with the changeover, but relates to the high rate of excise taxation. There may be very valid reasons for such taxes, for example in the case of cigarettes.

The greatest disadvantage of the euro is that the Government has lost the power to, on its own, do what is right for the economy. What might be right for the German economy, which was trying to heat up a year ago due to high unemployment, might not be right for Ireland, which was trying to dampen its economy at the time. We do not have the freedom to use the economic tools we have used in the past, such as setting interest rates.

If I were to emphasise only one aspect of the euro it would be that the work done before the introduction of the euro, after the decision to join has been made, is important. Careful listening and planning is needed. It is more than a year since we adjusted to the euro, but I discovered only last week that despite our forward planning, £358 million remains outstanding in pockets, drawers and sofas. I am not trying to plug my company, but it is offering to take the old money for three days next week. I mention it as it has been done in other countries where a huge amount of money has been retained unintentionally.

I would love to see the United Kingdom adopt the euro, if only for the ease it would afford to Irish people who travel and do business there.

Deputy Mulcahy

I welcome members of the UK committee. There was a perception among consumers that prices increased substantially after the introduction of the euro, although I appreciate that this was not the case in top-drawer supermarket chains. Certain retailers may have taken advantage of the changeover by increasing prices - one certainly did not hear about many retailers decreasing prices after the introduction of the euro. If there is one lesson to be learned, it is that any country adopting the euro should have a rigid watchdog mechanism for prices in the first six or 12 months. Perhaps Ireland lost out by not introducing such a body. The new currency was adopted remarkably quickly - Members of the Oireachtas were surprised by the smooth changeover. There were no problems after the first day or two.

As somebody who used to travel to the UK quite regularly, I agree with Senator Quinn - I would love to see the UK joining the euro. It is psychologically easy to travel to and spend money in the European countries that have adopted the euro. If one asks oneself if one will travel to London, Paris or somewhere else, it is easiest to choose to go to Paris - it is a psychological twitch. I would like to see the statistics on trade between Ireland and the UK before and after the introduction of the euro. Small to medium businesses, which used to source products from the UK have sourced them from mainland Europe since the introduction of the euro. Has the UK lost out economically by not being part of the euro zone?

Mr. McFall MP

Economists here say we have not lost out and that patterns of trade have not changed much between Ireland and the UK.

Mr. James Plaskitt MP

As a committee on European affairs, to what extent do members feel the decision to join the euro related to Ireland's European status rather than to economic factors? Has full membership of the euro zone, altered Ireland's role in the EU?

Chairman

We might put it differently as individuals. We committed to the European Union, though we had a bit of a hiccup when we had to hold a second referendum on the Nice treaty. Our experience of union has been the complete reformation of the economy and the country. We have gone from being a largely agricultural economy to an industrialised economy with a significant financial services sector. It is nothing like the City of London, but it is very important and growing. The opportunities membership of the EU has brought have been momentous. We are a small fish in a large pond, but foreign investment in our economy means that we export to the EU more business software than does the United States of America.

When I became a Member of the Dáil 20 years ago, 1,000 people in my constituency signed a petition because they had to wait for telephone lines. Our experience of the EU has been very different from that of the UK. Since independence, we have struggled to reform our economy and in the 30 years of our European membership economic development has been far greater than in the previous 50 years. Psychologically, there has, therefore, been a greater commitment to union. Changing the currency was not a big deal either. When we joined the EMS in 1979 we had already made the decision psychologically to stay in the ERM. There was a major debate among the social partners because social partnership is very important here. The success of the economy has been due to it and one of the great benefits of monetary union has been in the way it forced us to meet the discipline needed to keep the debt-GNP ratio down. A few years ago, our debt-GNP ratio was about 130% and it is probably down to 30%. That does not mean our debt has decreased as much as it means we have kept it down while the economy has grown. Government borrowing and inflation have to be kept at certain levels and the discipline has been good for us. We were in a vicious cycle for long enough and we are now in a virtuous cycle.

In order to keep borrowing and inflation down, agreement among Government, unions, business, farmers and, more recently, non-governmental organisations was required. We are negotiating an 18 month extension of the agreement. When there was a great deal of money in the economy the Government compensated for the restraint imposed on pay demands by lowering taxes. We do not have the money to do that now, which is why the trade unions are seeking to make other deals. Discipline has been good for us and the social partnership that was required to bring about the necessary consensus has been a positive experience.

In the European Commission's report, which looks at the introduction of euro banknotes and coins one year on, it is noted that in some countries citizens linked the euro changeover to significant increases in prices. This perception is not confirmed by hard facts. Detailed statistical analysis of price evolution based on the harmonised index of consumer prices demonstrates that the impact of euro banknotes and coins on prices ranges between 0.0% and 0.2%. The report indicates that some prices increased in the service sector, particularly in restaurants, hotels and bars, but not in supermarkets.

Mr. Nigel Beard MP

Senator Quinn touched on the limitation that central monetary policy brings for dealing with matters of a particularly Irish nature. The stability and growth pact curtails fiscal action to manage the economy. Is it proving to be a matter of controversy that this degree of control over the economy has been removed, as it is in Britain? How does the committee see the rigidity of the stability and growth pact being addressed?

Senator Ormonde

I would not dare to answer that question. I will leave that to the experience of our supermarket hierarchy. I congratulate those responsible for the smooth transition to the euro. I support the points raised by previous speakers. We have all touched on the disadvantages in terms of inflation and price increases, which are particularly noticeable in the service industries. The price of hairdressing increased a great deal in terms of the price of a blow-dry and the tip had to be increased accordingly. Where a person would have tipped £1 one would not tip €1.27, but would give €2. That has become the way we think about money. When it drafted its magnificent plan to facilitate smooth transitions, did the committee think about the service industries and how the changeover would affect women right across the board? Many people told me how ridiculous they found the price of a blow-dry which is a small thing, but it had increased in price by €5. Is there a plan to monitor prices and issue guidelines with regard to the future of the service industry?

The big bang approach to conversion is very interesting to read about. In the education world, I have heard many colleagues describe how well the changeover was presented to the younger generation.

Deputy Harkin

I am unable to answer the question asked by the last speaker. I will leave that to those who know more about it than I do. I was not an elected representative when the changeover to the euro was made and my perspective on it is that of an ordinary person. The changeover was very smooth. The chairman quotes the Commission as indicating that price rises were not significant. As a member of the general public, I agree with Senator Ormonde. There was certainly a perception that prices were increasing, not so much in supermarkets, but for professional services, eating out in restaurants and so forth. I recall that at the time it was suggested a legally enforceable moratorium be imposed on price increases for a month or two months before and after the changeover. This did not happen, perhaps for good reason. The British Government should consider such a measure, as it would give the general public security that prices would not rise and the matter was being closely monitored. Whether it was real or apparent, the impression here was that prices increased.

The possibility of using the same currency when one travels to Brussels, Paris or elsewhere in "euroland" is one of the advantages. This could even put people a little off visiting London. I noticed figures the other day showing that in 2002, for the first time, Irish people spent more as tourists abroad than tourists spent here. One factor may be that we can now compare prices in "euroland" and know the exact cost of items. I do not know how the British economy would be affected in terms of tourism, but the matter should not be ignored.

I do not often travel to Northern Ireland.

Senator McDowell

It is nearly 20 kilometres from the Deputy's home town.

Deputy Harkin

For some reason people there do not have respect for the euro; it is regarded in some ways as "funny money". If Britain decides to change over to the euro, a significant public relations campaign will be required. The question was asked as to how joining the euro contributed to our European status. It made us feel very much part of Europe. For many reasons, there was a hiccup with the Nice referendum, yet the debate proved worthwhile. Joining the euro made us feel more European than before.

Senator McDowell

I will address economic policy instruments and issues. Our decision to join the euro was largely political. The decision in Britain is also likely to be driven primarily by political considerations. While the British Government will need to satisfy itself that joining would not cause a short-term economic difficulty, nonetheless the decision is, by and large, a political one.

The question concerning the loss of monetary instruments previously available to us is an important one. Before we joined the euro we did not have an independent monetary policy. Although we devalued and revalued a couple of times during the 1980s, we did not have an independent monetary policy, no more than Denmark or Sweden now have one, whereas Britain clearly does. In any case we did not and do not have an economy which is particularly responsive to interest rates, as we have discovered in recent years. If one is to believe the economic orthodoxy, the low rates of interest we had in recent years should have been extremely damaging in terms of inflation, yet they were not, at least not to the extent that would give rise to concern. On that score, we worried more than we needed to and the loss of what was really a fictional monetary policy instrument has made little difference to us.

Much more important is the stability and growth pact with which we are likely to run into trouble very soon. Again, our circumstances are somewhat different from those in the United Kingdom. Our capital spending is in excess of 5% of GDP, which is high by "euroland" standards and higher than in Britain. Most of this is being spent to make up for an infrastructural deficit. As I understand it, the Chancellor of the Exchequer is talking about increased spending, largely on current services, although this would obviously entail some capital spending too. It would certainly be in our interests and Britain's to have greater flexibility than the current 3% limit.

My longstanding view on the matter is that the inflexibility of the pact in this regard is stupid and we should mobilise to have it changed. It is far better that we should make this case now when we are not about to hit the 3% limit, rather than in two years when we will go cap in hand to Frankfurt or Brussels requesting it be raised to avoid exceeding the limit. The Government should articulate our concern about this limit and its in-built inflexibility much more loudly because it clearly does not provide for circumstances in which we would finance our capital budget requirements from borrowing, which most people accept is a perfectly reasonable approach.

We share a common interest with the United Kingdom in relation to changes that would allow greater flexibility on the public spending cap. Given that both countries currently have two of the lowest GDP debt ratios in the European Union, we are well positioned to take advantage of the flexibility for countries with low GDP to debt ratios proposed by Commissioner Solbes. Perhaps pushing out the boat in conjunction with the Commission and the Commissioner might be no harm from both our perspectives.

The major problem for us arising from joining the euro was always likely to be a loss of competitiveness. We have not been faced with this yet because the euro is still worth less than when it was introduced. Our competitiveness vis-à-vis the UK, therefore, is still better than it was a year or 15 months ago. Where we could run into trouble - a reason we would like the UK to join the euro fairly soon - would be circumstances in which the euro continues to increase in value against sterling and our exports to the UK continue to lose competitiveness. If that happened, Senator Quinn and some of his colleagues in indigenous industry, which is far more sensitive to currency fluctuations than American multinationals based here, would start to feel the pinch. However, we have not yet reached that stage.

Ms Angela Eagle MP

I noted the comments of ECOFIN and the Commission on how the Irish economy was performing and its direct comment on Irish budget strategy made a couple of years ago. I wonder how these were received by the population and in terms of political debate, especially given the inadequacies of the stability and growth pact and in light of the analysis we just had. I do not agree with the pact because it does not take account of the cyclical nature of the economy, nor does it give special preference to those economies, such as those of Ireland and the United Kingdom, which have a low debt ratio and require significant capital investment in infrastructure.

Chairman

The answer is that the comments went down well with the Opposition, but not with the Government.

Deputy Haughey

I welcome the delegation. I reiterate what the Chairman has already established, namely, that our decision to join the euro was a political one and economic considerations were secondary. We decided on the basis that we considered ourselves to be committed to the European Union project.

On the question on the stability and growth pact, we became one of the first countries to be reprimanded by the Commission for breaching its terms in the run up to the first referendum on the Nice treaty. This was not received well by the Minister for Finance and neither did it go down well with the public. The fact that these so-called bureaucrats in Brussels were telling us how to run our economy was a factor in the defeat of the first referendum, as it did not go down well with the electorate.

Senator McDowell

There was and still is a perception that smaller countries are treated differently than larger countries and that Ireland and Portugal will inevitably be kicked around because it is easier to do so, whereas France and Germany will be accommodated. This factor also played a role in our response.

Deputy Haughey

To return to the increase in prices and retailers rounding up, the Governor of the Central Bank appeared before the committee on several occasions in the run up to the changeover. His only response to the perceived problem that retailers would round up prices was that competition would save the day and discerning consumers would not allow it to happen. Unfortunately, it happened, which shows that one cannot rely solely on competition to address the problem.

The ongoing Convention on the Future of Europe is considering the growth and stability pact. We do not know what will emerge from that process. It may be changed in some way. At this stage, will one of the visitors outline the position of the UK on the euro and the political plans in regard to the timescale and so forth?

Mr. David Ruffley MP

None of the distinguished witnesses to whom we have spoken today has even mentioned the issue of giving up an independent monetary policy. It appears to be a non-issue. Might this not be a problem in the future if one no longer has the ability to set interest rates specific to this part of the euro zone? Does anyone regret this fact, as it is a policy tool that might be required in future?

Chairman

We are in a different situation. We really did not have it in the first instance to give away. As a small open economy we tended to automatically follow what happened in Britain or Germany, which were the biggest influential factors on us. We never had the kind of liberty enjoyed in the United Kingdom.

Senator McDowell

Denmark has been so closely tied to the euro that it might as well be part of it. Its interest rates are also very closely tied to euro zone rates, it is just lacking any say in it. The UK is different.

Senator Quinn

Mr. McFall asked a question about the stability and growth pact. I take Mr. Ruffley's point. There clearly is a loss of independence, but as Senator McDowell has already pointed out, as a small nation we did not really have much independence in that regard. However, the constraints and lack of independence also have benefits. While we have to behave ourselves we can also blame somebody else. The same applies to Greece and Italy. They said they did not like to do certain things but they had to because of the nasty stability and growth pact and that they would be ticked off for not adhering to it.

A member of a golf club that was started with money provided by the founding members would not have to pay as much of an admission fee as those who join later. The same should hold for a country that stays out of the euro zone with the intention of waiting to see how it gets on before making a decision on whether to join. An extra fee is justified in such circumstances. I am sure the speakers have some influence and if the mood is changing towards joining at some point, the earlier it is done the better. We will do our best to ensure the fee is not too big when the time comes.

One of the reasons our economy has been doing so well is that we have freedom on tax, particularly, corporation tax. We feel quite frightened when we hear sounds from central Europe, which generally has a higher rate of such tax, on the need for tax harmonisation. We are anxious to maintain that freedom and we have been able to do so up to now.

Senator Mansergh

Joining the single currency has so far been hugely beneficial to Ireland. I accept that our situation as a small country may be different in certain respects from that of a bigger country. As has been pointed out, we did not have full monetary independence, although in the latter end of the ERM it was not too far off a floating rate as there were very wide margins.

We have lived very comfortably within the stability and growth pact. It is true that the reprimand from the Commission caused some considerable Government annoyance, but the Commission's concerns about our economy overheating were not entirely illegitimate given that we were enjoying incredibly high growth rates in the region of 8% to 10%. It has since reprimanded Germany and possibly France, so it is unjustified to suggest that it only comes down on small countries.

We had a very bad experience, as did Britain, in regard to the currency crisis of the early 1990s. However, our attempts to defend the currency and establish credibility had some positive aspects. Interest rates soared and there has been instability since 1999, but we have enjoyed low interest rates. As a smaller country with a currency that is not internationally traded in the way sterling or the dollar is, we have, if anything, more to gain from being part of an internationally recognised currency whether one is talking about investment, trade or tourism.

Investment has mainly been marketed to the only other English-speaking part of the euro zone. Economically, it would have been very much to the advantage of Northern Ireland, for which I had some responsibility as an adviser, to be part of the euro zone. The same is true for other outlying parts of the UK such as Scotland and Wales. It is certainly the feeling of business in Northern Ireland that they are considerably disadvantaged by the UK not being part of the euro zone.

Chairman

Looking back on a report I wrote in December 1988, I noted that to qualify for future EMU membership under the Maastricht treaty, a currency must respect the normal fluctuation margins in the EMS without major volatility and without initiating devaluation for a period of two years prior to the examination of the applicant's ability to meet EMU qualifying criteria. I also noted in the report that the Bank of England would participate in the general council of the European system of central banks. What discipline does that impose on the British Government and what is the best guess as to when there will be a referendum in the United Kingdom on the question of joining the euro?

Mr. McFall

It is time to say goodbye. The view of the British Government is that we will not need to be in it for two years. However, a spokesman from the European Commission said at a committee two weeks ago that it was his understanding that we should be in it. That is an issue for political debate that needs to be kicked into the political long grass for now.

None of us knows what is the best estimate for a referendum date. Last Sunday, The Sunday Times economics correspondent, David Smith, said that Gordon Brown had definitely ruled it out. He is a well-respected economic commentator but an hour after receiving my Sunday paper, I switched on the television to hear Gordon Brown say that this was not the case. Nobody knows much at the moment other than that the Government is committed to reporting in June. If one listens to the public statements of the Prime Minister, he is very clear that he wants to be at the heart of Europe.

The best way to consider it is that there is an economic test taking place. Gordon Brown has said that if one looks through the twentieth century that the history of the sterling exchange rate has not been very good in terms of economic analysis from the time we went on the gold standard in 1925 right through to when we left ERM in 1992. He is taking that analysis very seriously and when that is done the Prime Minister, the Cabinet and Parliament will make the decision. There will be a referendum following that process. All these hurdles have still to be surmounted. The best guess as to whether there will be an outright "No", a "Maybe, or a "Yes"——

Chairman

From here, it might seem the economic tests are just a cover. Does Mr. McFall really feel the public will not support the idea? Is there any effort to say, "The EU has 15 members, it is about to have 25 and others want to join. There will soon be one currency throughout perhaps 30 countries in Europe, and Britain will be on its own."? Is there any sense at political level that that is a cause for concern in the longer term?

Mr. McFall MP

Our visit here has changed some of our perceptions. Ireland did not have the economic analysis because politics were what mattered to it, and rightly so. It proceeded on such a basis, but economic analysis is very important for the UK. We also have a population that is mildly against the euro. If a referendum was called it would be a very hard fight if the Government decided to recommend entry into the euro zone. The history of both our countries in that respect is different and we have——

Senator McDowell

Reading the British newspapers and listening to media, we get the sense on this side of the Irish Sea that the more the debate is prolonged the less keen the British public seems to be and that, far from being persuaded by the experience of other countries, it is getting fed up with the debate.

Chairman

I was Minister of State with responsibility for European affairs during our last Presidency. I was regularly asked to contribute to BBC radio programmes and contacted by British journalists. Almost everything that came out of Europe, before it was analysed or discussed, was deemed bad. We, particularly Senator Mansergh, can understand that because we have been dealing with the Northern Ireland issue, and realise how populations can become embedded in particular points of view. However, it seems from a distance that Britain is allowing this major shift to be driven by France and Germany in particular and that Britain is not using its great diplomatic experience to offer leadership in Europe. Britain is taking a back seat while the EU is continuing to develop.

Ms Eagle MP

There are varying opinions. Some people are very enthusiastic about Europe. The Government's policy is to enter when the economics are right and when convergence is right. The main opposition party is Euro-skeptic in nature and, with some exceptions, is against joining the euro. There is a significant body of people in the UK Conservative Party that wants Britain to leave the EU. We also have very Euro-skeptic media, which engage actively in the current political debate. There has not yet been a proper debate, but nobody is really engaging with this.

The debate will happen if the five tests are passed and the Cabinet decides it is in Britain's interest to join. Then there will be a debate in Parliament that will lead to further debate. When there is a positive decision to opt for the euro and when we move towards a referendum, debate will be engaged in properly and it will be tough. There is no overwhelming argument for one side or the other. I could not predict the result. It would possibly be like the first Irish Nice referendum, with the electorate very evenly divided. It is not a foregone conclusion and a tough job will have to be done. No Government will risk its future by opting for a referendum unless it considers it has more than an even chance of a positive result because that would be disastrous.

Senator McDowell

Does Ms Eagle feel a "Yes" result is out of the question?

Ms Eagle MP

No, it is not out of the question at all.

Chairman

It looks like it is from a distance.

Mr. McFall MP

Let me explain. The debate, as Ms Eagle said, still has to take place. It will not be short, but quite extensive in order to make the political argument. I hope our committee will be able to set the parameters of that debate, which have not been set so far in the UK. Once this is done and the debate takes place, there will be a chance of persuasion. There is no alternative to the economic case——

Mr. Plaskitt MP

If one looks at the matter from the Irish perspective, it is understandable that one would think we are very much against the euro. If one took superficial polling evidence and forced people to state whether they would opt for the euro, approximately two out of three people would be against it. If one delves deeper into public opinion to discover who is firmly of what view, one will find two small minorities. There is a big group in the middle that is open to persuasion, which demonstrates the importance of adequate debate on the issue.

Senator McDowell

Do the delegates feel that the five economic tests are a precedent to the greater political debate and that if they get over the first hurdle, they can then debate the real issue? What is the position in respect of a political or economic veto?

Mr. McFall MP

If the Senator asked Mr. Blair, he would not say that. He would say he and the Chancellor are working on it together.

Chairman

One thing that occurred to me during the discussion is that we had the debate when we joined the European Union. The difference is that we had a referendum in 1972 for the Single European Act; we joined in 1973. We had referenda on the Maastricht and Amsterdam treaties. We got so used to referenda that we thought we did not have to campaign for the first Nice treaty. Some 35% of the electorate turned out, 18% said "No" and 17% said "Yes". We learned a lesson very quickly, which is why this committee has become much more pro-active in making people aware of the issues. We engaged in debate early on, but the UK does not have our tradition of referenda.

Mr. McFall MP

The European Union has been hugely beneficial for Ireland since it joined. The debate in Britain involved the Conservatives and Mrs. Thatcher saying "No, no, no" time and again. That is the climate that exists in Britain and therefore we have a bigger hurdle to overcome.

Ms Eagle MP

One also has to remember that we have a larger economy and that we have been net contributors over the period of our membership. Ireland is coming from a different position in terms of its argument. There is still a significant minority of people in the UK who would have us out of the EU, including a large part of the UK Conservative Party.

Mr. McFall MP

Some 30%.

Senator McDowell

To make a totally provocative point, out of a spirit of fraternity because I am a Labour Party member, do the delegates think it would be better for the Prime Minister to stake his future on this issue rather than doing President Bush's bidding in respect of Iraq?

Mr. McFall MP

Ultra vires, ultra vires.

Deputy J. Bruton

Do the delegates think the current exchange rate between the pound and euro is the appropriate one at which the UK might be able to join? One of the great problems the UK will face if it joins will be in bringing sterling down to a level where it can achieve the necessary exchange rate. Obviously, John Major made the wrong call when he set the rate for entering the EMS. It is important that that mistake is not repeated. It seems that the present exchange rate is just about right and therefore there is a window of opportunity to make a decision now.

I presume a rate will be set before the referendum. Is that so or will it be set afterwards? There will obviously be no problem if the latter is the case. I imagine that every opinion poll will suggest different exchange rates based on the results. Have the delegates any views on the dynamics of a referendum campaign for the exchange rate, particularly relative to opinion polls during that campaign?

Mr. Beard MP

Six or 12 months ago, an issue arose as to whether we could have an exchange rate with which the manufacturing industry, in particular, could live. It became an issue whether the exchange rate was acceptable to the manufacturing industry. One of the penalties of being outside the euro is that the manufacturing industry has had to live with too high an exchange rate; much volatility also exists outside the single currency. In recent months the rate has fallen to the top end of the tolerable bracket. It is likely to fall further during the argument over the five tests and towards the referendum.

It remains to be seen whether we need to spell it out before or after the referendum. It would be preferable to do so beforehand so that there is no anguish in the background when the debate is held. That we have approached it will diffuse the issue and take it out of the debate to a large extent.

Mr. McFall MP

The Chancellor is due to appear before our committee at the end of this month to discuss the euro and the five tests and this meeting will get wide exposure. We have been given very definite messages since we came here and it has been very helpful to us. For example, Philip Hamill and Tom Considine gave us a rundown on the euro changeover; they did a fantastic job and we agree with the comments on that made by Senator Quinn and others. Britain has an independent Bank of England and we have been asked whether this good model could be used to change the stability and growth pact. The point about the window of opportunity has been put to us quite a bit.

Coming here has changed perceptions for a number of us. It is commonly held in Britain that Ireland is not doing well from the euro, but we have found the opposite to be the case and that strengthens our position. What country stands independent in a market where there is a free flow of capital? The one size fits all aspect has been down. The English language is one of the benefits Ireland has enjoyed in Europe. We have had a tremendous education here and that will be reflected in our report. I will make sure the Chairman gets a copy of our report.

Chairman

I look forward to that. We have a slight advantage in that we receive British television, radio and newspapers and we are more informed about day-to-day events in Britain. An exchange like this is very useful. For example, going by what I have read I would not have thought it possible that a referendum would be carried.

The joint committee adjourned at 4.05 p.m.