Vol. 1 No. 56
I apologise to the Minister for Finance for the delay. He has a flight to catch so he must leave at 3 p.m. This is a very busy time of year for him. He was only invited to attend this meeting last week and I thank him for coming at short notice.
I welcome the Minister. I propose that he makes an opening comment and then we can have a question and answer session.
I welcome the opportunity to discuss the Stability and Growth Pact with the committee. It has an important role in economic policy across Europe and I trust that today's discussion will be enlightening and useful for all of us.
I shall do my best to explain the pact in simple terms for those among us who might not be aware of all of its intricacies. The Maastricht treaty of 1992 laid the groundwork for the Economic and Monetary Union and Europe's single currency. People recognised that the EMU had to go hand in hand with increased economic policy co-ordination among member states.
Article 99 of the treaty provides that member states must regard their economic policies as a matter of common concern. Article 104 requires member states to avoid excessive deficits and a protocol defines them as deficits of 3% of GDP or higher. Where member states fail to observe the excessive deficit provisions, the treaty provides a corrective mechanism called the excessive deficit procedure, culminating in financial penalties that I will outline in further detail.
The pact was agreed in Dublin in 1996 and builds on the Maastricht treaty provisions in two key ways. First, the pact requires member states to adhere to a prudent medium-term budgetary objective of "close-to-balance or in surplus." This medium-term target is underpinned by a detailed framework for multilateral surveillance that requires member states to submit stability programmes annually showing how the objective will be achieved.
Second, the pact sets out the detailed provisions for operation of the excessive deficit procedure under Article 104. Under this procedure the Council has the authority to identify an excessive deficit and to issue a recommendation to the member state in question to take effective action to correct it. Where a member state in the euro area does not satisfy the Council that it is serious about correcting an excessive deficit as required, the Council may issue a formal notice directing it to take corrective action. Ultimately, the Council may impose financial sanctions upon a recalcitrant member state.
The treaty provisions and the Stability and Growth Pact are designed to provide a stable macro-economic framework within which member states can pursue any of the range of national policies that will promote employment, competitiveness and sustainable growth. The pact seeks to ensure that fiscal indiscipline in one member state does not give rise to damaging knock-on consequences for other member states in the single currency zone. Otherwise excessive borrowing and an inappropriate fiscal stimulus by one member state could lead to higher interest rates across the euro area. This would lead to weaker growth, higher mortgages and fewer jobs.
Ireland adheres to the pact not just because of the EU rules but because they make sense. Sound public finances are essential to underpin business confidence, investment and sustained economic growth. This is not to say that we do not see scope for more flexibility in some aspects of the pact. I will return to this topic in more detail if the committee so wishes.
On 25 November ECOFIN discussed the excessive deficits of France and Germany. I will briefly outline the background to these discussions for the benefit of the committee. Both countries incurred excessive Government deficits of greater than 3% of GDP in 2002. This was due largely to the effects of the cyclical downturn in the international economy. Earlier this year, in accordance with the treaty, ECOFIN issued recommendations to both countries requesting their Governments to take measures to bring their excessive deficits to an end by 2004. Since then the economic situation has failed to improve as anticipated. All sides were agreed - the Commission, the Council and the member states in question - that a 2004 date for correcting the deficit was no longer appropriate.
The discussions at Eurogroup and ECOFIN were concerned with how to progress the situation in the light of these economic realities. The discussions were particularly protracted and the main issue was about procedure and not about what was required of France and Germany to bring their excessive deficits below 3%.
The Commission's preferred option was to proceed with a formal Council Notice under Article 104(9) of the treaty. The majority of member states, including Ireland, considered that a more appropriate approach was to secure a commitment from France and Germany to correct their excessive deficits by 2005 at the latest and to incorporate this agreement within the Council conclusions. This sensible approach has helped to safeguard the pact's future and continues to secure sound public finances within the eurozone. There is no difference between the substance of the Commission's proposal and the Council's decision. The excessive deficits in France and Germany had to be corrected and it had to happen by 2005 at the latest. This is what the Commission proposed and is what the Council incorporated into its conclusions.
As I said, a decision was reached after lengthy discussion. The majority of member states took into account the need to achieve the necessary fiscal adjustment in practical terms, particularly in the light of France and Germany's stated willingness to adhere to the Council's substantive view on the matter. I am also satisfied that the decision was in accordance with the pact. The rules of the pact contain an inherent flexibility and it is appropriate that this flexibility be applied with common sense and consistency.
The public finance deficits of France and Germany cannot be viewed in isolation but rather reflect the economic situation that has existed since 2001. The European Commission has estimated that growth in France in 2003 will be just 0.1% and in Germany there will be zero growth. Investment in both countries has contracted, confidence has weakened and unemployment has grown. In these challenging economic times public finances inevitably come under increasing strain. It is quite appropriate that the pact contains inbuilt flexibility to respond to such situations in a way that makes economic sense.
Welcome signs of economic recovery are appearing on the horizon. In the United States, a key economy to support a world economic upturn, a record third quarter growth of 8.2% and improved employment statistics indicate that a long awaited recovery may be under way. In the European Union the Commission now projects growth of 1.8% this year and 2.3% in 2005 as the Union moves towards its potential. Commission forecasts indicate that France and Germany will post higher growth figures and lower deficits in 2004 and 2005. The favourable economic outlook will tend to support Europe's efforts to get its public finances back on track.
The position of the Stability and Growth Pact has been maintained and it will continue to be applied during the Irish Presidency. Far from eroding the authority of the pact, as some reports have claimed, the Council unanimously reaffirmed its commitment to the pact. The Council expressed its determination to implement the pact's provisions as the basis for strong economic growth and increased employment.
The ECOFIN decision was reached after eight hours of discussion. Perhaps it will stimulate more discussion and reflection on whether the pact needs to be further developed to take account of more complex circumstances and variables. President Prodi has indicated that the Commission may prepare a new initiative, after a sufficient period of reflection, to improve economic governance across the Union. This issue may also be discussed again when Finance Ministers meet this weekend en marge of the European Council.
As incoming President of ECOFIN, I take this opportunity to reiterate my personal commitment to sound public finances in Ireland and Europe. The Stability and Growth Pact is a core policy instrument for promoting such fiscal goals.
I thank the Minister for attending at short notice. The statement of 3 December by Commissioner Pedro Solbes on this issue states that the excessive deficits were not solely due to cyclical downturn in the international economy as the Minister indicated. The Commissioner went on to make some points that I would like to raise with the Minister. He said that a minority of member states blocked the approval of the Commission's proposal at the Council, taking what he called "an unprecedented step" by reaching an agreement outside the treaty. He goes on to say that the implications of this agreement in the form of "Council conclusions" are farreaching and go well beyond the mere application of the Stability and Growth Pact of France and Germany.
The Commissioner mentioned two other points. He said that the political agreement reached in Council involved the application of intergovernmental agreements to the management of our currency and created a dangerous precedent for the future. He also said the European Court of Justice will probably have to clarify whether the national governments are entitled to create new procedures which, in practice, replace a Community framework laid down in the treaty for certain aspects of economic policy.
Did ECOFIN have the authority to do this? I am concerned about this, and not just in the context of the economy. I have raised this concern in the context of the joint meeting of the French German Cabinets, President Chirac standing in for Chancellor Schröder, the approach to the Intergovernmental Conference of both governments and now their power on the Stability and Growth Pact. If there is a case for relaxing the rules, France and Germany and others should have made that case and then the new rules should apply to everybody. It seems that they broke the rules and the finance ministers might have also broken the rules by sanctioning this on an intergovernmental basis.
I agree with some items Mr. Solbes mentioned. The Commissioner, whom I have got to know very well over the past seven years and with whom I have a very good personal relationship, is a very reasonable person. While I would not agree with all his utterances, he attends as a representative of the Commission. He is correct in saying that France and Germany in good economic times did not do enough to reduce their debts and keep strong financial controls. If the Commissioner means what he says when he refers to that, I would agree with him. They probably should have done more in the good times.
At the last ECOFIN meeting there were two legal opinions. The Commission said we were obliged to follow the series of steps outlined under Article 104. It also pointed out that we are a long way from the final sanction of a fine. Its legal opinion was that this was the only approach. The treaty says "the Council may"; the regulations the Commission drew up said "shall". Our laws must follow the Constitution.
The Council's legal services, which were available on the night and on the next day, stated we could do exactly as we have done. In the aftermath, all sides agreed that we would allow France and Germany have until the end of 2005 to deal with their excessive deficits. The Commission agreed that, due to international circumstances, the downturn in the economic fortunes of France and Germany was much harder than expected. When Germany first got its warning, it did everything required of it to the letter and in spirit. It took more than 1%, or about €15 billion, of spending out of the German economy in expenditure reductions. The case of France is somewhat different. However, due to economic circumstances this was not enough. In 2003 Germany is expected to have zero growth and growth in France is expected to be 0.1%.
At the end of the ECOFIN meeting we agreed to do exactly what the Commission was going to do in any event. The wording, etc., is the same. The majority of member states felt this was the appropriate way to proceed. Ultimately it came down to an argument between procedure and substance. The Commission argued that the procedure was more important than the substance - we had both agreed on the substance. The Council's conclusions contained exactly what the Commission would have had in its document in any event. By the end of 2005 the deficits must be back to below 3%. Article 104.9 stands in abeyance and can be introduced at any time. It must grow at 3% at a minimum and if they get better, they must do better than that.
There are some offended egos concerning this matter. The Commission said its route was the only way. As my former colleague, Senator McDowell, will know, barristers make money by having two people on opposing sides each saying his side will win. This is how they survive in litigation. Perhaps this matter will ultimately be decided by the European Court of Justice. The Council's legal service unequivocally gave its opinion in full public view that this was proper and legal and this is what we did, which in substance was the same as what the Commission wanted. Only the procedure was in doubt. This has been forgotten in the whole debate over France and Germany.
I thank the Minister for coming here today and giving us what so far has been very useful information. I am glad to hear there were not one but two legal opinions.
I had forgotten that the Deputy was another member of that great profession.
There is also plenty of employment in that industry in Europe. From the point of view of European citizens, this is extremely important. Various commentators have said that if the Stability and Growth Pact is significantly breached, there is a possibility of higher interest rates in the short to medium term. Such increased rates might not be necessary if we stay within the guidelines. I am glad the Minister has clarified that there was legal advice from the Council on this important matter, which gave ministers the green light to make their decision.
We should be understanding of countries that are in difficulty. We should be supportive of them if they are genuinely restructuring as the boot could be on the other foot in other circumstances and countries such as Ireland might not be supported if we had to restructure. For the future we must all know where we stand and play by the same rules. Article 1 of the protocol to the Maastricht treaty refers to the 3% limit on deficits. Is there a settled opinion on the legal efficacy of the 3% and how binding is it?
The Minister raised the question whether this matter will be referred to the European Court of Justice. If it is, what is the timescale for receiving an answer? I found the Minister's explanation helpful because we were a little concerned that the train might go off the tracks and the public has similar concerns.
As colleagues will be aware, I take a particular view about sound public finances. My view will be no surprise to Senator McDowell and perhaps Deputy Gay Mitchell. The rules underpinning the Maastricht treaty about sound public finances are good in any event, but even if there were no rules under the treaty or the Stability and Growth Pact I would be strongly of the view that as a small country, Ireland should abide by sound, prudent financial policies. This is coloured by recent experiences - by "recent" I mean over the last 30 years - although not entirely so. A small country does not have the same flexibility as larger member states. Little boats should sail close to the shore. That is my view and it has worked well for Ireland.
What are the reasons for the pact and the reference to sound public finances in the articles of the Maastricht treaty? The Maastricht treaty paved the way for the euro. There is an independent central bank and each member state gives away its right to revalue its own currency and its control over interest rates. Each member state, however, still has control over its fiscal policies and can decide its taxation and expenditure, so there must be a set of rules. In a country such as the USA, with a central government and a single central bank, if there is a difficulty in California, the government can theoretically put its funds in that area, but in Europe, which does not have a central Government but has a common currency and which has an independent central bank but allows member states control over their own fiscal policies, it is necessary to have a set of rules, because if many member states were financially irresponsible it would undermine the currency. The price of this would be higher interest rates.
The market usually does the business for us. I had better not name any country, but if we were to lend to certain countries in Africa we would exact a monster interest rate because of the risk involved. That is how business operates the world over. The currency and interest rates pay the price. There must be a set of rules so that member states cannot do what they like under a common currency. That is why the rules were brought in.
I was asked 100 times in the Dáil my view on where the Irish pound should go before we ever formally joined the euro. Members know my view, which is that one does not comment on these matters - most people should abide by this Europe-wide. The value of the currency should reflect in the longer term its economic fundamentals. However, the markets have not operated in this way in recent years. For example, when Europe had sound budgetary policies and surpluses the euro was exceptionally weak against the dollar but now, when Europe has fiscal problems, the euro has moved into a stronger position. There is an inverse relationship there. What people were saying to Deputy Mulcahy was that inevitably, if we have irresponsible financial policies, the market will exact a price. However, that has not happened nor is it likely to happen in the near future. It has nothing to do with the Stability and Growth Pact at all - the markets have other ways of pricing the dollar and the euro.
Deputy Mulcahy referred to Article 1 of the treaty. The treaty is the document that covers all the issues. As I said in the earlier discussion, it came down to an argument over wording - Article 9 of the treaty states: "In such a case the Council may request the member state to submit reports. . . " while the regulations use the word "shall." The latter is the more definite term.
Will it go to the European Court of Justice?
I do not know. The Commission might follow that course - the Council members have nothing to do with that decision. The Council received legal advice from its legal service, which was not just brought in for the occasion but is part of the Council's operations. The advice explicitly stated this could be done while the Commission's legal advice was the opposite. It may go to the European Court of Justice and then it will be decided forever, but for now people should settle down. The purpose of the Stability and Growth Pact is to allow economic growth, low unemployment, social justice and social inclusion among European economies. We should not become too legalistic and forget the bigger picture. That is my advice to everybody.
I agree with the Minister, although he did not say this explicitly, that there is little or no chance of an increase in interest rates arising from the decision of the Council. That is not to say that increases will not arise from similar decisions in the future, but in current circumstances it will not happen. It is useful to have that on the record.
I have believed for some time that the Stability and Growth Pact needs substantial reform. The Minister probably agrees with most of my views on this. We would also agree - I invite him to confirm this in view of our upcoming Presidency of the Council - that countries with low GDP ratios should be allowed to invest for capital purposes without it being taken into account in terms of the excessive deficit procedure. The Council's current intention deviates from that in that it has clearly decided, for political or economic reasons or perhaps a combination of both - I do not disagree with the judgment, but the process of getting there is a worrying one - that it would allow two countries with different experiences to overshoot the 3% mark and continue to do so for the foreseeable future. I do not believe for one moment that the deficit of either France or Germany will come in under 3% next year. There is some possibility but it is extremely unlikely. Whether they do so in 2005 is within the realms of speculation. The Council has decided and the Ministers have decided that Germany, in particular, should be allowed to go over the 3% mark because to bring the deficit under 3% would almost certainly push Germany into recession. This is the opposite of what the Minister calls sound public finance. The Council has decided that Germany should be allowed to continue to spend money to ensure its economy is sound - something with which I agree, but which seems to fly in the face of what the Minister normally says.
We must consider a mechanism under which the Council can make decisions such as these. I am not suggesting it will be easy to define how this can be done, but it will be necessary for the Council, if the pact is to mean anything, to take a macro-economic view of a large economy such as that of Germany and, balancing the benefits for everybody, decide that we cannot allow it to slide into recession and the strict provisions of the pact must therefore be made more flexible and allowed to slide. This must be done explicitly because the danger in not doing this is that we obtain what we now have - a disparity, which people have noticed, between the Council's method of dealing with small countries and its method of dealing with large countries. I have not the remotest doubt that if Ireland, Finland or Austria were in this position the Article 104(9) process would have been moved along. We could also turn that on its head and say there was never any possibility of it happening in the case of France or Germany. In the case of France, which is effectively running a deficit so it can borrow money to reduce taxes, it is a different matter. This is something I have little time for. There is a political downside in treating large economies differently to small economies. What changes would the Minister like to see in the operation of the pact?
This may have been forgotten, but in the 12 or 15 months up to March of this year we engaged in a process of trying to reform the rules of the pact. This may be forgotten as well, but in the 15 months up to March of this year we have been engaged in a process of trying to reform the rules. Ireland has put forward the case countries with low debt and infrastructural debt should have some flexibility in this regard. The UK took a similar view because its government has decided to invest a lot in public services. The Commission came forward with proposals very much in line with ours, so Ireland and the UK is in the van of this reform. The Commission has documentation on this also. My view on this has been the same for a long time, that large countries and small countries should not be treated the same way. I do not expect us to be treated in the same way, with 4 million people, as Germany, which has 78 million people. There must be all types of flexibilities within the matrix. The Commission put forward proposals we could have lived with but we could not get agreement among all the member states. Last March at the Council they signed off and said the rules stay as they are I will tell Members what happened. Every country wanted some flexibility. There are three countries with debt-GDP ratios of over 100% - Italy, Greece and Belgium - which wanted flexibility, while we are the second lowest at 33%. Luxembourg is the lowest at 4%. Even the big countries wanted flexibility but we could not get agreement because everyone wanted a change for their purposes. We should realise it will be exceptionally difficult to change the 3% rule because it was so hard to get it agreed, which occurred in the last Irish Presidency in 1996. I have some ideas as to what should be included or left out, the technicalities of which we have discussed with Eurostat. That is a separate matter, though it may be the best way to approach this.
That is number one. The Commission may put forward a proposal but we need to get over this recent contre temps. Egos are somewhat bruised and sometimes it is better not to make decisions when that happens. The unfortunate aspect of the debate has been the issue of big and small countries, and Deputies are right to raise that matter. The first country to be dealt with was Portugal, which had a recommendation it fulfilled. If one has been to Portugal one sees its socialist government has introduced the most difficult measures which could be contemplated. There was a change in government there about two years ago and the new government came in and introduced what we would call in an Irish context extremely difficult measures in social welfare and so on. They have done that and now they are back within the rules.
Next up were the German and French situations. Germany did what the Commission said and took approximately 1% of GDP out in expenditure reductions. Mr. Schroder and his government recently formed a new proposal to do with more long-term structural changes relating to business and taxation rates, a subject we have often debated. Germany did that and it was not enough; the level was supposed to be lower.
The difficult arose with France because its government was not taking this procedure seriously up to late last year. There was an election in France last year and one of the promises Mr. Chirac's party made beforehand was to do certain things after the election. They have put some of those measures into effect and Deputy McDowell gave a succinct account of it. The French had their budget on December and were not taking this seriously but they are taking it seriously now. That is the big and small country debate - if France were a small country would it get the same flexibility?
It should be borne in mind that Germany did exactly what it was asked to do, so it is not fair to compare the two or say they are alike. This is a testing of the rules because this is the first time the big countries have come under the spotlight. I accept things are evolving. We dealt with what we could in the Article 104 area and the question is this: what will happen at the end of 2005 if neither of those countries are complying with the rules then? We will have to judge what happens then and I accept that is a major issue. Growth is picking up and I am reasonably confident of a better outturn for both those larger economies. We will have to wait and see what happens. It is a difficult time for the rules but we will have to abide by them. I am prepared to accept that if there are better rules we will abide by them but these are the rules now. There are rules of Dáil procedure I do not like. There were rules in my party in the past which I did not like. When one is a member of a club one abides by the rules and that is what we are trying to do.
I welcome the Minister. He has dealt with some of the issues I wished to raise.
I am reading the press release from Pedro Solbes and he says the Commission deeply regret that the Council failed to abide by either the spirit or the letter of the Stability and Growth Pact. That is a fairly strong statement and the Minister said this is more about egos than anything else. Is there a sense we should not get too legalistic and lose sight of the bigger picture? The Minister said the substance is the same as the Commission's proposal. Is he saying what we have here is a political solution to an economic problem? Mr. Solbes said only a rules-based system can guarantee that all member sates will be treated equally. My question would have been this: if Portugal or Ireland were involved would there have been a different response from France or Germany? The Minister has dealt with that. How has this been viewed by the accession countries?
Countries with low GDP can invest in infrastructure. Ireland has a high GDP rate. What about the ESA 95 principles on national accounting treatment of public-private partnerships, where private resources for public projects must show up in national accounts as public expenditure? This will obviously have huge implications for Ireland within the context of the Stability and Growth Pact. What are the Minister's views on that?
I have spoken on what Mr. Solbes said and gave an account of our views of this area. I said this was a political solution to a legal forum but we are a political forum and the whole point is to find solutions which will benefit Europe. Interestingly enough, if we stick really rigidly to the rules, we would be asking Germany to put its economy into a downward spiral by 2004. Germany makes up approximately 30% of Europe's GDP and is the motor that drives the European economy. Most of Europe's direct trade is only about 10% outside the euro zone - we deal with the US and UK so we are way above that. In Europe Germany and France are the major motors of the economy and must be borne in mind when considering the events of last week. We came out with the same solution but we did it in a different way. As I said, this may come out in two different legal opinions.
The basic point about the accession countries is enforcement of the 3% rule. None of the accession countries are in the euro zone but some may enter it in the near future, though others may not joint the euro zone for a long time. That is down the road. Most of the ten countries coming in have quite low debt ratios, apart from Poland, which has quite a high ratio. However, some of the other, smaller countries have low debt ratios but massive economic problems. Poland has quite a high debt ratio, while some of the other smaller countries have quite low debt ratios but massive economic problems such as high unemployment and current deficits - not just overall deficits - above the 3% level. They too are required to put forward their stability convergence programmes. Ireland's programme is called a stability programme because it is in the eurozone. Those countries too are expected to abide by the same common economic principles and should all be heading in the same direction. Some of the countries have quite low debt ratios but very difficult economic problems and bad infrastructure too. I will be interested to see what happens in that area.
It will be very difficult to change some of the rules, such as the one regarding the 3% figure, and to get agreement on that. People are talking of public private partnerships, but the way around the problem lies in the interpretation of accounting terms regarding what is counted in or out. ESA 95 is currently being re-examined in the context of the accounting treatment of public private partnerships. Eurostat set up a working group which deals with the Central Statistics Office. The Department of Finance does not have any say at all. The statisticians deal with one another in a very independent manner and my Department has no say. In any event the CSO comes under the Department of the Taoiseach. Following the Eurostat dealings with the CSO we understand that some changes will be proposed, or recommendations made, in early January 2004. That might allow for a different accounting treatment of some of these matters such as PPPs. It will certainly be a lot clearer than now, when one gets the advice only after the event.
In Portugal, for example, much of the work done there under public private partnerships years ago has landed the country in great difficulty. Even though the jobs are done, Eurostat said in the recent past that the accounting for those PPPs should not have been done in that way and that penalties would be applied. In the United Kingdom, many of the PFI projects have been so difficult to work out in terms of accounting that they were put into abeyance, with people not knowing how to treat them, even though the projects were carried out in the last ten years.
We will at least be clearer on what is allowed and what is not. One is currently given an idea at the outset but is not sure until the job is done how the matter will be treated in terms of accounting. That has happened in the Irish context. The Eurostat working group will make these matters clearer once the review is issued. That will affect only the accounting treatment, the technicalities. It will be a much more difficult job to have changes made to treaty issues such as the 3% rule and other matters. We will have more success on the technicalities.
Much of what I had in mind has already been covered in the questions asked by Senator McDowell and Deputy Harkin and answered by the Minister.
What the Minister has said in his most recent response in regard to the weight of the German economy and its overall importance in European economic terms tends to reinforce the argument that there is one law for the larger countries and another for the smaller. The converse of what he has said would be that because of that weight, the capacity to undermine the single currency and the capacity to do irreparable damage is so much greater, so that something that might be a breach for a smaller country is of major significance for a larger country.
Like the Minister, I agree with some of the things Commissioner Solbes says and I disagree with others, but he was very forceful in his opening remarks when he said that the events related to the application of the Stability and Growth Pact had brought us to one of the most serious institutional crises of the last few years. These events clearly demonstrate that we need to strengthen economic governance in the EU. The Minister has indicated some of the ways that might be done. If one goes on from the particular to the general, it seems that the instruments for enforcement are very lax. I accept the point the Minister makes on flexibility and agree that is necessary. Yet if one looks at Article 104 and goes through the various stages, and then comes to paragraph (9), which we have discussed in some detail, one arrives finally at the point under Article 11 whereby the European Investment Bank is invited to reconsider its lending policy towards the member state concerned, "to require the member state concerned to make a non-interest bearing deposit of an appropriate size with the community until the excessive deficit has in the view of the Council been corrected, and to impose fines of an appropriate size". That is the nuclear option, yet it takes an indefinite period to arrive there. We are returning to the point about how the governance can be or should be improved, not with regard to this particular breach, but to breaches in general, and how they should be dealt with.
Deputy Harkin made a point about public private partnerships. I remember that when we were told that the Cork School of Music could not be built, the reason given was that the Growth and Stability Pact had been breached. We become concerned about the difficulties created for a matter such as the Cork School of Music, so one wonders how big an issue is needed to get Germany or France exercised.
The convergence criteria which were necessary to allow the single currency to become a reality were of major benefit to Ireland. We had to abide by them so that everybody would be able to join the currency. One wonders then what message is being sent to the acceding countries. They too have to go through that process to allow the single currency become a reality. What sort of message does this example send to them in terms of the convergence criteria and their responsibilities in meeting those criteria?
Commissioner Solbes said that the problem to be overcome is the weakness of the present system of economic governance at EU level. He said that in order to tackle that problem, the Commission was preparing after calm reflection an initiative aimed at improving that economic governance. Is there any indication when the initiative might emerge?
We might learn more about that matter this weekend, but we need to be very careful before we give carte blanche acceptance to that principle as expressed by Mr. Solbes. I will tell you what the Commission has been seeking, not just now, but previously too. The Commission wants a strict rules based system to take politicians out of the area entirely. It is like phoning in one's answer. Sometimes we would like things done like that in the Department of Finance. The Commission would like to present us with rules by which we must abide. There will be lovely boys and girls sitting in Brussels kicking out or fining those who do not do stick to the rules. They want a strictly rules based system with no place at all for political input.
That would be grand if I believed economics to be an exact science. It is not. Senator McDowell has heard me say in the Dáil on many occasions, when he was the Opposition spokesperson on Finance, that if economics was an exact science, there should be a place somewhere in the world where one would call an 1850 number to ask for the prescription for an economy to be sent along, one which would work very well. That is not the situation. I have consistently said over many years, long before I became Minister for Finance, that this does not apply. The prescription for running the Irish economy would not apply in Germany. We happened to find a reasonably successful method of running the Irish economy, though I do not expect everyone to agree with that. It is not necessarily a method that would or should work in France or Germany.
The Commission wants a strictly rules based system and because of the example given, the Commission is again girding its loins for a battle about economic governance. It may arise today or tomorrow at the ECOFIN meetings but is more likely to arise in the context of the Intergovernmental Conference at the weekend.
Would an effort not be made at Naples to put manners on the Commission and basically take away its role altogether?
The opposite keeps happening. In all of these areas, including taxes, the Commission will not give up on this. It wants that exact rule based system. It should be borne in mind that this is the underlying raison d’être of the Commission in this and in many other areas. It would not be good for any country, particularly one like ours, to have a very strict rules based system without any political input at all. There would be no point in having elections then, if one thinks about it logically. At least the people have the unpleasant job of re-electing people like me every couple of years and having to listen to me, but then they have great option in a few years’ time of throwing me out and putting Deputy Gay Mitchell in my position.
I will second that.
As I said in the Dáil, if Deputy Joe Higgins' party gets 84 seats in the next election the more power to him, he can nationalise the banks and the land and have 99% tax rates as that is the wish of the people. I do not have a problem with that. I do not think it would be the wisest thing to do but it can be done.
Senator Dardis asked about the differential treatment of large and small countries and this is the unfortunate by-product of this particular debate. I must take into account the weight of Germany in the overall scheme of things in Europe. We could do a lot of crazy economic things here without affecting the currency of Europe because we have a 1% weighting in terms of wealth and so on. However, if things happen in a country like Germany to make things worse than we should take stock and see what will happen.
Would the breach not have huge consequences?
Yes, but what happens in Germany has huge consequences for, say, the eurozone, and I have tried to explain the difference in the legal interpretations. Senator Dardis mentioned the Cork School of Music. As I have tried to explain in the Dáil a few times, this relates to how expenditure is interpreted in the ESA 95 to which Deputy Harkin has referred. Europe is not stopping the Cork School of Music. It is up to the Minister, if he can fit it within his overall budgetary framework, to approve such projects but the money spent counts just the same as if we had borrowed it. Under the present interpretation, such expenditure would count against us during the period of construction even though the payment would be over a period of many years. That is the issue there——
The Minister might get together with the Minister for Foreign Affairs——
No, the Minister has been quite clear that such expenditure would be counted against us as though we had borrowed the money all in one go. Consider projects which are not funded totally by, say, user charges. Imagine if Deputy Mitchell went down to the bank in the morning and asked to borrow €300,000 to buy a new house and repay it over the next 20 years. Under the ESA 95 as it exists at present, that €300,000 would be counted against him as though he intended to repay it all on the one day. It is the €300,000 rather than the 20 annual payments that is counted against one. That is the simple way of explaining this. It may be too simple but is probably the most effective way of explaining how things like that are counted against a country.
In conclusion, I hope that the solution to the Cork School of Music problem is not to decentralise the Dublin School of Music.
That would be an idea.
I raised earlier the perception that can come across about the democratic deficit in regard to larger member states, but it certainly helps to close the democratic deficit when Ministers can make themselves available at short notice for important business, and I appreciate that very much.
