Mr. Nat O'Connor:

I might talk about the political and institutional end before getting into the economic detail. One issue with Europe is the question of cohesion on the one hand and fragmentation on the other hand and both the economic and wider political policies speak to that. At present, we have something of a mixture. We have the core eurozone of 17 members out of 27. The economic and monetary union, EMU, policies under discussion are about how the European economy will work but in particular about the eurozone. At the same time, there are countries like United Kingdom which have a permanent opt-out from the euro, as do Denmark and Sweden. Even within the 17 eurozone members, there is the question of whether all 17 are going in the same direction with regard to EMU policies or whether there is beginning to be something of a division. In Ireland in particular, we find ourselves to be a country that is both small and peripheral. There of course are small countries which are closer to the centre and which have advantages in terms of infrastructure and closeness to other economies. Ireland is both peripheral and small, even though it is within the euro and close to the centre in that sense.

A number of issues exist in this regard and in addition, there also are countries such as Norway, which is in the European Economic Area but is not in the European Union itself, and Switzerland, which has close economic ties but is in neither in the European Union nor the European Economic Area. In the short term, we have the problem of whether we can get 27 and soon to be 28 countries to agree EMU policies that make sense for all of us and which must have the flexibility to take into account questions such as the core versus periphery and so on, while at the same time controlling fragmentation.

I will give two examples. First, there is a longer game in play in terms of the treaty. Any country that now signs up to the European treaties must join the euro; it is not optional and a country cannot have an opt-out. In the longer term, there is certainly a vision of the European Union where, as Deputy Durkan stated, we all have membership of the same currency. That leaves a question as to whether the United Kingdom, Denmark and Sweden will eventually opt-in or find themselves in a second tier of the European Union. Of course, Ireland, being geographically on the other side of the United Kingdom, will find itself in a difficult position. We would be in a very bad position if the United Kingdom leaves the European Union or pulls away because we trade so much with the United Kingdom, and yet we have growing trade over the recent decades with the European Union. It would be a bad position for Ireland if the United Kingdom pulled away.

On the question of what a coherent EMU might look like, there is the question, that Deputy Donohoe raised, of how far might tax harmonisation go. One of the questions there is size. Currently, speaking relatively, the European Union budget takes a small percentage of member states' budgets and pools it. One of the tax harmonisation questions would be, not only what taxes we might harmonise but just how much tax. For example, if we were to move towards including social insurance as part of tax harmonisation and trying to have harmonisation of social insurance, that would be a major step towards a much larger European Union budget. It would also be a detailed harmonisation of social protection and social welfare systems which might make sense because it could work well with the integration of the European labour market. It would strengthen the social Europe dimension because there might be the development of a European-wide stronger social safety net. That is an example of how it would be a major step, in terms of the amount of money involved in the European Union and, therefore, a transfer of power from the national level to the European Union level. That then brings in the question of the European Union institutions - the role of the European Parliament, its mandate, its effectiveness in terms of its committee at holding the various European institutions to account, the division between the Commission and the European Central Bank, etc. All of that becomes an even more serious issue depending on how fast and how much we harmonise in the coming decades. That is what is at stake in terms of the issue of core.

Fragmentation is the other side of the coin. What I have described are some of the forces that might be involved in a more coherent larger European Union over the coming decades, and EMU is at the centre of that. With something like the financial transaction tax to which only 11 eurozone countries have signed up, the following is what we have seen in those who have not signed up. Finland is currently holding itself aloof, but the five other countries that have not joined the financial transaction tax all display similar features - these countries have larger financial sectors; while not being tax havens, have features of a tax haven; and are identified in various lists as countries to do with financial privacy, etc. Arguably, the financial sectors in those countries are against the financial transaction tax, and are persuasive or have arguments why they are staying out. Malta, Cyprus, Luxembourg, the Netherlands and Ireland are the five countries not in the financial transaction tax even though they are in the euro.

The risk of fragmentation on the political level is one which begins to get a complete incoherence of European policy. The central train is economic and monetary union where the eurozone countries are growing closer together and something such as the fragmentation we see in the financial transaction tax, could slow that down. That is really what is at stake. It is a matter of whether we can get the 28 countries to agree mechanisms whereby they can agree or there will be ever more situations where member states make multilateral agreements together with the enhanced co-operation procedure. The latter would slow down integration which, of course, would weaken the European economy in the global sense. If the European Union takes another 10, 20 or 30 years to sort out where we will combine policies and when we will have different policies, it will weaken the European Union in terms of global trade.