Mr. Tom McDonnell:

A wide spectrum of questions were raised. I will try to touch on at least one issue mentioned by every member.

The issue of what was described as excessive influence over interest rate policy is a reflection of the size of economies and the weighting they are given over inflation policy. The larger the economy the closer the chosen interest rate to the correct rate for the country concerned. As smaller countries have a reduced weighting, they are likely to be more volatile and pro-cyclical in respect of the interest rates decided by the ECB. However, it is not a case of bias or undue influence per se.

Members asked a number of related questions about why eurobonds would not work, what fiscal integration would look like, whether it would make sense to have a single currency for the entire European Union and what direction banking integration was likely to take. One of the problems when the euro currency was introduced was that policies which may have been sensible individually ended up as a mess when taken collectively. I do not agree that the crisis was only discovered ten or 12 years later. There were massive credit inflows to certain countries from the very beginning, but they were not acknowledged as being part of a bubble. The crisis began when high levels of indebtedness began to form. They should have been identified earlier. The policy failures were imbedded from the outset.

Eurobonds will not work because the eurobond models that have been discussed to date give rise to moral hazard issues. Making EMU work and ensuring coherence in fiscal policy require us to deal with the moral hazard problem because we are members of a club and discipline is important alongside solidarity.

The question then is how does one do what one is supposed to do in terms of one's central bank and create a lender of last resort that can do what is supposed to, which is to stabilise the system, and reconcile that with the inability to provide unlimited funding to whichever country wants it, that is, it has be a conditional lender of last resort. The eurobond model, unfortunately, does not deal with the moral hazard issue. It only deals with one issue and even then it is problematic because anything in excess of 60% is suddenly a second type of debt. The first 60% might be safe and fine but bond traders will look at the remaining portion of the deb and they will isolate it as being different and will arguably regard it as even more toxic. Eurobonds, therefore, are not an answer.

A circuit breaker, which prevents sovereign bond yields going over a particular value, is required but, at the same time, mechanisms are needed to prevent countries abusing that and, for example, running a 15% deficit every year because they know they can borrow at an interest rate of 2% or 3%. Those goals have to be reconciled and that, ultimately, will become the problem that must be squared. There are a number of ways in which that could be done. The ECB is not allowed to be a lender of last resort for sovereigns because of the monetary financing prohibition and for other reasons and, therefore, another institution would have to do that, whether that is a special purpose vehicle created by eurozone members such as the ESM. I have written a paper on this which I would be happy to circulate. There are many moving parts but, ultimately, that question is very much core to resolving the long-term issues and making EMU sustainable and coherent but eurobonds are not the way to do it. There are no solutions there and that possibly answers the redemption question as well.

We were asked what fiscal integration looks like and both Mr. Coffey and Mr. O'Connor have articulated the concept of a stabiliser. There are two stabilisers within the system. The first is the lender of last resort, which prevents sovereign borrowing costs from accelerating to unsustainable levels. If there is a circuit breaker, that is prevented from happening. The other automatic stabiliser traditionally has been government budgets but, as we are aware, there is limited capacity there. We are in a new type of construct. Ireland is not like the US. There are not inter-regional transfers between Ireland and Austria in the same way there are between New York and Mississippi. In the US, for example, if there is what is known as a localised shock such as a hurricane, the federal government can step in and provide emergency funding but if a local industry collapses in Ireland or there is an earthquake in Greece or a massive banking crisis, which leads to instability, there is no mechanism in place to deal with that and if unchecked, that can lead to higher levels of long-term unemployment in the long run as hysteresis and other effects kick in. What a state wants to do is to prevent those long-term effects from occurring and some form of a limited central fund is needed, which runs a surplus in normal times and which can be automatically activated for specific purposes such as for social welfare under specific conditions. My own preference would be for education, retraining and upskilling, which would be particularly appropriate in the Irish context, given the vast majority of jobs were lost in the construction industry and many of them will never return. Those people will have to acquire different skills. It should be about human and physical capital, which is part of the process of restructuring economies and structural reform.

The question then is how does one create the fund without it being a full fiscal union. In all likelihood, the eurozone countries will have to come together in a similar fashion to the FTT proposal, which is currently being put in place, and hypothecate some form of taxation from within each country, which would probably be a consumption tax. This could also be an FTT, for example, but which in all likelihood would probably be 1% off VAT. This fund would simply build up and be used purely to respond to the asymmetric shocks that have been identified for 50 or 60 years. This also addresses the question of united states and whether we should all come together and have a single currency. However, there would be hypothecated fund of, say 1% off VAT, which goes to a central place and which is activated upon certain events occurring such as a banking crisis or another crisis that leads to a major recession in countries. That would then be used to ameliorate the recession and allow those countries to more easily manage their fiscal consolidation-austerity process without causing as much damage to society. Countries tend, when reducing public spending, to go for the capital budget because it is politically the easiest thing to do by far, even though in the long term it is probably the most damaging thing to do in the context of the growth potential of the economy. If the fund was in place and ring-fenced for those type of activities, that problem could be circumvented as well to a certain extent.

With regarding to the direction of banking union, it will happen but I am not convinced it is what we need. The main thing required in the context of such a union is proper resolution mechanisms. If resolution is to be at European level, that means supervision and regulation also has to be at that level. This may be more severe than is perhaps anticipated. It could mean regular stress tests for banks to a much greater extent than before. It will probably be a requirement under a proper banking union with proper resolution legislation in place that it will have to be fully independent. This is why it is not popular among nation-states. If a fully independent body can turn around overnight and shut a bank, that will create issues at local level. Perhaps the answer is to simply look at it as a European banking system.

As to whether we should move to a single currency at European level, that comes down to whether one believes Europe is an optimal currency area. The US is not necessarily an optimal currency area. What does this mean? The issue is whether the benefits of the single currency outweigh the costs of losing exchange rate policy and the ability to devalue a currency to restore competitiveness and boost economies at particular times. Israel, for example, strongly devalued its currency and got through the crisis fairly well. I do not say that is the panacea. However, fundamental surgery is still required to create a genuinely durable EMU. There are a number of different ways in which all these things can be done.

With regard to jobs and what can be done for weak countries, the answer is a centralised targeted fund, which could be used in that fashion. Unfortunately, there are no silver bullets when it comes to jobs. It is a long-term grind. The question is how long-term growth is generated. The answers to those questions are different and those type of structural reforms at root and branch level remain important.

The problem with the FTT is the costs and benefits for individual states are different and, as Mr. O'Connor said, what we are witnessing is countries opting out of the things they believe will be negative for them and, in the context of 28 states, it will be increasingly difficult to fully integrate at that level. There will be smaller clubs in different areas.