Dr. Gavin Barrett:

I thank the Chairman for the kind invitation to attend this meeting.

As he mentioned, I have been asked to turn my thoughts to a triple-tiered agenda - to consider, first, the financial, budgetary and economic policy integration in the European Union, second, democratic accountability and legitimacy and political union, and, third, the UK and the European Union and the implications for Ireland. Any one of these themes could legitimately form - I expect in due course they probably will form - the subject of extensive consideration by the committee and probably separate reports by it. I will do my best to express some coherent thoughts on the three areas. Given the time constraints I might confine myself to the first area – financial, budgetary and economic policy integration – and then return in more detail to the important issues of the United Kingdom and democratic accountability and legitimacy in the question and answer session that follows.

On the theme of financial, budgetary and economic policy integration in the European Union, probably the most sensible place to look is the extensive report produced by the President of the European Council, Herman Van Rompuy, towards a genuine economic and monetary union. We could call that the current culmination of a series of documents, interim reports, roadmaps, Commission communications and European Council conclusions, which constitute responses to the June 2012 invitation by the European Council to President Van Rompuy to do something extremely ambitious, namely, to come up with a specific and time-bound roadmap for the achievement of a genuine economic and monetary union. The ambition of the document should not be underestimated. It does only constitute proposals but we will see many of them come true, particularly the short-term and medium-term ones because they were mostly endorsed in the European Council conclusions on 13 and 14 December. Whether some of the long-term proposals come to fruition remains to be seen. Any document written by the President of the European Council with the collaboration of the European Central Bank, the President of the Eurogroup and the President of the Commission is no ordinary discussion document and it really needs to be taken seriously.

Three stages are envisaged in heading towards a genuine EMU, or completing the half-built house that is economic and monetary union. Stage one runs from the end of 2012 to the end of 2013. In other words, we are already in stage one. Stage two runs from 2013 until 2014 and thus also to some extent involves activities which have already begun. Stage three runs from after 2014. The aims involved in the three stages overlap with each other. They run into each other and they are multifaceted. Rather than parse each stage, a better idea is to pluck out the three biggest ideas involved in the Van Rompuy paper. These are the following: big idea No. 1, if I could call it that, is that of integrating the eurozone’s financial framework or, to put it another way, creating a financial market union. Big idea No. 2 is what is called integrating the eurozone’s budgetary framework. Big idea No. 3 is what is called integrating the eurozone’s economic policy framework. I would like to have a quick look at financial, budgetary and economic integration.

Big idea No. 1 is the creation of a financial framework, or to put things more ambitiously, which is the case in the Van Rompuy report, the creation of a financial market union. This is really about breaking the perilous link, as we found out to our cost in this country, between banks and sovereigns. It is about ending the situation in which when banks go under, they drag countries' finances down with them. The proposals in this area are concentrated in stage one and stage two. In other words, they are happening right now. What I am talking about is the setting up of a single supervisory mechanism for eurozone banks. As we are all aware, we have already had unanimous agreement of the legislative framework for that to guarantee effective, unbiased oversight so that banks do not get into trouble in the first place. Second, work is also ongoing on the creation of a so-called single rule for banks. That will include the adoption of the capital requirements regulation and the capital requirements directive. Third, there is agreed harmonisation of national frameworks for resolution of insolvent banks. We are talking about the recovery and resolution directive. Fourth, is the agreed harmonisation of national deposit guarantee frameworks. In other words, that is the draft deposit guarantee scheme directive. The idea is to ensure sufficiently robust national deposit schemes are set up so that one does not get destabilising deposit flights between institutions. Fifth, there is the setting up of an operational framework for direct bank recapitalisations for the European Single Market. We will be interested in that one but also in how retrospective its effect might turn out to be.

That is all happening right now. In terms of achieving the aim of what I call big idea No. 1, only the first main element is the single supervisory mechanism. The second main element involves more harmonised deposit guarantee mechanisms. The third element considered necessary is a single resolution mechanism. Already, there is a draft directive on recovery and resolution. The idea of that is harmonising the tools needed for orderly bank resolutions in all EU member states; in other words, sorting out bank failures. The single resolution mechanism would go a step further. It would move the responsibility for dealing with bank resolutions to European level. Once the recovery and resolution directive and deposit guarantee scheme directive are in place the Commission is going to propose a single resolution mechanism. A crucial element of what Van Rompuy is proposing is an appropriate and effective common back-stop as well; in other words, money, which would have been very useful if it had been in place like a lot of mechanisms associated with economic and monetary union when our crisis hit home. The idea basically is that public assistance would be recouped via ex postlevies on the banking industry. That is big idea No. 1. The plan is that it will be set up by the end of 2014.

Big idea No. 2 is what is called integrating the eurozone’s budgetary framework. Again, that is based on the reality that we are all economically interdependent, in particular within the eurozone. When one country messes up budgetarily, we are all left picking up the pieces. The idea is to ensure sound national finances and, vitally, as we have seen in this country, to build up the eurozone’s capacity to deal with asymmetric economic shocks, which is what we experienced in this country. We have already seen a huge amount of activity in this particular area. Since December 2011 we have had the five regulations and one directive that make up the six pack. I do not need to remind anyone that we have had running parallel to that the fiscal stability treaty. The day before yesterday the European Parliament agreed on the two pack, involving strengthening eurozone surveillance and monitoring and assessing of draft budgetary plans. To borrow a phrase, a lot has been done but a lot remains to be done.

It is probably fair to say that we have seen more stick than carrot in regard to stage one, even if the stick is necessary in order to ensure that we do not commit budgetary hara-kiri. One could ask about stage two which runs up to the end of 2014 and stage three. For stage two, Van Rompuy is suggesting the possibility of financial incentives being provided for member states to engage in valuable structural reforms. Stage three is the most interesting idea. Basically, what is being proposed is the idea of giving the European Union the ability to provide fiscal solidarity against adverse fiscal shocks. Again, that is something that would have been most interesting had it existed when the Irish financial crisis hit home. Van Rompuy does note that all other currency unions are endowed with a central fiscal capacity. We do not have that in the European Union as a distinguishing feature. I noticed that in the European Council conclusions of December that particular point remained conspicuously absent. There are no guarantees that it is going to happen at the end of the day.

As I said, this is a report that has been considered by the presidents of all of the important institutions at European level so it cannot just be ignored. There is always the point that if one eliminates the impossible, whatever else remains no matter how improbable must be true. Is it possible for a European Union to exist without this kind of centralised fiscal capacity? It is obvious that those particular presidents have some doubts in that regard. We will have to wait and see. There is nothing coming up in terms of European Council results in relation to that but certainly the idea is out there at the moment. The Van Rompuy report does refer to choices regarding particular shock absorption mechanisms as to whether they would be macroencomic or microeconomic but I do not need to detain the committee with those considerations today.

Big idea No. 3 is the creation of an integrated economic policy framework. The problem being addressed here again is that we are all economically interdependent and if one country pursues unsustainable policies that gets everyone into difficulty.

In terms of the proposed solution, the Von Rompuy paper puts forward a number of ideas, one of which is completing the Single European Market, which will promote growth. That is something of a perpetual aim. It is not easy to achieve in difficult economic circumstances such as those we are experiencing.

The second idea is creating a framework for systemic ex anteco-ordination of major economic policy reforms. Members might recall that systemic ex anteco-ordination is specifically envisaged in Article 11 of the fiscal treaty. In other words, setting up a mechanism for that is envisaged and work on that is ongoing.

A third idea we can expect to see implemented in stage 2, Towards a Genuine EMU, is the idea of contracts, in other words, arrangements of a contractual nature between member states and the European Union institutions to bring about desirable structural reform. It is a type of contract between the institutions on one hand and the member states on the other. The idea is that it would be as a result of a dialogue between the member states and the EU institutions. They would need to be approved and monitored by national parliaments, and the details of their implementation possibly renegotiated on the occurrence of a national change of government.

Those are the basic ideas being put forward, and I imagine they are the kind of ideas that need to be thoroughly discussed in Ireland. There are also the issues of democratic legitimacy and accountability, and also the important issue of the United Kingdom, but I have probably used up my speaking time and I want to give Professor Laffan an opportunity to contribute. With the Chairman's permission, I might come back on the other issues during the questions.