Professor Brigid Laffan:

I thank the Chairman for the invitation to give evidence today. This is clearly a time of major change in the European Union, and therefore it is important that we examine Ireland's engagement with the system. The key question should be the way Ireland can shape this evolving Union and adopt what I would call smart strategies for dealing with our partners and European institutions. Central to being smart is knowing what is happening, and the general drift in integration that Ireland needs to understand and shape.

I will refer to three issues. The first message I have, which echoes much of what my colleague said, is that we are looking at more Europe, so to speak, in the euro area. There will be further integration of a serious kind to retrofit the euro area to ensure it becomes more stable and sustainable in the longer term. The euro area itself has settled on what I would call a very low trust regime in that there is still a major cleavage between the debtors and creditors, the prosperous and less prosperous, those with high unemployment and those without. That remains a major challenge in terms of what is happening in the real economy.

As my colleague said, retrofitting is the Van Rompuy roadmap that looks to develop the four pillars of the EMU. First, on banking, I will not reiterate what my colleague said on banking other than to say that a banking union will have major implications for the Irish pillar banks, the International Financial Services Centre, and also for the Irish Central Bank. There is high politics but there are also many technical issues, and that must be watched carefully. That part of the Van Rompuy plan is proceeding at a pace.

Second is the fiscal area. In a sense one is looking at the build-up of very strong monitoring, surveillance and what I would call intrusive EU policies in the budgetary field. That raises major issues for national parliaments, including this Parliament, because it will alter the timing of the budgetary cycle in Ireland, and the Commission will make recommendations about the Irish budget. The question arises, therefore, as to how Ireland interacts with the Commission on this. I do not believe the Commission should simply come to national capitals and talk only to finance Ministries and officials. It must come into Houses like this and engage with the Parliament. It is more stringent monitoring, more surveillance and what I would call the development of constrained politics. That is important not just for the Parliament. It also has implications for all political parties that aspire to holding power. The budgetary regimes are shifting.

The third issue is economic union. I would argue strongly that a stable, long-term euro area will require automatic stabilisers, a capacity to intervene, and a capacity to help countries facing asymmetric shocks. Therefore, we should work out the kind of stabilisers we believe are necessary for the euro area, and we should support that development. That is not in the immediate agenda. It is further out from that, but in the long term there is a very strong functional need for this in the euro area.

To sum up, those three pillars are necessary if the euro is to remain a stable currency and we avoid the calamity of the past few years. It will require more Europe, as it were. In my view it will also require another European treaty at some stage. Given that we are a referendum country, I know that the prospect of further treaties is always a challenge.

It is also important to consider the format such a treaty would take. Will it be a treaty of the 27 member states or of fewer countries? We must think carefully about whether the fiscal treaty or compact has now become a model. That has implications because the fiscal treaty was ratified once 12 countries agreed to it. It did not require the unanimity of all. Therefore, the referendum on the fiscal treaty in Ireland was the first time Ireland had a referendum on a European issue that was only about Ireland and that had no implications for the other member states. Had we voted "No", we would not have been part of the fiscal compact, but the fiscal compact would have happened anyway. We do not know what will happen in terms of future treaty change.

That bring me to the second issue, the euro area, and the so-called ins, pre-ins and outs. There is no doubt that the European Union, à la 27, is now characterised by what I would call enhanced co-operation across the member states. Law making among smaller groups of countries is now used much more frequently. For example, a financial transaction tax has just been proposed for 11 countries, and there are other examples.

In the long term the question that arises is the way this system retains unity, given this diversity or divergence. In that regard one would distinguish between what I would call the pre-ins, who want to joint the euro at some future date, and those who are unlikely to do so. Currently, I identify four countries that are unlikely to join, that is, Sweden, Denmark, the Czech Republic, although it might shift, and the United Kingdom.

On the relationship between the United Kingdom and the European Union, that has now become highly contingent following Prime Minister Cameron's speech, his desire for renegotiation, and his commitment to putting an issue of in or out to the British people at some stage in the future. It is in Ireland's interest that we do everything we can to keep the United Kingdom as a full member of the EU. We are its closest neighbour. It really matters to us. There is a benign scenario and a less benign scenario. The benign scenario is that both the 26 member states and the UK can do a deal on competences, they will review what is happening in the EU, and on issues such as the working time directive or whatever, they will be happy to reach a deal that a British Government can then put to the people.

It is almost, although not entirely, inevitable that there will be a referendum in the United Kingdom. I think the Labour Party may have to offer a referendum but that may not be the case, and the current Government may not win the next election. What is clearly at play is a high level of uncertainty and contingency about the relationship between the United Kingdom and the system. It is important we display very strong support for continuing membership and that we engage actively in ensuring there is something with which both sides can live, but that is challenging because we are looking at a much more flexible EU and more flexible membership.

That brings me to the third area, namely, democratic legitimacy and accountability. If one looks forward ten years to where the system is going and at what is happening not so much in the institutions but also in politics across Europe, it is clear that party systems across Europe are under strain. We see parties of both the extreme left and right acting as challenger parties, those in the centre getting squeezed, and a good deal of instability in party systems in a number of countries.

How will Europe deal with this? I do not think democratic politics will live with it for ten years, unless there is the prospect of prosperity for all countries in the system. I do not think we can continue on this track for the next five years. What really matters is what will animate politics across Europe. There are the related questions of how the political actors can be held accountable and how national parliaments can respond to what is happening. There is, however, no institutional or policy-based fix. What we are seeing is that democratic politics is largely national - that is where the most important events take place for individuals in Europe - but the European Union is really important in terms of the policy remit. This needs to be knitted some way or another. These are questions of politics rather than institutions, but they also involve the question of how national parliaments can continue to be important arenas with democratic legitimacy, given that the European Parliament is becoming a much more dynamic and powerful actor. Therefore, there are challenges for the country, the Oireachtas and members of this committee as politicians. There are also challenges for us as analysts because prediction is always easier in hindsight. All I have tried to do is give the committee a sense of where the drift is taking place in the system.