Professor John McHale:

Many questions have been asked so I will be selective and answer those focused on me. Senator Healy Eames asked about the focus on the supply side. A narrative has developed that Europe's problems are supply-side problems because labour, product and capital markets are not growing quickly enough and require structural reforms, which often mean measures such as reducing employment protection and changing unemployment benefit systems. Certainly, important reforms need to take place in labour and product markets, including completion of the Single Market. When one examines the economics it is harder to bring about the structural reforms which lead to better performance in terms of growth and employment than much of the rhetoric seems to suggest. It takes a long time and often the immediate effects are damaging to growth and employment rather than helpful. Measures need to be taken, but the existence of a magic recipe to turn around European growth is exaggerated. Examining the recent history of European growth, one sees a big drop during the crisis, and recovery when countries were generally pursuing more stimulative policies.

With the sharp turn to austerity, which was common right across Europe, one sees quite a significant fall off in growth. This year, within the eurozone, the projection is that the zone will contract by 0.3% of GDP, coming back slowly next year. It is hard not to believe that there is a significant demand side element to this and that the co-ordinated austerity that is taking place is a significant component of the European growth problem.

Added to that is the less than helpful stance of the European Central Bank or, more accurately, the stance of the ECB that is not as helpful as it could be. While the ECB has certainly brought interest rates down to a low level and provided huge support for banking systems, its stance compares less favourably with that of the US Federal Reserve, which has done things like signalling strongly that it will keep interest rates low for a long period of time and clearly focusing on what is happening not just to inflation, but also to employment. The single mandate of the ECB has led it to pursue a less stimulative monetary policy than would otherwise be the case.

There is a need to challenge the narrative that Europe's growth problems are all on the supply side. There is also a need, in this revamp of economic and monetary union, to make sure it is capable of counter-cyclical action so that the focus is not just at a national level. We must also look at what the sum total of these national policies amount to in terms of the overall fiscal stance of the eurozone, although I certainly do not see enough evidence of that happening at present.

Members also asked about the debt redemption fund and there are different proposals being examined in that regard. One of the core proposals, which is contained in the European Commission's blueprint, envisions debt above 60% of GDP effectively becoming mutualised. In Ireland's case at the moment, that excess amounts to about 60% of GDP itself because, as Deputy Byrne pointed out, we will be at 123% of GDP this year. The proposal essentially means that as debt becomes due to be rolled over or used to finance new deficits, we could finance about 63% of GDP in the Irish case, through this fund. The funds would be raised collectively, with joint and several guarantees. Effectively this would give us guaranteed access to low-cost funding up to that amount. This is combined with disciplines that force countries to bring their debt to GDP ratio down over time. In the original proposal from the German Council of Economic Advisers, the fund was set up so that at the end of the process, countries would have debt to GDP ratios below 60%. It was a combination of disciplines and supports, essentially giving countries access to low-cost funding and for that reason, I believe it would be a very effective crisis resolution tool. The concerns that Ireland has about raising funding over the next few years, which are forcing it to pursue very a tough austerity programme in order to regain access to market funding, would be eased by such a fund.

I wish to return to something Dr. Ahearne said and which was also raised in a number of questions regarding the particular fiscal policy that is being followed. Dr. Ahearne mentioned that there might be scope to ease the planned fiscal adjustments of €5.1 billion up to 2015. I will give a brief recap on the Fiscal Advisory Council's thinking on this issue. First, the original projections to get our deficit down to 3% of GDP by 2015 are a central forecast. We know there is huge uncertainty around growth so, in that context, we looked at past forecast errors and built confidence intervals around those projections. Even now, with the central forecast dropping to closer to 2% of GDP, there is about a one in three chance, based on historic forecast errors, and even with the assumption that the €5.1 billion of adjustment will actually take place, that the 3% target will still be missed. There is a one in four chance that our debt to GDP ratio, which is now 123%, will not have stabilised by 2015. The reason for the margin of safety and for aiming at something below the 3% target is to give some insurance that the actual target will be met, which we believe is critical to ensuring we retain access to borrowing.

Deputy Donohoe asked why we are engaging in this austerity programme and about the implications of a situation where the financial markets will not lend to us. The real rationale for doing these very difficult things and engaging in this austerity is to retain access to borrowing. It is somewhat paradoxical in the sense that we are pursuing this austerity programme because we fear there will be much greater austerity if we lose access to borrowing, given that we still have a very large deficit. In essence, we are trying to pursue a plan that allows us to phase out that austerity to the maximum extent possible, given the negative effects that those fiscal adjustments have on growth. We want to be able to retain access to borrowing so that we can maintain the welfare state we value, in terms of social protection, social services and so on. It comes back to the importance of access to borrowing. If we lose that access and the financial markets do not lend to us, we would have much more accelerated austerity and would probably be forced to default. My reading of the evidence leads me to disagree somewhat with Professor Mooney's thesis, which tends to play down the negative effects of defaults on countries. That is what seemed to lead him to believe in a different strategy, involving more debt restructuring or default and less austerity. What we see from episodes of default is that although countries can often regain market access surprisingly quickly after defaults, the outward costs, particularly coming through mechanisms of the banking system, but also confidence effects and so on, can be significantly negative. The likelihood is that the crisis would go into another vicious phase if we ended up in default.

Therefore, in order to be able to phase out this austerity without a highly disruptive default taking place, we need to be able to borrow. Of course, we have not been able to borrow from the financial markets until quite recently. We have, instead, relied on official lenders but, of course, to retain access to official funds, we had to meet the conditions of the loans, which require that we meet the targets. The most important element for secure future market access is that investors believe we will have access to official funding, should we need it. The world is an uncertain place and shocks that occur in other countries could spill over to us and uncertainties remain about future growth prospects. Investors are uncertain what the future will bring.

They are considering whether we will be in good standing with official funders and particularly that we would get that funding without them forcing us to restructure our debt as, for instance, occurred in Greece. If a country's debt is not on a sustainable path, they will not lend to it without a restructuring, which is likely to have quite negative effects on the economy in the short to medium term. Any programme is likely to have much tougher conditionality as we have seen in Greece if a country is not in good standing because it has not met targets in the past. This is why the fiscal council has emphasised the importance of meeting those targets in this highly uncertain growth environment just to give some sort of cushion. We previously thought that cushion would only come by making adjustments of more than €5.1 billion.

Coming to Deputy Eric Byrne's question, the good news is that because of a number of developments, particularly the promissory note development, we can now have that margin of safety without doing any more than the Government is already planning. The fiscal council's strategy has remained the same but we can now have that margin of safety without having to impose even more difficult and damaging austerity on the economy.