Dominic Hannigan (Meath East, Labour)
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I ask members and guests to turn off their mobile telephones. It is not sufficient to put them on silent mode. They must be switched off because otherwise they will interfere with the broadcasting equipment.

The first item on the agenda is an exchange of views with the European Union Affairs Committee of the Latvian Parliament. I am delighted to welcome a delegation from the Saeima, the Latvian Parliament. It comprises Mrs. Zanda Kalnina-Lukasevica, chairperson of the EU affairs committee, and Mr. Vjaceslavs Dombrovskis, chairperson of the economic, agricultural, environmental and regional policy committee. We are also joined by the Latvian Ambassador to Ireland, Mr. Peteris Karlis Elferts. You are all very welcome. The delegation is on a short visit to Ireland in advance of the Irish Presidency of the Council of the European Union in January 2013. During its visit to the Dáil and Seanad the delegation will also meet representatives from the agriculture and finance committees.

The purpose of the delegation's visit to Ireland is to gain an insight into the priorities of our forthcoming Presidency. Latvia has started the preparations for its Presidency which will happen in 2015. Issues of particular interest to the delegation are the EU budget, the position with the multi-annual financial framework, Cohesion Funds and the Common Agricultural Policy. The members of the delegation also wish to talk about the future of Europe and particularly the eurozone and the euro crisis. That is certainly something we would like to discuss. Latvia is still willing to join the euro at the end of 2014.

We look forward to a discussion on that. I would also like to discuss the youth guarantee and youth unemployment. I invite Mrs Zanda Kalnina-Lukasevica, chairman of the European affairs committee, to make her opening remarks.

Mrs. Zanda Kalnina-Lukasevica:

I thank the Chairman and the members of the committee for this meeting. It is already a tradition of the European affairs committee of our Parliament to pay a visit to the Parliament of the forthcoming EU Presidency. We have close economic and social ties with Ireland and therefore it is necessary to have deeper interparliamentary co-operation. We hope we will be able to develop it.

We are happy to see the Irish Parliament actively involved in the EU policy-making process. This is the approach to be taken by countries with parliamentary democracy. Domestic policy and legislation cannot be separated from the process of shaping EU policy and legislation. We hope the upcoming European Council will bring us all closer to a sustainable and fair multi-annual financial framework for the EU, meaning the Irish Presidency will continue fulfilling a significant and important task of leading negotiations on the programming of EU financial instruments. In this respect, we hope for productive co-operation.

As the Chairman mentioned, discussions on the multi-annual financial framework on economic growth in Europe is central to our work. Today, the most important task is to create favourable conditions for economic growth and jobs. Therefore, this discussion is important in seeking ways to create stability and confidence in the European economy and confidence in the euro. Strengthening the role of national parliaments, and especially co-operation between parliaments, can help us to reach these goals. Therefore, we are happy to share our views on the multi-annual financial framework, the cohesion policy and the Common Agricultural Policy. My colleagues will share our views in more detail.

Last but not least, during Ireland's previous EU Presidency, Latvia acceded to the European Union. During the forthcoming Irish Presidency, we look forward to a decision on Latvia's accession to the eurozone. It is a significant development from one Irish Presidency, when we entered European Union, to the next, when the decision on our accession to the eurozone will be taken.

Mr. Vjaceslavs Dombrovskis:

I will start with an observation about how alike our countries are. Both are small countries and both have spent some time in recent history struggling to regain their national identity after being part of an empire. It is only 20 years since Latvia left the Soviet empire. The third similarity is the commitment and drive for economic development. Since Latvia joined the European Union, Ireland has been a special country for us. We have been inspired by Ireland's example of rapid economic development and have always sought to emulate it. In our period of high economic growth, we liked to call ourselves the Baltic tiger, after the Celtic tiger. Many similar things have happened to the two countries since that time and there are many ways in which we are alike, although not all are as we thought they would be. Latvia has had a painful emigration record over the past ten years; 10% of the population left to look for jobs and better lives in other countries, with the United Kingdom and Ireland representing two major destinations. There was a major economic crisis similar to Ireland's, with financial globalisation, excessive capital flows, reckless borrowing, a real estate boom and resulting shadow cities, a large percentage of bad loans and the recapitalisation of major banks by Latvian taxpayers. There is also the painful experience of adjustment under a fixed exchange rate, just like Ireland. We have gone through some painful fiscal consolidation. Public sector pay has been cut by 35%, on average, over two years. Now, perhaps, an example we can set to Ireland and other countries in a similar predicament is that there is light at the end of the tunnel. After finishing with fiscal stabilisation, Latvia had some robust growth, in the order of 4% to 5% of GDP, for two consecutive years.

Dominic Hannigan (Meath East, Labour)
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We are glad to have the witnesses here today. Mr. Dombrovskis is correct that Ireland and Latvia share many similarities. We are two of the smaller countries in the European Union and, like Latvia, Ireland has a population of 4.5 million. The history of Ireland is not dissimilar to that of Latvia.

Mr. Dombrovskis mentioned that 10% of the population are living abroad because of the economic recession. Many of our young people, in particular, have emigrated or are in the process of emigrating. Also, many Latvians are in our country. There are many Latvians in my constituency and they work very hard. They are well liked by people here and they contribute greatly to Irish society, so they are very welcome.

Perhaps the witnesses can arrange between themselves who is best placed to answer my questions. My first concerns the euro and the hope of Latvia joining the eurozone in 2014. What do the witnesses think of the current proposals for a banking union? I refer in particular to the potential changes to the voting rights of the supervisory board and the movement from one vote per member state to votes based on population. What is the position of Latvia on that point? What do the witnesses think of the financial transactions tax? Do they expect to see it come into play in Latvia in the near future?

Youth employment is an issue for Ireland during the Presidency. We are seeking to make progress on the youth guarantee and the witnesses are probably aware that proposals will be made in December. Do the witnesses have thoughts on how a youth guarantee will work in Latvia? What is it considering in this regard? I will provide more information on our Presidency later.

Timmy Dooley (Clare, Fianna Fail)
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I extend a warm welcome to the delegation from Latvia and I am delighted to see the chairman of the European affairs committee, which we meet through COSAC. I want to frame a number of questions on the theme of working together at national parliament level and how the witnesses see that developing over the coming years.

As the Chairman said, we share some common goals and objectives and some common concerns in regard to the development of the European project. I am very interested in how we can develop links, as smaller states within the European project, to enhance our capacity to see the kind of issues common to us advanced rather than decry the development of two of the largest states effectively guiding us through the crisis, as has happened over the past year and a half, which I regularly do through this committee and in other areas. What are the witnesses' thoughts on how best we can further develop the network of smaller states? Do they think COSAC is a good way to do that? Should we try to do more bilateral work or should we work around particular issues of common concern? Should a number of smaller states meet outside the COSAC framework under others headings which are relevant to individual states?

Dominic Hannigan (Meath East, Labour)
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Perhaps we will take those questions first.

Mr. Vjaceslavs Dombrovskis:

We are fully committed to joining the euro on 1 January 2014. Of course, we are counting on Ireland's support. Our compliance with all of the Maastricht criteria is looking pretty good. We are complying in terms of inflation. Our level of public debt is slightly more than 40% and our budget deficit will be 1.4% next year. Even interest rates seem to be falling into line.

I refer to the specific question the Deputy raised in regard to banking union. We fully support the initial proposal for the single supervision body, Union-wide insurance of deposits and single regulation. I think we have some pretty common views on that.

In regard to voting rights, unfortunately, I am not fully familiar with the detail of this, so I am giving my personal opinion. It certainly makes sense for the smaller countries to push for something which may resemble the American system of balancing the interests of the large populous states vis-à-vis those states which are less populous so as not to allow a situation where a few very populous countries could effectively dictate to the others. That should be built into the voting structure. How it should be done is a good question but it definitely should be done.

In regard to the financial transaction tax, our position is somewhat reserved at the moment. We have a relatively large and what I would describe as a two-tiered banking system in which we have a few largely foreign Scandinavian banks, which are the retail banks. We also have quite a few smaller banks which largely service our ex-colleagues in the former Soviet Union. We look at the proposal for the financial transaction tax with some caution. If it is along the lines of taxing advanced financial instruments, like derivatives, that probably would not be of that much concern to us because it is not something our industry is into but it remains to be seen as to what exactly it will be.

On youth unemployment, we have that problem in Latvia. It is not dissimilar to Europe and, I am sure, to Ireland. I am afraid I am not that knowledgeable about that as it is somewhat outside the competence of my specific committee. One would have to get into the area of active labour market policies and so on and I am not that familiar with the details of that.

Mrs. Zanda Kalnina-Lukasevica:

Youth unemployment in Latvia is higher than average but it is not as high as in western Europe. Total unemployment is approximately 12% and youth unemployment was approximately 20% during the deepest part of the crisis, but it is not anymore. We created several specific programmes for youth. An example, which was quite successful, was that we created a special programme together with our former state President and we called it "possibility for the future". The idea was to invite companies, government agencies and local government agencies to provide internships for youth. If one is not able to get a real job and to be paid, sometimes it is because one does not have any experience. Providing an internship gave people experience in the jobs market. Young unemployed people were very much interested in the project. Of course, there were many other programmes as well.

The question on developing better co-operation between parliaments and whether we need special co-operation between the parliaments of smaller states is a very good one. Sometimes it seems quite attractive to have special groups comprising smaller countries or Nordic or southern countries but I am not so much in favour of having specific divisions because it is a challenge for Europe to stay integrated and not to create two to five tiers. There are many questions to be answered, including how to involve national parliaments more and how to create better co-operation.

We decided to create a reflection group comprising the chairpersons of European affairs committees and we will meet next Monday in Copenhagen.

Dominic Hannigan (Meath East, Labour)
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Will Mrs. Kalnina-Lukasevica be at that?

Mrs Zanda Kalnina-Lukasevica:

Yes.

Dominic Hannigan (Meath East, Labour)
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I will see her there.

Mrs Zanda Kalnina-Lukasevica:

I think approximately ten chairpersons of European affairs committees will go to Copenhagen and we will have a good discussion on the role of national parliaments and co-operation between them. Next Monday could bring some new ideas.

Timmy Dooley (Clare, Fianna Fail)
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I am certainly not talking about creating other layers. It must be at an informal level. I fully agree that we cannot allow a further disjoint to take place. It has already taken place as a result of the different blocs. It is about trying to do it in an informal way that seeks to bring in some of the smaller states which might feel somewhat excluded.

Dominic Hannigan (Meath East, Labour)
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We can perhaps talk more about that at dinner tonight.

Timmy Dooley (Clare, Fianna Fail)
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I forgot to ask about the witnesses' position on the Common Agricultural Policy? Could someone deal with that?

Dominic Hannigan (Meath East, Labour)
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We will take some more questions first. CAP and the issue of unemployment are issues at which we will look during our Presidency. I will give a very quick overview of the priorities of the Presidency.

The first is the restoration of stability within Europe. Key for us is making progress on the issue of banking union and bedding down the European semester. The second is to secure agreement on the budget; therefore, the multi-annual financial framework is of key importance to us, particularly, as Deputy Timmy Dooley said, the CAP, on which we want to ensure there is agreement, as well as on the multi-annual financial framework, as quickly as possible in the first few months of our Presidency. The other key aspect is human rights in order that there will be a human rights dimension to the Presidency. Perhaps most important, we will be pushing forward with an economic growth and job creation agenda. We will be looking at full implementation of the Single Market Act, the digital and the blue economy which the Cypriots have been prioritising in the past few months, and trying to make it easier to create jobs, particularly for younger people. When we last spoke in Cyprus, we discussed Latvia's efforts four or five years ago to generate more employment and start more businesses. We spoke about how Latvia had reduced bureaucracy to make it easier for people to set up businesses. Perhaps these efforts might be outlined to other committee members.

Mr. Vjaceslavs Dombrovskis:

It is hard to summarise our position on the CAP in a few words. It has been in place for a very long time - we all know the reasons - including when we entered the European Union. We encountered it as a necessary evil.

Timmy Dooley (Clare, Fianna Fail)
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Do not forget where we are.

Mr. Vjaceslavs Dombrovskis:

We find some elements of it to be distortional. For example, Latvia is the country that receives the smallest direct payments, which are abysmal. According to the Commission, they are just 53% of the EU average. Therefore, we are out sync with the other countries when they are discussing the CAP. For us, the main concern is that the very small direct payment is due to an historical anomaly. The direct payments are tied to productivity, which depends on economies of scale - the larger the farm, the higher the level of productivity. Very small farms, therefore, have very low levels of productivity. The Baltic states spent some time under the control of the Soviet Union, when farms were collectivised. In the early 1990s they were broken up. Therefore, in a period of a few years in the early 1990s we went from having about 300 large collective farms to having 50,000 or 60,000 small, fragmented farms, with the resulting effect on productivity levels which were used in the calculations for direct payments. In a sense, we are being punished for being occupied by the Soviet Union and taking part in collectivisation experiments. This is not exactly fair and our major concern is to have our level of direct payments at least at the same level as that of Romania and preferably 80% of the average.

Joe O'Reilly (Cavan-Monaghan, Fine Gael)
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I join in welcoming the Latvian delegation. I was interested to read in the briefing material provided by the Department of Foreign Affairs and Trade that Ireland did not recognise the incorporation of Latvia, Lithuania or Estonia into the USSR. This is acknowledged in Latvia and fosters our bonds of friendship. There is an historical friendship between our two countries and a sense that we are both small nations with common interests and that we should work together. Smaller states should support each other and there is that sense between the two states. The fact that so many Latvian nationals live here also makes for a connection between the two.

As Deputy Timmy Dooley said, the CAP is a vital national interest; it is important to the survival of the people. In European terms, there is a need for food security; it is important that enough quality food is created to feed an ever increasing world population. There is a rationale for the Common Agricultural Policy at a macro level. We have an increasing global population that needs to eat and wants quality food. As such, the CAP must support and encourage the production of that food. It is also important, with respect to Mr. Dombrovskis's latter comments on smaller farms, that while we support and encourage our smaller farmers, that we also support a level of production to meet future requirements. We must balance support for our very small farmers, which is admirable and right, giving them the capacity to develop and supporting a level of production that will meet targets to feed the population.

As far as possible, countries should have domestic discretion on how they can spend the money when they receive their envelopes, allowing them to adjust their spend to meet the requirements of the agricultural sector and economic objectives in general. We hope to receive support from Latvia on the Common Agricultural Policy and maintaining the amount of money allocated to it in order that it is not reduced within the multi-annual financial framework. We should at least be able to reach agreement on this but having Latvia's absolute support is important. We could then discuss its distribution, but, first, we must secure the amount allocated. After that, we can strike a balance in the distribution between supporting production to the degree that we can feed our people and encouraging small units and farmers. That is the objective.

The Chairman referred to our similar high rates of unemployment. The rate is 13% in Latvia, while ours is somewhat higher. We have a joint interest in addressing the unemployment problem. I ask for Latvia's support during our Presidency for our initiatives to tackle unemployment. The Tánaiste told us last week that we would place the unemployment problem and solutions to it, particularly youth unemployment, centre stage. We seek the active support of Latvia on that issue for all of sakes. There is no issue more important because unemployment affects the dignity of persons who are unemployed and their quality of life in a massive way.

It also has enormous economic effects. The cost of supporting unemployed persons is just one part of the problem. Those who are not earning adequate money cannot spend and there is a lack of productivity and genius in the economy. It is, therefore, a crucial issue for all of these reasons and I stress that it will be central to our Presidency. I would like to have an absolute assurance that it is a central issue for Latvia also. Actual initiatives need to be taken to deal with unemployment, specifically youth unemployment which has been mentioned by the Chairman.

As Latvia has been in an IMF programme, it has experience of the situation Ireland is in. The question of the separation of banking debt and sovereign debt, in the interests of the alleviation of the hardship of the people, is an important one in this country. It is important for us that the international agreement achieved on 29 June becomes part of concrete reality. We would like to receive the support of Latvia in that regard. We have a community of interest because Latvia has a similar agenda. It is interesting that there was also a property bubble there. It seemed to build in a similar way. If I understand the situation correctly, prices went out of control in the construction sector. We all have to try to take steps to prevent this happening in the future. We need to construct our economies on a more production oriented basis and focus on real jobs in areas such as agriculture, tourism and trade.

It is great that the delegates are here and they are very welcome. My fundamental objective is to welcome them like everyone present would like to do.

Bernard Durkan (Kildare North, Fine Gael)
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Like my colleagues, I welcome the delegation. All of us, including the Chairman, have encouraged similar visits in the past as they help us to ensure we have a better understanding of each other's positions when dealing with issues at European level. I have felt for a long time that the level of interaction between the Members of national Parliaments is not nearly sufficient. Such interaction takes place at Government level, at Civil Service level, at European Parliament level and at Commission level, but it does not take place at national Parliament level. One of the bulwarks of the Lisbon treaty was that extra powers and strengths were to be given to national Parliaments. I saw it as a contradiction in terms to be looking for greater integration which would, in effect, give more power to the European Parliament and the other European institutions, while trying to give more power to national Parliaments at the same time. It was obvious that these two goals were on a collision course.

Like other speakers, I express my feelings on these issues by examining Ireland's position on the Common Agricultural Policy. The food industry is to the economy what wine and cars are to the French economy, or what engineering is to the Italian and German economies. It is vital. Almost 90% of our produce is exported. It is often said there is not enough food to feed the population of the world, but it is interesting to note that there is adequate space and potential to produce food for at least 3 billion more people. That is a fact. It could be done if the space available was utilised properly. Rather than curtailing agricultural activity in areas with the climate best suited for food production, we should be developing and advancing the agriculture industry in such locations. That is the upside.

Like everybody else, we need our vital interests to be maintained in the discussions on the Common Agricultural Policy, the budget and the multi-annual financial framework. If the European Union does not have a budget, it will have a problem. It is obvious that in such circumstances, the largest countries with the most resources will ultimately win out. It is in the interests of the smaller countries, in particular, for a strong financial commitment to be made in terms of a budget. That should not be undermined further in discussions that might take place in the context of the WTO. That has happened in the past also. Major players on the European scene have entered into arrangements with third countries which have benefited certain regions of the Community more than others. I am not sure that Ireland or Latvia will be high on the agenda when such negotiations take place. We have common cause in such areas.

I would like to put Ireland's economic downturn in perspective. We were faced overnight with a situation where two thirds of our annual revenue disappeared. In 24 hours 66.66% of our revenue, because it was coming from the construction sector, disappeared overnight. It continued to fall afterwards and still continues to do so.

My colleagues have made interesting comments about job creation, an issue about which we have spoken at meetings of these committees for a long time. It is of fundamental importance that we get back to creating jobs. How will that come about? Do we feed money into it directly, or do we encourage growth? It is obvious that we will need growth. I predicted two, three or four years ago that there would be a contraction because of the direct hit the economy had taken. I thought everything would have to close down and we are lucky we did not go far. At the same time, there is no growth.

Dominic Hannigan (Meath East, Labour)
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We have had some growth.

Bernard Durkan (Kildare North, Fine Gael)
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A little. We are doing better than we thought we would. In our current position, if we want to go the extra mile and do the extra job that has to be done, we will have to hit the sector that generates money in the local economy. That is the danger area. It is interesting to note that the IMF and the ECB are not ad idem on this issue. In recent times the head of the IMF and Jean-Claude Juncker had a public disagreement on the issue of whether Greece, for example, should be given greater latitude to achieve its targets. If there is not the potential within the economy to produce what is required to meet the current target, what should one do? The only thing one can do is elongate one's debt in a way that will make it possible for one's target to be met.

I would like to speak about the interesting position the country is in. It is obvious that we have been used by the European Union as a case in point - a living guinea pig - in economic terms. There is no doubt about the ability of the country to recover ground. When there is recovery, it will happen quickly enough. We have to get to the tipping or balancing point where growth begins to kick in again. I refer to the point at which growth does not lead to inflation in the economy or displace people's jobs which are already tenuous but is sufficient to draw people into employment and away from the unemployment register.

I cannot finish without engaging in my usual rant.

Dominic Hannigan (Meath East, Labour)
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We would not allow the Deputy to finish without engaging in it.

Bernard Durkan (Kildare North, Fine Gael)
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I usually mention something of which I have been critical for a long time. I have been a member of the Joint Committee on European Affairs for almost 30 years and have seen strange things happen during that time.

Timmy Dooley (Clare, Fianna Fail)
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The Deputy should receive an award for service to the State.

Bernard Durkan (Kildare North, Fine Gael)
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There should be an award for those who have tolerated my existence for so long.

Timmy Dooley (Clare, Fianna Fail)
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We have learned a great deal from the Deputy.

Joe O'Reilly (Cavan-Monaghan, Fine Gael)
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He was one of the founders of Europe.

Timmy Dooley (Clare, Fianna Fail)
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Monnet, Durkan and Schuman.

Bernard Durkan (Kildare North, Fine Gael)
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I remember a time when we were greeted warmly all over Europe, without exception. The concept laid down by the founding fathers of Europe was like the motto of the Three Musketeers - "one for all and all for one" - but whether we like it, it is a fact that it has since been lost. Some countries, perhaps including Ireland from time to time, have ceased taking ownership of the European project. It is as if we are not part of the European Union at all. Many commentators throughout Europe refer to the Irish, Greek and French problems as if they were not part of the European scene for which we are all responsible. Either we take ownership of and responsibility for the project, or we do not. We cannot stand out and say we have no responsibility, any more than any state of the United States can do so. We cannot decide to opt out because we think we have no influence.

Texas wanted to opt out of the United States a long time ago but was prevented from doing so.

The European Union must have a single currency throughout its territory. There is no use in making excuses about it. The United States would not function with a multiplicity of currencies and a combination of currencies would not be better than the current system with the US dollar. It is for this reason that the dollar remains stronger than other currencies, although the euro is also a strong currency. I have spoken for a long time and note the Chairman has refrained from interrupting me, possibly owing to my age.

Dominic Hannigan (Meath East, Labour)
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The Deputy has made a very interesting contribution. Would our guests like to respond?

Mr. Vjaceslavs Dombrovskis:

I am pleased to note the Deputy and I have a remarkable coincidence of interests. Ireland has our full support in seeking to preserve the size of the Common Agricultural Policy budget.

At the peak of the recession in Latvia unemployment reached 20% of the population. It is three or four years since we reached that peak, but employment growth remains sluggish and the rate of unemployment is still between 14% and 16%, depending on how one counts it. The level of youth unemployment has been declining very slowly. With the youth unemployment rate much higher than the average unemployment rate, it is a priority for us.

To address the third area identified by the Deputy, we had very similar challenges to those faced by Ireland when the second largest Latvian bank failed, largely due to its inability to pay down large syndicate loans to the international financial markets, whatever they are. Latvian taxpayers have taken on the full burden of recapitalising the bank in question, resulting in the public debt increasing by more than four times as a percentage of gross domestic product. Since 2007, Latvian sovereign debt has increased from less than 10% of GDP to 42% or 43% of GDP. Latvia also fully supports all elements of the banking union, as outlined in the original report, including common deposit insurance and supervision by a single authority.

I am very much inspired by Deputy Bernard Durkan's speech about the problems of Europe. It is important to realise, as I did in my previous life as a professional economist, that there cannot be a single currency without solidarity on sovereign debt, bank provisions and many other matters. The position is exactly as the Deputy stated; the system cannot work without adopting a "one for all, all for one" approach. This is what the European Union should be about. I fully share the Deputy's vision.

Mrs. Zanda Kalnina-Lukasevica:

It is difficult to add to comments made by a professor of economics.

Dominic Hannigan (Meath East, Labour)
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It would be useful if Mrs. Kalnina-Lukasevica outlined what action Latvia took to make it easier to set up a company.

Mrs. Zanda Kalnina-Lukasevica:

When one speaks of a single currency, one also speaks of a single European entity. This means closer integration and greater solidarity. We are all aware of the problems arising from proposals to reduce the cohesion policy envelopes for member states. Solidarity is also tied with job creation in regions and countries. In previous years we did considerable work aimed at assisting economic development in the most depressed region of Latvia which is located on the border with Russia and Belarus. This required the creation of several new programmes and the implementation of a number of structural reforms. We used Cohesion Fund moneys and redesigned investment from cohesion policy to enhance the ability of people in the region to set up their own companies. What was needed was a specific education and training programme to improve human capital in the region. We used Cohesion Fund moneys to provide this training and create specific education programmes. A second element was reducing bureaucratic barriers. We introduced a new form of enterprise - micro-enterprise - and it is now possible to set up a micro-enterprise for 1 lat, which is equivalent to €1.50. Previously, setting up a company cost approximately 2,000 lats or €3,000.

Dominic Hannigan (Meath East, Labour)
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The cost of creating a company declined from €3,000 to €1.50.

Mrs. Zanda Kalnina-Lukasevica:

Yes. A large number of small companies and significant levels of self-employment were the result. This measure allowed people to create a job for themselves and perhaps other members of their families. This approach has worked and employment in the region is improving. However, measures of this nature must be implemented alongside education and training programmes. Sometimes people become used to working as an employee and are reluctant to create their own companies.

Mr. Vjaceslavs Dombrovskis:

One of the features of Latvian reform has been the simplification of the taxation system for paying salaries in small companies. We have some abysmal rates of personal income taxation. The combination of all personal income tax and social taxes that must be paid amounts to 46% of labour costs in Latvia, whereas the Irish equivalent figure, if I am not mistaken, is about half the Latvian figure. We have been working on this issue and a rate of simplified taxation has been introduced for a certain sum. Only minimal taxes are paid on 500 lats or slightly more than €700, with no questions asked. We have also been purposefully trying to reduce the taxation level applied to the workforce. As of 1 January, we will reduce the personal income tax rate by 1% and it will be decreased by 5% in the next three years.

Dominic Hannigan (Meath East, Labour)
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I invite the Vice Chairman, Deputy Paschal Donohoe, to contribute.

Paschal Donohoe (Dublin Central, Fine Gael)
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I am sorry to have missed the opening presentations, although I followed the exchange of views with great interest. The Latvian ambassador, Mr. Elferts, recently made an excellent presentation at a conference in Maynooth on the European debt crisis in which he presented the view of a non-eurozone member and outlined the difficulties experienced by his country.

It is interesting that Latvia wishes to join the eurozone. In the light of the current problems in the eurozone, will Mr. Dombrovskis elaborate on the reasons it is considered to be in his country's interests to cede the power to set its own exchange rate by joining the euro? Despite not being a member of the eurozone, I understand Latvia adopted the same policy as eurozone members on supporting the banking system. In the case of Ireland, the decision was made - or made for us, depending on which side one takes in the debate - that no Irish bank could fail and we had to recapitalise the banking system from our own resources.

My understanding is that Latvia supported a large Latvian bank out of the resources of its taxpayers and that went directly on to the Latvian sovereign balance sheet. Given that Latvia did not have a body, such as the ECB to deal with when it made that decision, why was that template chosen as a means of supporting its banking system, as opposed to a model of allowing the bank to fail? Why does Latvia wish to join the eurozone? What was the reason that template was chosen for supporting its banking system? A growing discussion is taking place on the idea that austerity is self-defeating, that one does all these things without ever catching up because the loss in tax revenue that is caused by a decrease in economic activity means the deficit continues at the same level or narrows only by a small amount. Latvia went through a series of budgetary adjustments that were eye-watering in comparison with what we have done in Ireland. What progress was made in that period in regard to its budget deficit as a result of those measures?

Mr. Vjaceslavs Dombrovskis:

There appears to be some hardcore economic questions but I will struggle to answer them. Why join the euro? There is a broad-based answer to that question and there is a somewhat narrow-based answer as to why one should devalue if one has a chance. In broad-based terms the reason one would want to join the euro is because it is much more than the euro. As the Deputy said this is about the future of Europe. The Europe of a single currency cannot survive without, in essence, the institutions of federalism. Do we want to have more European integration or less? If the answer is that one wants to be part of a more integrated Europe then a single currency is a feature of that more united Europe. Therefore, if one wants to be at the core of that Europe and not on the periphery, where we have been for quite some time and know the price, hence our choice in the broad base. In the narrow sense, why devalue? I used to be a professor of economics at the Stockholm School for Economics in my previous life before the Parliament. The theoretical case for this so-called internal devaluation is very weak. Recently I read the biography of Winston Churchill - I do not know how popular he was in Ireland.

Dominic Hannigan (Meath East, Labour)
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He was popular.

Bernard Durkan (Kildare North, Fine Gael)
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He was popular with some.

Paschal Donohoe (Dublin Central, Fine Gael)
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He is a figure of great interest.

Mr. Vjaceslavs Dombrovskis:

That is going back in history. The now popular John Maynard Keynes in his own time wrote the essay on the economic consequences of Winston Churchill, reciting the failure to leave the gold standard, the eurozone of the time. The gold standard was a system of fixed exchange rates which was widely criticised at the time. At the same time, that particular historian has noted that the failure to leave the gold standard, at least for Britain, has played quite a decisive role in the destruction of its industry, especially advances in radar and the aeroplane industry led to the weapons which helped Britain withstand the World War II. Latvia has paid a tremendous price for the internal adjustments. In whole figures, GDP fell, cumulatively by 25%, unemployment topped 20%, and 10% of the population left the country, therefore the price is high. At the same time there has been no denial about the effect on industry. Many people were forced to restructure, to look for new ways of doing things, as a result of which we now have a qualitative difference. The industrial sector is more oriented towards exports and has become much more robust, as a result of this gruesome experience. The answer to this is far from being settled as to whether one should opt out for the relatively painless way or whether we should opt for more suffering but which may do some good in the long run.

In regard to the banking system, the topic is quite controversial in Latvia as to the extent to which the Latvian taxpayers had to cover the risks of those players in the financial system who gave money to the commercial bank. I can only say that most likely the roots of this go back to the previous wave of crisis in east Asia, Indonesia and so on where it is well known that banks were allowed to fail effectively and the results were quite disastrous. Now it appears the pendulum has swung in a different direction in that there has been the risk of disruption to the financial system and the disruption to Ireland's economy was considered to be so high that the banks were saved. Whether in retrospect that will be judged to be the right decision is not for me to say at this moment.

Is austerity self-defeating? The answer to this depends on where one lives. For example, in a small country such as Latvia while at the moment not in substantial public debt, the trust of the international financial markets is quite important, otherwise it can get into the vicious circle of failure to regain the trust and being punished by higher interest rates - high interest rates mean the need for more austerity which we may fail to achieve resulting in a further erosion of trust and so on. If regaining the trust of that financial system is through austerity, that would strike me as the right way to go. For the large countries, the calculus may be might be quite different because the financial markets cannot invest on Mars, they would have to invest somewhere. There is going to be the same anchor of the central countries which, as we have seen recently in the case of Germany, are being paid to borrow, therefore, they will have to settle some way. Some large countries may have to use that to have a different kind of policy in order to help the other countries. Some countries will always be able to tap into the financial markets, unless there is the option to invest on Mars, which is still not available to the best of my knowledge.

Dominic Hannigan (Meath East, Labour)
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What about the levels of deficits?

Mr. Vjaceslavs Dombrovskis:

The short answer is that when the crisis struck, in our case there had been an almost instantaneous fall in the public budget revenues by about one third. The initial levels of deficit were in the region of about 10%. We were lucky to have some very good friends so we got the rescue package from the IMF but most important from the European Union, a good example of the all for one, of which the euro package was about one third of our GDP which was an unprecedented and remarkable rescue package that we have received and which made this adjustment possible for us. The budget deficit for the next year is planned to be 1.4% of GDP.

Paschal Donohoe (Dublin Central, Fine Gael)
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Some 1.4%?

Mr. Vjaceslavs Dombrovskis:

Yes, 1.4% of GDP and the following year even much smaller and so on. We have subscribed to all the six-packs and so on.

Dominic Hannigan (Meath East, Labour)
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The six-pack rating.

Paschal Donohoe (Dublin Central, Fine Gael)
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It strikes me that there is a similarity between Latvia's approach to the euro and Ireland's approach to the euro when we joined.

In essence, what you are saying is that devaluing one's own exchange rate is an artificial source of competitiveness and that in the long run where competitiveness comes from is from the structure of one's industries and so on. Latvia wants to go down that route, which is exactly what Ireland has done. It is very interesting to see this from a country looking to join a project that I am convinced will not only survive, but will prosper in a decade or two. It is interesting that Latvia wants to join the eurozone while others within it predict its demise. I am sure they are wrong, but it is interesting to hear your view on that.

Mr. Vjaceslavs Dombrovskis:

The main problem of the crisis, though this may be an over-simplification, was a high inflow of funds into some economies, some reckless over-borrowing, concentrated in real estate and the resulting excessive construction in real estate. At the risk of over-simplifying, one could say that too many resources were put to work in one particular sector, such as construction. The basic problem is that many or most of the people involved need to requalify and find a job somewhere else, which is a concern. This is a problem that can hardly be solved by movements in currency. The problem is on the ground. People need to be helped to find their way into another industry. This means, of course, we need to help industry create jobs for these people.

Dominic Hannigan (Meath East, Labour)
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Absolutely. That is something we in this country are still trying to achieve. I thank our visitors for coming to this meeting today. They had an early start this morning and I thank them for taking the time to come in and answer our questions so thoroughly. A number of us will meet them later on, so until then I hope they enjoy the rest of the day.