Liam Twomey (Wexford, Fine Gael)
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I suggest that we deal with correspondence in private session and start immediately with public business as our guests must leave at 3 p.m.

The agenda for this meeting is a review of the annual growth survey for 2013 with the European Commission Representation in Ireland. The committee has prioritised this item in its EU scrutiny work programme for this year.

The committee appreciates the importance of the European semester and the role the European Commission's annual growth survey plays in the revised budgetary framework. It also appreciates the important role parliaments and, in particular, the Oireachtas can play in the European semester process. Both the annual growth survey discussion with the Commission and the draft stability programme update with the Minister for Finance, Deputy Michael Noonan, on 24 April are, to a degree, immaterial because Ireland is limited by the memorandum of understanding which applies to it as a programme country. We must, however, seek to make the European semester process part of the DNA of this committee because once the process becomes fully operational, the committee will have an opportunity to offer its views on the revised budgetary framework. The role of the Oireachtas and the committee will be strengthened as a result. By meeting the representatives of the Commission today to discuss the annual growth survey and the Minister on 24 April to discuss the draft stability programme update we will learn how to better structure our engagement in order that when Ireland exits the current economic adjustment programme, the committee will be ready for full engagement and there will be far more meat on the bone as the full value of the European semester becomes apparent.

I welcome Mr. Nigel Nagarajan, resident adviser on economic and financial affairs; Mr. Jonathan Claridge, head of the political section and, Mr. Graham Stull, economic analyst, from the European Commission Representation in Ireland. Am I correct in stating Mr. Stull used to work in the Oireachtas?

Mr. Graham Stull:

Yes.

Liam Twomey (Wexford, Fine Gael)
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The format of the meeting will be that Mr. Nagarajan will make some opening remarks and we will then engage in a question and answer session.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they give to this committee. If they are directed by it to cease giving evidence on a particular matter and continue to so do, they will be entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person, persons or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

I again welcome Mr. Nagarajan and invite him to make his opening remarks.

Mr. Nigel Nagarajan:

It is a pleasure to be here to talk to the joint committee about the annual growth survey, AGS, for 2013. As members are aware, the AGS was released in November last year and intended to launch what is called the European semester for economic policy co-ordination which runs from January to June this year. The aim of the process is to ensure member states better align their budgetary and economic policies with the Stability and Growth Pact and the Europe 2020 strategy. The AGS is the basis for building a common understanding of the priorities for action at national and EU level as the European Union seeks to return to a path of sustainable growth and job creation. The motivation behind the exercise is twofold: first, to provide policy guidance for member states to help them to achieve the shared objectives; and, second, to help strengthen the co-ordination of economic policies at national level and also across member states in view of the fact that there are significant spillovers across the different levels and hence the potential for efficiency gains to be made through the better co-ordination of policies.

I will not speak at great length about the process, but the intention is for the AGS to feed into national economic and budgetary decisions which member states will set out in stability and convergence programmes under the Stability and Growth Pact and national reform programmes under the Europe 2020 strategy in April. These programmes will form the basis for the European Commission's proposals for country specific recommendations which are due to issue in May. As the Vice Chairman mentioned, the treatment of member states operating under programmes is somewhat different from that applied in the case of other member states. In the case of Ireland which is operating under a programme, the only country specific recommendation is that it implement its programme. Alongside the AGS, the Commission also publishes an alert mechanism report, AMR, which deals with macroeconomic imbalances and forms part of the new macroeconomic imbalances procedure. The AMR provides an initial reading of member states' economic policies against a scoreboard of 11 indicators which are intended to focus on developments in competitiveness, indebtedness, asset prices, adjustment and links with the financial sector. Again, however, countries which are operating under EU-IMF programmes are excluded from the country specific aspects of the report. It does not, therefore, really apply to Ireland.

Having dealt with the process, I will try to focus the remainder of my remarks on the key policy messages contained in the AGS and explain how the Commission views these messages. The AGS contains five key policy priorities which the Commission has identified as important for the European Union. These are the same policy priorities that were identified in the previous AGS exercise carried out in 2012. They were endorsed by the Finance Ministers at the ECOFIN meeting in February. The five priorities to which I refer are: pursuing differentiated, growth-friendly fiscal consolidation; restoring normal lending to the economy; promoting growth and competitiveness for today and tomorrow; tackling unemployment and the social consequences of the crisis; and modernising public administration. I will briefly discuss each of these priorities.

In the context of pursuing differentiated, growth-friendly fiscal consolidation, I will, first, explain what these two terms actually mean. The term "differentiated" refers to the fact that member states have different degrees of what is called "fiscal space", which is really room for fiscal manoeuvre. The path of adjustment must, therefore, be adapted to reflect the various circumstances applying in member states. Some of the more vulnerable member states with very high levels of debt and deficits and, as a result, very high sovereign risk premiums face a more urgent need for fiscal consolidation than countries with lower debt and deficit levels and sovereign risk premiums. In member states with greater room for fiscal manoeuvre the so-called automatic stabilisers can be allowed to play their role in cushioning the impact of shocks. This is in line with the Stability and Growth Pact. The main aspect to bear in mind in this regard is that all member states are required to ensure their fiscal policies are sustainable. However, the differentiated approach means the adjustment path must be appropriate to meet the circumstances of each country.

The second aspect of fiscal consolidation is the fact that it must be "growth-friendly" in nature. What does that term mean? We are aware that in the short term there is a negative impact on growth of fiscal consolidation. However, the cost in this regard must be balanced against that which would obtain if fiscal consolidation was not pursued and the public finances were not placed on a sustainable path. Elevated sovereign risk premiums also act as a drag on growth and reduce the likelihood that businesses and households will be able to access finance at reasonable rates. This is because a sovereign's financing conditions can spillover into those of households and businesses. To minimise the negative impact of fiscal consolidation on growth, member states must give real consideration to the question of how they should go about pursuing such consolidation. This means making choices. There are two such choices which are important, namely, that which relates to the balance between expenditure and revenue measures on the adjustment path and that which relates to the particular revenue and expenditure measures that will be employed.

In the context of the balance between expenditure and revenue, there is quite an amount of evidence to the effect that expenditure-based consolidations are more likely to be successful than those which are more revenue-based. In terms of the growth impact, a fiscal consolidation mainly achieved through a reduction in expenditure is more likely to be growth supportive in the long term than one that is based on raising tax revenues. That is the first consideration. The second relates to the choice of individual measures to be implemented on both the spending and revenue sides. A key policy decision in this regard relates to the mix between reductions in current and capital spending, particularly as the multiplier is likely to be different for each of these.

More generally, the Commission has recommended that member states attempt to be selective in where spending cuts are envisaged to try to preserve future growth potential and essential social safety nets. In particular, it considers that investments in education, research, innovation and energy projects should be prioritised and strengthened, where possible. With regard to taxation, there is scope to adapt tax bases less detrimental to growth and job creation and to make tax systems more efficient, competitive and fairer. Again, there is considerable evidence to suggest taxes on labour are more detrimental to growth than other types of taxes such as those related to consumption or the environment.

Member states should try to increase taxation more by broadening the tax base rather than by raising individual tax rates per se.

The second priority is restoring lending to the economy. One of the key developments since the start of the crisis has been the fragmentation of financial systems along national borders and retrenchment of financial activities into domestic financial markets. This has resulted in limited or costly access to finance for many businesses and households which, in turn, can act as a major obstacle to recovery. As a consequence, the improvement in financial conditions we have seen in Europe since the most acute phase of the crisis has not yet fully translated into improved conditions for borrowing for households and firms. In particular, access to credit for small and medium enterprises, SMEs, is particularly problematic if access to credit is limited because they can play a potentially large role in employment creation during recovery.

A key recommendation made in the annual growth survey, AGS, is for member states to explore options for SMEs to tap what are called non-traditional, non-bank sources of finance. This includes initiatives such as promoting business to business lending but also providing more possibilities for SMEs to issue corporate bonds, as well as facilitating access to venture capital by SMEs. In addition, a very important initiative at European Union level is the late payments directive. This is important in terms of reducing payment delays on the part of public authorities to SMEs which can help a good deal in dealing with the cash flow position of SMEs. I should also mention that the provision of an extra €10 billion for the European Investment Bank will enable it to provide an additional €60 billion in additional finance in the next three to four years which, in turn, is expected to unlock approximately three times that amount from other providers of finance.

The third priority is promoting growth and competitiveness for today and tomorrow. In that respect, the alert mechanism report I mentioned shows that there are some positive developments in terms of price and non-price competitiveness that are contributing positively to improving external imbalances, although with some time lags. In particular, those members states under the most intense market pressure have undertaken significant reforms and regained a good deal of competitiveness, but there is still more that needs to be done across a wide range of member states. In this area some key priorities are driving innovation, new technologies and raising levels of public and private research and development investment, raising the performance of education and training systems and overall skill levels, improving the business environment further and tapping the potential of the green economy.

The fourth policy priority is tackling unemployment and the social consequences of the crisis. We have seen that the length of unemployment periods has increased a good deal, in part because of the restructuring of economies and the difficulties in finding jobs. There is now a risk which we have identified of unemployment becoming increasingly structural in nature. We then see a growing number of people withdraw from the labour market. In turn, there are clear indications that risks of poverty and social exclusion are increasing in many member states. In spite of the high levels of unemployment, there is also evidence of skills bottlenecks and mismatches, with certain regions and sectors lacking employees able to fit their needs. Increasing participation in the labour market and improving skill levels and facilitating mobility remain urgent priorities. Also, further efforts to improve the resilience of the labour market and invest in human capital are essential to help companies to recruit and adapt and to allow more people to remain active and take up opportunities. The social partners also have a key role to play alongside public authorities.

The recommendations the Commission is making in this area include limiting the tax burden on labour, notably for the low paid, as part of the broader efforts to shift the tax burden away from labour that I mentioned, and also continuing to modernise labour markets by simplifying employment legislation and developing flexible working arrangements. At the same time, member states should do more to fight unemployment and improve employability and support access to jobs and a return to work, including by boosting public employment services and stepping up active labour market measures such as skills upgrading and individualised job seeking assistance; reducing early school leaving and facilitating the transition from school to work; developing and implementing the youth guarantee scheme, whereby every young person under the age of 25 years would receive an offer of employment, continued education and an apprenticeship or a traineeship within four months of leaving formal education or becoming unemployed. In addition to these measures, additional efforts are needed to ensure the effectiveness of social protection systems in countering the effects of the crisis to promote social inclusion and prevent poverty.

The final policy priority under the AGS is modernising public administration. During the years many member states have undertaken measures to increase the efficiency of their public administration. Such reforms have been particularly far-reaching in countries in financial distress. Examples include reorganising local and central government; the rationalisation of the public sector pay system and the governance of state-owned enterprises; the reform of public procurement processes; regular comprehensive expenditure reviews; and the promotion of efficiency measures across the public sector. Recommendations in this area include improving the efficiency of the tax collection and health care systems, reducing delays in making payments and strengthening the role of public employment systems. In addition, the Commission has also placed emphasis on areas such as making full use of public procurement opportunities in support of market competition and improving the quality, independence and efficiency of judicial systems.

The guidance provided in the annual growth survey is intended to help member states to design appropriate policies to help us exit from the crisis and lay the foundations for smart, sustainable and inclusive growth across the European Union. The Commission is committed to working closely with national authorities, including national parliaments, to help to create a shared sense of ownership of this process.

Liam Twomey (Wexford, Fine Gael)
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I ask members in asking questions to keep to the point because we have 30 minutes only.

Peter Mathews (Dublin South, Fine Gael)
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I thank Mr. Nagarajan for his presentation and his colleagues for attending. With the Vice Chairman's permission, I will put my questions in a conversational way and ask Mr. Nagarajan to be kind enough to answer as pithily as possible.

We have just heard what can be described as a comprehensive mouthful. I do not want it to reflect negatively on Mr. Nagarajan's report, but it is like a chunk of theory in abstract and conceptual language. As in the case of bar or pie charts, we do not have anything quantified in terms of what we need to do. It is all very well saying we agree that Christmas is a time of goodwill and that in that respect we would like to introduce measures that would make people more inclined to be kind to one another. Where is the Commission going with this initiative?

There are 20 million people unemployed across Europe. In Ireland there are 450,000 unemployed. Households and businesses are being creased by legacy debt. They cannot spend or invest. They are, psychologically and emotionally, out of the market, and the financial system has held and continues to hold the real economy to ransom. That is what is wrong and nobody is addressing the issue in hard, concrete language. I am not happy with where the country has been left as a result of six banks going on a lending splurge involving a sum of €200 billion in four years, with money provided by institutions, mainly European, and bondholders, and, when the music stopped, being secondary market investors, not the primary subscribers. They got away scot free because the euro system insisted that none of them take a serious hit for fear it would result in a cascade of losses all around the place. The euro system provided these six stupid little banks, two of which are now called pillar banks - two others are dead and buried - with emergency liquidity assistance, ELA, and European Central Bank, ECB, loans to pay approximately €75 billion to bondholders. That was wrong and remains so.

I refer to the promissory note nonsense that occurred a month or so ago, whereby an odious €31 billion of extraordinary liquidity assistance, ELA, secured on €31 billion of promissory notes - which means the people of Ireland are being forced to underwrite the exit of the bondholders - is now being spread over 40 years or thereabouts and back-loaded, as though it were some miracle elixir or cure. It is wrong.

Liam Twomey (Wexford, Fine Gael)
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Deputy, please focus on the questions.

Peter Mathews (Dublin South, Fine Gael)
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I have been patient for two years and will now get it off my chest.

Liam Twomey (Wexford, Fine Gael)
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Deputy, as far as I am concerned from sitting here in the Chair, you have been getting it off your chest for two years.

Peter Mathews (Dublin South, Fine Gael)
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I was told it was kindergarten economics 18 months ago. When Mrs. Lagarde alludes to something I said 18 months ago, everyone thinks it is right.

Liam Twomey (Wexford, Fine Gael)
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Deputy, I have 30 minutes available and will be really strict. You were going very well in the beginning and I want you to keep your focus in the same way.

Peter Mathews (Dublin South, Fine Gael)
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Okay. My point is that the fundamental engineering flaw and what one might call subsidence in the economy remains. Moreover, until those banking-originated losses are mutualised and relieved from our people, it is a sure thing, as the IMF has tentatively indicated, that we face ten years of galley slavery and that is wrong. Ireland has a small economy. Cyprus represents 0.2% of Europe's GDP, while Ireland represents approximately 1.8%, and it is wrong that 45% of Ireland's national income - forget GDP - is debt that has been lumped onto the people. We had better start this discussion afresh because the €31 billion has now been cemented in 40 years of formal national debt. As for the other €30 billion or so put in the two pillar banks, more is needed. This reason the banks have not been writing down loans to repayable and recoverable amounts is that the amount they got in two bites - that is, in March 2010 and March 2011 - was not enough. They were not honest. Moreover, the bigger firms in the establishment - be they investment banks, advisers, BlackRock Solutions, PricewaterhouseCoopers, KPMG or whoever they were - failed us in the measurement of the scale of the problem. It was simple to calculate on the back of an envelope that four years of turbo-charged lending of €200 billion would lead to losses of approximately €100 billion. Anyone with any honest experience would know that.

Liam Twomey (Wexford, Fine Gael)
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Deputy, I am sorry.

Peter Mathews (Dublin South, Fine Gael)
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I ask the witnesses, as members of the Commission staff, to bring back this message. Let us start an honest debate, an honest rehabilitation and medical management for the economy. I am doing this. It is my brief from those who elected me-----

Liam Twomey (Wexford, Fine Gael)
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Sorry, Deputy; I must ask you-----

Peter Mathews (Dublin South, Fine Gael)
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-----and I am getting it across.

Liam Twomey (Wexford, Fine Gael)
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I thank the Deputy. It might be easier to take a few questions together.

Thomas Byrne (Fianna Fail)
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I thank Deputy Mathews for his excellent contribution, which certainly got to the nub of many of the issues. I have a few specific points on which I seek answers. In its annual growth survey, the Commission proposed ensuring a balanced approach to foreclosures in the case of mortgage lending while protecting vulnerable households and preventing banks' balance sheets from becoming overburdened. Today is the closing date for submissions on the Central Bank of Ireland's code of conduct regarding mortgage arrears. One huge difficulty with it is that the code will apply only to banks regulated by the aforementioned Central Bank. In this country, at least a quarter of the people have mortgages with institutions that are not regulated by the Central Bank of Ireland and this will be of no relevance to them. Consequently, the witnesses' presence today is highly relevant in that regard. What is being proposed in respect of this issue by the European Commission and the European Union, possibly in the context of a single supervisory body? Will the issue of mortgage arrears be dealt with centrally or will it simply be left to be dealt with on an ad hoc basis? I accept it is a failing on the part of the Government not to legislate for all banks in the country, which I believe it has the power to do. It certainly intends to legislate to allow repossessions of properties and this will apply to all the banks and financial institutions operating in the country. However, the aforementioned code of conduct, for which today is the closing date for submissions, does not even apply to the former Irish Nationwide Building Society. That constitutes the height of ludicrousness and I seek the European Commission's view in this regard because Irish Nationwide is not now classified as a bank and is not regulated by the Central Bank in its new form. This is a huge failing and it is a failing of the European Union not to have a common approach on this issue. I certainly have not heard a great deal of discussion on this issue at European level, although I would like to be corrected in this regard by the witnesses.

On the role of public banks and guaranteed institutions in lending to SMEs, about which Mr. Nagarajan spoke, the present Administration included in its programme for Government a proposal for a strategic investment bank, which is along those lines. However, nothing has happened in this regard. The Commission has published this worthy document, which I consider to be quite a good document overall, although I agree it may not be very practical in some ways. What is the view of the European Commission when it proposes something that member states have already stated they will do but then do not bother doing or do not implement at all? What is the view from Brussels in this regard?

Liam Twomey (Wexford, Fine Gael)
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Perhaps the joint committee will hear the comments of Mr. Nagarajan and his team on these questions before turning to the other two speakers.

Mr. Nigel Nagarajan:

I thank members for their questions. Perhaps I should begin by stating that I am somewhat constrained in terms of how I can answer some of the questions. I have been asked to attend to talk about the annual growth survey. I am very happy to do that in as helpful a way as possible, but I really must stick to that part of the discussion. Some of the questions or some aspects thereof go into quite a lot of detail on the specifics of Ireland's own situation and in particular on the Irish programme. Unfortunately, I am not in a position today to go into those aspects. I will try to answer from an AGS perspective and will try to be as helpful as possible, but I hope the joint committee will understand that I cannot go into the details of the programme today. Incidentally, members might recall that in July of last year, representatives of the troika appeared before the joint committee and answered questions. If members wish to invite the troika again to do this, I would be very happy to pass on such an invitation to the other institutions. However, it would not be fair for me, representing just one institution on my own, to try to take on some of these questions, especially as I was asked simply to discuss the AGS.

In an effort to address some of the issues raised by the two members and in response to the question from Deputy Mathews, I should have begun by distributing a handout I brought along for the joint committee. It actually includes some bar charts and what I hope are some useful charts and frameworks for explaining how the process works. I take on board the Deputy's comment, because this is a process I am trying to explain. It is in part a process and in part policy guidance and it is perhaps a little hard to grasp fully the mouthful I tried to convey to members. I hope the charts and the graphics can be helpful in that respect.

As for some of the specific points raised by Deputy Mathews, I will try to respond with an AGS focus, rather than an Irish-specific focus. The Deputy was basically pointing to the failure of the financial system to support the recovery, and this point is very much evident in the AGS. However, we must think about what practical steps can be taken now to help SMEs and households to get access to credit. The financial system is not yet fully supporting the recovery in many member states. As for what options are available for member states to think about to support the recovery-----

Peter Mathews (Dublin South, Fine Gael)
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Halve the salaries of the bankers.

Mr. Nigel Nagarajan:

-----that is where the AGS document has a number of recommendations to make. The second point made by the Deputy is that high levels of private indebtedness are weighing on the recovery. It is a point with which I definitely agree and the deleveraging in the private sector is weighing on the recovery. This also is a point that is made in the AGS and in the supporting documents. Consequently, I do not disagree with the Deputy in that regard. However, it is important to try to move the discussion on a little in terms of what practical measures can be taken at both member state and European Union level to try to support the longer-term investment that is needed in Europe. Consequently, some of the things that have been raised in both the AGS and the other documents that are coming out are trying to go along these lines.

Peter Mathews (Dublin South, Fine Gael)
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Is Mr. Nagarajan aware that the composite of our household, non-financial, corporate and sovereign debt is approximately 430%? That percentage is way above that of Japan, but the penny, centime or cent has not dropped in the minds of the Germans.

Liam Twomey (Wexford, Fine Gael)
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Sorry, Deputy; please do not interrupt.

Mr. Nigel Nagarajan:

In respect of indebtedness, that is one of the aspects that is being looked at in the scoreboard to which I referred earlier, namely, the macroeconomic imbalances procedure.

Peter Mathews (Dublin South, Fine Gael)
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That is the biggest one.

Mr. Nigel Nagarajan:

This is one of the things about which members can find more information in the material we distributed.

To turn to the questions asked by Senator Byrne, he again went into some detail about the Irish-specific situation, the code of conduct on mortgage arrears and so on. Again, I apologise, but I cannot go into detail today to address those questions. I can try to speak in general terms.

Thomas Byrne (Fianna Fail)
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The point was about how the Commission is proposing to relieve foreclosure and protect vulnerable households, yet individual member states are regulating only certain banks. If Ireland is not able to regulate all of the banks that operate or have lent money in the economy, it requires a European response. The nub of the question is: what is happening from a Brussels point of view?

Mr. Nigel Nagarajan:

It is an interesting question. Most of the competences are national competences. It is true that as a result of the crisis some of the competences are being moved to the European level but we are at an initial stage of this process and it will be a learning-by-doing process.

In terms of what the AGS says about the issue we have raised, Senator Byrne correctly states that the AGS calls for a balanced approach to foreclosures. That is something that is stressed - for example, the establishment of adequate protections for the family home is something we recommend for member states.

It is hard for me to go into the details of financial regulation in individual member states because that is not really the purpose of the AGS strategy, which is to provide general guidance in terms of policies for member states. One also must recognise that member states have an incentive not to cede their existing competences. Senator Byrne's question was about what more should be done at a European level, but from a member state perspective, member states are keen to keep as many of their competences, particularly in the area of financial regulation, at a national level.

Stephen Donnelly (Wicklow, Independent)
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I thank the three representatives for coming in. It is good to see them again.

On the growth forecasts, the Irish Fiscal Advisory Council, which was set up recently here, produced for the committee an extraordinary chart which showed the growth forecasts for all of the major players, such as the OECD, being revised downwards quarter by quarter. It was an extraordinary graph that showed a clear systemic error in growth forecasting. The fact that these institutions and economists all were making the same error repeatedly means it is a systemic error. It means there is something wrong with the economic modelling capabilities of the smartest persons we have doing this. Has this been addressed in the analysis? Has anything specifically been done to address that fact that because everyone has got this wrong every quarter and always in the wrong direction, it is clearly a systemic error? That is my first question. I have a few different questions; does the Chairman mind if we take them one at a time?

Liam Twomey (Wexford, Fine Gael)
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Time is against us. Okay, but I ask the Deputy to keep it nice and tight.

Stephen Donnelly (Wicklow, Independent)
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I thank the Chairman.

Liam Twomey (Wexford, Fine Gael)
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I will allow this to and fro, but the answers should be kept brief. We can get more out of it.

Stephen Donnelly (Wicklow, Independent)
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A shorter version of the question is this: why should we believe these growth forecasts when every institution, including each of our own institutions, has got them wrong every quarter for the past four or five years?

Liam Twomey (Wexford, Fine Gael)
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Deputy Donnelly should keep all of the questions like that and it will work perfectly-----

Stephen Donnelly (Wicklow, Independent)
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I was trying to ask a friendlier, less adversarial question.

Liam Twomey (Wexford, Fine Gael)
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-----and we should keep all the answers the same way too.

Mr. Nigel Nagarajan:

It is a valid point that economic forecasting is an inexact science. In fact, what happens when there are very large turning points in an economy is that the forecasts often miss those turning points. The reasons for this are complex. They are partly due to the fact that forecasts rely on data, and data tells one what happened in the past. In a way, it is a little like trying to drive a car while looking in the rear-view mirror, because all the data is telling one what happened in the past and one is trying to extrapolate.

Peter Mathews (Dublin South, Fine Gael)
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That is what accountants do.

Mr. Nigel Nagarajan:

One is then trying to extrapolate on that basis to talk about the future. When the economy more or less continues along a smooth path, one's forecasting should more or less be accurate. What has happened with the crisis is that there has been a very large shock due to the build-up of different factors and balances, etc., and it is true that in many cases institutions did not correctly forecast the size of that shock. That is a reason we need to reflect on how to strengthen our models. There is a considerable reflection exercise ongoing in my institution and other institutions about how to improve models and forecasts.

Stephen Donnelly (Wicklow, Independent)
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My point is slightly different. My question is not "Why are there inaccuracies?". I understand that. My question relates to the fact that the error is systemic. There is the same mistake in the same direction by every institution every quarter. Rather than getting into it now, it would be useful if Mr. Nagarajan could provide the committee over the next few weeks with a technical note. I would be interested to see whether anything has been done to address what is clearly a systemic error in macro-forecasting theory and modelling. I imagine the committee could provide it - the fiscal advisory council has the extraordinary graph that shows the systemic error - rather than wasting Mr. Nagarajan's time by getting into technical forecasting modelling. It would be useful to have a note. I would be interested to know whether Mr. Nagarajan and his colleagues have addressed the fact that everyone is getting it wrong in the same direction. We might be steering a car by looking backwards, but we keep crashing to the left and I am wondering if they have figured out that the steering is slightly off.

Mr. Nigel Nagarajan:

To briefly say something about Ireland, the forecasts that have been done jointly by the troika in Ireland under the programme have been more or less correct. Of course, every time we come on a review mission there is a chance to look at the data and discuss them with the different bodies, and also with the bodies that are doing forecasts, which feeds into our views. Each time we revise our forecasts as appropriate.

Stephen Donnelly (Wicklow, Independent)
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I think Mr. Nagarajan will find that they are constantly revised in one direction.

Mr. Nigel Nagarajan:

The forecast record under the programme in Ireland has been quite good.

Stephen Donnelly (Wicklow, Independent)
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My second question is about jobs. I have looked through the various recommendations. Consistently with the IMF reports in this area, they seem to be fairly exclusively on the supply side. As Mr. Nagarajan will be well aware, we do not have a supply-side issue in Ireland. We have a vast number looking to work. Perhaps in some sectors, such as high-tech, we are bringing workers in and there are measures that can be taken. However, there is very little on demand-side activation. Am I correct in that regard or am I missing some weighty demand-side activation measures on jobs?

Mr. Nigel Nagarajan:

My perspective is that this is the wrong way to approach the issue. Deputy Donnelly is correct that demand needs to increase if there are to be jobs, and everyone recognises that. However, the issue here is the way in which demand returns to higher levels. What we saw in Ireland was that at the peak of the bubble, because of the excessive concentration on construction, construction activity formed approximately one fifth of GNP and one in seven jobs were in construction. The sharp rise in unemployment that Ireland has experienced is in large part a reflection of the unsustainable rise in construction as a share of GDP. In fact, half of the increase in unemployment in Ireland since the busting of the bubble is from the construction sector.

My point was on how demand will come back. If demand comes back in the form of another construction bubble then there will be no problem finding jobs for unemployed construction workers, but that is unlikely to happen. What is likely to happen is that demand will come back in a more balanced way and construction will not be such a heavy feature of demand. It is critically important that we equip the unemployed with the skills that are likely to be needed when demand returns. If demand comes back in a different, more balanced form, then we need to ensure, for example, that ex-construction workers are given access to training that could help them to take up the new jobs that are being created, not all of which will be construction jobs. That is why thinking about the relationship between demand and supply is not as simple as Deputy Donnelly's question seemed to imply.

Stephen Donnelly (Wicklow, Independent)
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I appreciate it is not simple at all. I will make two points. First, I agree that one cannot necessarily get many unemployed plumbers working in high-tech Internet jobs. The rate of unemployment among those under 25 in Ireland is approximately 25%. According to the Union of Students in Ireland, for graduates it is 40%. It has nothing to do with construction. The jobs are not out there. I hear in Mr. Nagarajan's explanation a rationale that we must prepare the workforce for a good healthy balance of jobs when the jobs begin to arrive again. I agree with that, but let us not put all our efforts into getting all of these unemployed people ready and none of our efforts into helping to create those jobs.

Mr. Nigel Nagarajan:

Okay.

Stephen Donnelly (Wicklow, Independent)
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His explanation seems light. When I met the IMF's labour market team to discuss this, I asked about their demand-side activation measures and they said they had nothing. This feels like more of the same. I have no difficulty with what Mr. Nagarajan is saying on the supply side, but it is only half the picture.

May I ask one more question?

Liam Twomey (Wexford, Fine Gael)
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Just one more, please, and then we will move on.

Stephen Donnelly (Wicklow, Independent)
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While I have no issue with the five principles set out, one is missing, which is equality. We could see significant growth at the same time as a significant rise in inequality, as has happened under the US model over the last number of years. How is equality being factored into the growth survey and the specific policy recommendations?

Mr. Nigel Nagarajan:

In my initial attempt to answer Deputy Donnelly, I focused on the relationship between supply and demand and tried to explain that demand was likely to return in a different form from that which it took in the past. I did not say anything about the need for demand except for one small remark. I agree with Deputy Donnelly that we need demand to come back. What we are saying in the annual growth survey is that there is scope, notwithstanding the need for fiscal consolidation, for targeted measures to boost employment and growth provided that they do not put public finance sustainability in doubt. The survey sets out a number of different areas in which this can be done. I also referred to improving access to credit to allow the private sector to play a role in creating demand. I mentioned the role of AIB in providing access to credit.

I do not disagree that we need a demand component. It must be one that is compatible with the overall approach of restoring the sustainability of public finances and it must be beyond public sector actions. We need actions that facilitate the private sector to create jobs. There can be no disagreement with the Deputy's general remark that demand must come back.

Stephen Donnelly (Wicklow, Independent)
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I would like to see more of it here. I agree strongly with Deputy Mathews that the single most important factor in a return of demand in Ireland is the deleveraging of private, not public, debt. The only measure set out is foreclosures. While that is good to see, it will not deleverage debt in the way that is needed here. Mr. Nagarajan spends a lot of time here and is very aware of what is going on. The split mortgage approach does not deleverage private debt. These initiatives do not all come out this year, but inevitably the Commission is thinking about them. The single greatest component is not the European Investment Bank; it is private debt deleveraging.

My last question was on equality. How is the principle of equality being factored into policy recommendations?

Sean Barrett (Independent)
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I welcome Mr. Nagarajan and his colleagues. I found the document to be an instrument of despair. Page 9 sets out that we added 2 million to the number of unemployed in Europe in the last 12 months. I see the same old clichés about more committees, waffle and quangos, while nothing is done to address the basic problem.

The design faults in the euro must be addressed. It has been a disaster for Ireland, Portugal, Greece, Spain and Italy. As Brussels made the initial mistakes, it is not willing to address them. We must tell our visitors that this country is at the end of its tether about the way it is being treated and there will be a sizeable interest in Mr. Cameron's approach. Brussels should look in the mirror and see what a disaster it has been. Why does it continue to reheat failed policies from the past? Mr. Nagarajan mentioned the role of government; it is already 50% of GDP, which the EU encouraged. That must be looked at. Can economies survive with such large bureaucracies weighing them down and a currency design for which we are all paying the price? No one in Brussels appears to be willing to pay any price for the faults of the currency. The document refers to a compact for growth and jobs, a two-pack, a six-pack, a Stability and Growth Pact and a European systemic risk board. It just goes on and on. After these seminars take place, more waffle emerges. I see no economic content at all. The worst happens when Commission and Irish bureaucrats meet. We cannot get the fiscal council the full range of responsibilities the Commission wanted. If one reads the debate on the Finance Bill in the Seanad, one sees that the Department of Finance would not let the fiscal council look at things.

Mr. Nagarajan referred to taking lower income people out of the tax net. We did that for years, but Brussels's recovery policy put them all back in through the universal social charge. The first thing we need is a mea culpa from Brussels for what has been done to 25 million people. It should not think that because we have not set fire to buildings, unlike the Greeks, Irish people are not really resentful of what is being done in the name of the euro. Brussels must stop publishing pages and pages of clichés. They are not helping. We have unemployed graduates. The unemployment rate among PhD and master's degree graduates is 17.5%. It is 7% among bachelor's degree graduates. There is no evidence that research and development measures will lead to any return although I gather the Government has commissioned a study. On infrastructure, we have empty motorways, airports and sea ports. Infrastructure is not the answer. This is a sign that people at the centre have not yet woken up to the disasters that we have had in adding 2 million to Europe's unemployment figures. Brussels should stop recruiting new countries to the euro. Spain, Greece, Portugal and Italy should be allowed to leave. I cannot see how they will recover without an exchange rate and devaluation. There is not enough appetite in Germany for the level of fiscal federalism the model set out requires.

There is a lack of urgency and engagement with people who have really suffered. We have been conducting the experiment and blown up the laboratory. To suggest tweaks here and there will not work. In the context of public administration, it is recommended that we improve judicial systems. We cannot really blame judges when bankers and senior civil servants destroyed the European economy. Judges just wear wigs. Many irrelevancies are included in this document which neglects the fact that a small group of people in banks and public administration destroyed a large part of the European economy. Please, confront them with their incompetence. We could have artificial hope, of which there has been a great deal, but there is nothing here to address the 15% unemployment rate we have in Ireland. The mass emigration of our young people is to countries outside Europe. They do not see much future in it and are heading off to Canada and New Zealand.

Europe had better get its act together. There is no personal animosity in my points, but as an institution Brussels has failed. This document illustrates that.

Liam Twomey (Wexford, Fine Gael)
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When Mr. Nagarajan refers to the simplification of employment legislation, what does he mean specifically?

Mr. Nigel Nagarajan:

Deputy Donnelly asked about equality. One of the priorities I talked about was social consequences of the crisis and tackling unemployment. It is an important issue which is reflected in that priority. I would be happy to hear more on the Deputy's views of how that should be developed further.

To address Senator Barrett's points, there is widespread appreciation of the fact that there were design faults in EMU. I will not pretend there were not. The crisis would not have been as deep if there were no faults. The policy initiatives that have come forward are attempts at EU and national level to address some of those design flaws. Recently, the Commission has produced a blueprint for a deep and genuine EMU, which goes much further than would have been considered possible only a few years ago. It includes mutualisation of risk and the possibility of deepening solidarity on some of the matters Senator Barrett mentioned. It is a little bit unfair to say that Brussels is unaware of the need to address some of these design flaws. We may not be addressing them in quite the way Senator Barrett thinks we should but we are beginning to deal with them in some of these initiatives.

If the Senator has specific actions he feels we should be taking, I am very happy to listen to them. He was critical of the annual growth survey, but if he has different suggestions I would like to know what they are. One of the points of attending this meeting is not just to talk about the AGS but to hear committee members’ views on it.

The public sector makes up 50% of GDP in Europe, as mentioned in the AGS. Many of the most successful economies in the world are those with large public sectors. The Scandinavian economies, for example, have large public sectors but are also among the best performing economies in the world. It is not a large public sector by itself that will hinder one from having a successful economy. One needs to have the other elements that can help generate high levels of growth and job creation. The Scandinavian countries have been quite successful in this. They have a combination of generous welfare systems and flexible labour markets. Accordingly, I would not agree with the Senator on this point.

Mr. Graham Stull:

On employment legislation, what has happened in Europe over the years is that there has been a great deal of fragmentation in the way employment legislation has been carried out. There are certain measures under way at EU level to streamline this but also to simplify the processes involved and make them more responsive to the competitive needs of today. This will vary considerably from member state to member state. It is certainly applicable in countries that have had a large degree of public sector involvement in how labour markets work. It will not apply to the more flexible economies such as Ireland’s or the UK’s.

Liam Twomey (Wexford, Fine Gael)
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Is Ireland quite open and flexible in this regard?

Mr. Graham Stull:

I would say that is true compared to some economies in the EU.

Liam Twomey (Wexford, Fine Gael)
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There is still a criticism that we have restrictive practices.

Mr. Graham Stull:

Individual practices in member states need to be examined in several ways. There are probably specific sectors in the Irish economy that need to be examined. However, as this is about the overall area, I would not like to go into too much detail about what specific recommendations might come forth with regard to Irish practices.

Sean Barrett (Independent)
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I thank Mr. Nagarajan and his team for their presentation. However, the difficulty I have with a deeper EMU is that it is coming from the folks that brought us the last one. Have they improved their knowledge of economics since the launch of the first project? I hope they have but there is very little evidence of it. It will be very hard to sell giving more power to the guys who really screwed up the last time to our constituents.

Stephen Donnelly (Wicklow, Independent)
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The committee might find it useful if a comparative analysis were done as a part of this. If not, is it intended to do one? For example, the Vice Chairman asked about liberal labour laws in various member states and Mr. Stull replied that Ireland is not too bad but there are some others that are. Is there any comparative analysis of the various measures such as foreclosures, insolvency and labour liberalisation that shows which member state is doing well and which is not? This would be helpful in allowing us to see the areas in which we are pretty good and those in which we can learn from other countries.

Mr. Graham Stull:

The focus on the comparative dimension of economic governance arrangements is looking at macroeconomic imbalances. That is quite a task at the moment. The AGS is laying out these broad priorities. Within that, one has to look from country to country as to what specific recommendations are needed. One must take into account the fact that there is so much diversity across the European Union that it is difficult to come up with one coherent profile in any area, be it in employment legislation or some other area.

Stephen Donnelly (Wicklow, Independent)
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Has work been done, or will it be done, by the Commission in examining the various areas for every country so that we can see where we are good, where we can do better and from which member states can we learn to do better?

Mr. Graham Stull:

Beyond the annual growth survey, we have the ongoing work within the wider Europe 2020 strategy and across the various Commission Directorates-General that carry out comparative studies within that.

Stephen Donnelly (Wicklow, Independent)
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When will we have these studies?

Mr. Graham Stull:

The Europe 2020 strategy is up and running and one can get specific information from its website on various policy areas. The Directorates-General publish ongoing comparative studies in all sorts of areas.

Liam Twomey (Wexford, Fine Gael)
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I thank the delegation for attending this afternoon. I must apologise for cutting this meeting short as it had the potential to get into deeper details. I hope we will be able to return to this topic.