Dr. Alan Ahearne:

I thank the Chairman for the invitation to appear before the committee today. In my opening remarks, I will make some brief comments about recent developments in economic governance in the EU and about some of the proposals for the future of economic and monetary union set out in the so-called four Presidents' report and in the Commission's communication on the issue published late last year. In addition, I will talk about the implications for Ireland of these developments and proposals. I will also mention some proposals for fiscal and monetary policy actions at the European level that could boost employment and growth.

It is well known that the original Stability and Growth Pact failed to prevent a major ongoing crisis in the euro area. The SGP rules were disregarded by larger member states, and in any event they wrongly focused almost exclusively on budgetary issues while ignoring excessive private capital flows which were the root cause of the crisis. European leaders have responded to past failures with a new regime of obligations and surveillance. This regime is built on a dizzying number of new rules and regulations. We now have six packs and two packs, economic partnership programmes and post-programme surveillance programmes, European Semesters, macroeconomic imbalance procedures and macroeconomic scoreboards. Highly intrusive oversight of draft national budgets in the euro area by the European Commission will be in place by the end of the year. Where is all this enhanced oversight leading us?

This new regime, in and of itself, will not make for a better functioning monetary union.

We will benefit, however, from these recent developments if they pave the way for genuine fiscal union in Europe or, as the four presidents' report put it, "a fiscal capacity for the EMU". This capacity should include risk sharing, such as an insurance type scheme between member states, and should ultimately lead to some form of eurobonds or euro indemption fund.

As an aside, I hear a lot of discussion about Ireland regaining its economic sovereignty. The phrase is used a lot in the political system and in commentary. It is usually associated with Ireland being able to borrow again from financial markets. Anybody who thinks that when Ireland can borrow again from financial markets it will mean we have regained full economic independence, should have another look at the treaty and the six pack. They should look at the two pack also.

A more urgent priority is the establishment of a banking union in Europe. A speedy resolution of problems in the banking sector is a precondition for growth. The single supervisory mechanism constitutes a first step and its establishment may help to speed up the restoration of a properly functioning banking system in Europe. However, it is the single resolution mechanism that will potentially yield greater benefits. In that context, Ireland must ensure that European leaders deliver on their 29 June commitment to break the vicious circle between banks and sovereigns.

In addition, although in principle the so-called bailing in of uninsured creditors and failed banks - which will likely be part of the final bank resolution and recovery directive - has much to recommend it, in practice it is not clear that policy makers will choose such actions in the absence of a genuine lender of last resort in the banking system. The experience of Cyprus is informative in that regard.

As I have said at this committee previously, bolder monetary and fiscal policy actions are needed at European level to end the economic crisis. The ECB could cut interest rates further and expand its credit programmes to support lending to SMEs. A European-wide programme of investment in green-tech infrastructure, for example, could boost aggregate demand and employment.

The pace of fiscal consolidation in some EU countries needs to be readjusted to support economic recovery. This is especially true of Germany.