Professor John McHale:

I thank the Chairman and all members for the really excellent questions. There is quite a lot here. One theme that came up in a number of members' questions related to the intrusive level of disciplines that have been put in place under the six-pack, the two-pack and so on. One concern I share with Dr. Ahearne relates to the sheer complexity of the rules that are being put in place. Even for supposed experts in this area, going through the rules for the implementation of the Stability and Growth Pact is quite a mindnumbing exercise and, sometimes, trying to figure out how the rules combine together can be extremely difficult. This goes to the point made by Senator Reilly in terms of political support.

Thus far, the process of putting in place these various rules has gone reasonably smoothly, including the success of the fiscal treaty in the referendum. However, many people are simply switched off and have come to the conclusion they cannot really understand the workings of many of these rules. This creates a lot of risk in respect of the legitimacy of the process. One issue with which members probably are very concerned is that of democratic accountability, but legitimacy very much depends on public understanding of what is happening and there has been too much unnecessary complexity built in. A lot more could be done and while I acknowledge this joint committee plays an important role in this process, at European level a great deal more also could be done to explain to people the workings of these various rules and the reason they are so necessary.

Another theme running through the questions related to political compromises and this goes back to a theme in my statement about this balance between these disciplines, which are necessary, and supports. In some senses, one could think of supports as being the quid pro quo for the disciplines. This was clearly visible in the context of the fiscal treaty debate, where it was made explicit that access to the European Stability Mechanism, ESM, depended on having this fiscal compact. However, I worry that we will get the disciplines, which in many ways are necessary, but that in the process of political compromise, we may not get the supports which really are required for the successful functioning of economic and monetary union, EMU. I also noted this in my statement but this is evident in respect of the things that fell out on the way from the Commission's blueprint to the four presidents' report. There is no mention that I can recall in the aforementioned report of the debt redemption fund or the eurobills, for instance.

Another theme in the questions pertained to the need for austerity. What we have seen in this crisis is that in the case of a country within the monetary union with a high level of debt, which in particular is heavily dependent on foreign funding of that debt or on foreign investors to invest in that debt, access to borrowing and basic creditworthiness is incredibly fragile. This is the reason I stated we really have no choice but to get down to safer levels of debt and deficits. However, the crisis has shown that we also need effective lenders of last resort within the eurozone or these crises will recur. This is where the elements that already have been put in place, such as the ESM and the ECB's outright monetary transactions, OMTs, are so important but we must go further. First, the OMTs must really be shown to be effective and to be really accessible to countries and this is yet to be proven. However, in the longer term, we probably need to take bolder steps towards moving to something like a debt redemption fund or more in the short term to the eurobill proposals. This is supposed to be the return for the disciplines and, consequently, we must keep our eye on the process in order that we do not just get the disciplines, and the supports get lost along the way.

I will close by responding to another theme in the questions which related to the debate on austerity. It certainly has exploded in the last while as a result of the comments of Professor Mody, the debate about the Reinhart and Rogoff empirical findings, the comments of President Barroso, the Minister for Social Protection, Deputy Burton, as well as those of President Higgins and so on. There has been much discussion and it certainly appears as though austerity is being questioned in this trade-off Deputy Durkan mentioned between austerity and economic growth. However, it is very important to distinguish between two things from the point of view of what it is that we are criticising. I refer to a national, domestic view in which we must decide what to do in the context of the arrangements that exist, that is, in the context of the Stability and Growth Pact as it is designed, the context of the supports that are there and the conditionality that exists within the programme Ireland is in. The judgment of the Irish Fiscal Advisory Council has been that because of the vulnerability of our access to borrowing, it is very important that we meet the conditions of the programme. In a highly uncertain environment, it is important we recognise that because of uncertainties in respect of growth, we may need to have a little bit of a buffer or a margin of safety to ensure we can meet these key targets. If we hit these targets, we then will be in good standing with official funders and even were we to need another programme, the likelihood is that we would be able to get access to a programme without a restructuring being imposed on Irish debt. Effectively, the latter would be a default, which I believe would be highly disruptive.

The fear of such a default could make the whole thing self-fulfilling, because this is what private investors are looking at most. They are asking whether, if this country needs another programme, it will be forced to default and to the extent we remain in good standing with official funders, it becomes much less likely that such restructuring would be imposed and our chances of getting back into the markets are significantly greater. Moreover, as the threat of default recedes, it helps confidence to return and interest rates tend to fall right across the economy, including in the banking system, and that supports this process of a restoration of growth. Consequently, from a national perspective, it is highly important that we stick with the plan to get the deficit down, to meet the targets and to remain in good standing with official funders. The process we now are seeing unfold with dramatic falls in interest rates is likely to continue and we have a very good chance of being able to return to market funding.

While this pertains to the domestic side, we can distinguish it from what is happening at the European level and I now am talking about the design of the system itself. One point I made in the statement, which I believe Dr. Ahearne also underlined, is there is a contractionary bias in European policy.

I did not talk about it at the monetary policy level but Dr. Ahearne did and one can certainly see it with the single price stability mandate of the ECB. One also sees it in fiscal policy which is a very national focus on each country reaching its targets under various excessive deficit procedures. I do not think there is enough attention to the overall aggregate stance of a European fiscal policy, to extend to it what President Barroso was getting at in terms of the overall fiscal policy that gets produced by the process for Europe as a whole. We must pay more attention to that aggregate fiscal stance, to demand in the European economy in general, and more attention to developing lender-of-last-resort supports to reduce the fragility of individual countries. They are all reforms that need to take place. I do not believe it is inconsistent to believe that there is too much of a focus on austerity in the overall design of economic and monetary union while recognising that given the system as it exists, the right course is to continue with the fiscal adjustment policies that are currently being pursued.