Dr. Alan Ahearne:

Deputy Donohoe asked what would happen if markets would not lend. That is just arithmetic. The country then has to close its budget deficit instantly because nobody would lend. In the case of Ireland, with a big budget deficit, it would be simply catastrophic and would mean considerably more austerity. For that reason it is very important to be able to borrow either from financial markets or from a programme.

We probably have some leeway in the budgetary adjustment in coming years if one thinks about access to financial markets. The Government might confirm it was going to hit its target of 3% of GDP target by 2015 but from that it would back out the adjustments it needs in the next two years. If that number was four rather than five, then it would do four and thereby reach the target. How would financial markets respond? I do not believe they would respond badly. Provided that the financial markets view the debt as sustainable and would start to reduce, I believe they might well be relaxed. In order to ensure they feel relaxed about it, we could give them certainty about the next few years.

I am somewhat surprised there has not been an update to the National Recovery Plan 2011-2014. That plan set out what the Government was going to do and was helpful for financial markets. It shows not just what the debt will be but also the measures the Government will introduce to achieve that. If that was updated to go out to 2017 at the same time as announcing that we would stick to the 3% target, I do not believe the markets would react negatively.

Professor McHale is right that there are big risks involved in the coming years. I am not sure those risks would reduce significantly by, for instance, another €1 billion in budgetary adjustments that are not necessary to reach the 3% target. There are two big risks. One is from a possible recapitalisation of the banks which would require more money. That goes back to what we were discussing today, namely, Europe. If there is, it is not possible to do ever-increasing amounts of fiscal consolidation to put aside yet more money - that money would need to come from Europe. That is a risk, but one that cannot really be solved through fiscal consolidation here. The solution to that must come from Europe.

It is also true of the other big risk, which is that the euro area will not grow but stay in recession. That is a big risk for the Irish economy. I am pretty sure that if the euro area economy was growing robustly now, the Irish economy would be growing robustly. The euro area staying in recession would be a big problem for the Irish economy and for Ireland's fiscal outturn. Again, is that something the Irish can do something about? That seems to be a problem that needs to be solved in Europe through the measures I discussed earlier. If it is not solved how do we get around that one? The State now owes more than €40 billion to the EU and presumably there is leeway in terms of concessions. This is what has been happening. In recent years interest rates have been reduced and the loans have been pushed out. These are official concessions that are helping to keep things sustainable. If they had stuck to the initial rate and not pushed things out, Irish debt might well have been unsustainable by now. My guess is that if things do not pick up in Europe, they will just do more of that.

Things have turned 180° since the Deauville agreement, which insisted that private sector lenders to an economy should be subordinate to official lenders. This meant that if something went wrong with an economy, official lenders should get all the money back, but the private sector - people holding the bonds - would get a haircut. Since then, that has completely flipped and essentially the private sector lenders are senior to official lenders. If something is going wrong and the economy is not picking up, the EU - the official sector - is giving the concessions, which makes the private sector position better. If a troubled borrower has two creditors and one creditor is given concessions, that is good for the other creditor. That is a major part of the reason for our interest rates having come down. There is more leeway - in theory €42 billion worth of leeway. If we do not get a recovery and things in Europe remain bad, I would not be surprised to see even more concessions on that. If it is a problem in the euro area - in Europe - it has to be solved at a European level.

There was a question about Cyprus. The initial plan for Cyprus was very problematic in that it was going to hit depositors with more than €100,000. The real problem with the second plan is that they have had to put in capital controls. I mentioned that in my statement. Two countries have bailed in private creditors in the crisis - Iceland and Cyprus - and in both cases they had to impose capital controls. That is what it means going into this brave new world with new bank resolution involving bailing in private creditors. If that is done on a large scale - as may be necessary with some country in the future - it is also necessary to impose capital controls, which are terrible for economic growth. If banks are recapitalised, the ECB should be willing to lend to them. It looks like they were not prepared to do that in this case. Now the lesson seems to be while we will have this resolution involving bailing in, it must be accompanied by capital controls. In the Irish case the banks' creditors were bailed out, which was very expensive and bad for the sovereign. In Cyprus they were all bailed in which is also very bad and destructive to the economy. The lesson from Cyprus is that a country with many bad investments on banks' balance sheets will have a bad outcome.

There was a question on the troika programme. The country has been in a programme since 2008 and will be in a programme for some time. The programme from 2008 was a programme imposed by Government and funded by markets until 2011. Then it was a programme funded by the official sector. The country will probably be able to borrow from markets again but will still be in some sort of programme, by which I mean reducing the budget deficits, and restructuring our tax system and economy. That is all part of our programme. The reason for fiscal consolidation is not that there is a troika. It is because we had a very large budget deficit that has to be reduced. I believe there will be a programme regardless of what happens.

I was asked how close we are to banking union and the answer is not close enough. I believe it needs to happen much faster. It is very difficult to see how the euro area economy will grow unless credit is flowing properly and that will not happen until the banking systems are sorted out at a European level. The member is absolutely right to point out that the banks have been very slow to deal with the impaired loans. The Government and the Central Bank have set them targets for the mortgage arrears, which hopefully will force them to up the pace. They have undoubtedly not acted as fast as they should have to reduce that problem.