Oireachtas Joint and Select Committees
Wednesday, 8 May 2013
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Forthcoming ECOFIN Council: Discussion with Minister for Finance
I welcome the Minister for Finance and his officials to this meeting. The format for the meeting will be that the Minister will make some opening remarks which will be followed by a question and answer session. I remind members, witnesses and those in the Visitors Gallery that all mobile phones must be switched off. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the House or any official by name or in such a way as to make him or her identifiable. I now invite the Minister for Finance to make his opening remarks.
I thank the Vice Chairman and the committee members for inviting me to speak here today in advance of the ECOFIN meeting early next week. I would like to open by giving an overview of the European and international dimension to the work of the council. As we are now in the fifth month of our Presidency, I would like to take the opportunity to brief members on some of our key dossiers and achievements, while discussing the agenda for next Tuesday’s meeting, after which I will be happy to take questions and observations from committee members.
In terms of the process, I am sure members are aware that the focus of ECOFIN is heavily influenced by the economic and fiscal backdrop, the work of the European Commission and the guidance of Heads of State or Government, who meet regularly in European Council Summits in Brussels. Into the mix, it is the job of the six-month rotating Presidency to guide and steer the debate. Our priorities are clear and have been shaped by the need to bring stability to a fragile and somewhat volatile economic and financial situation, as well as to pursue policies that will underpin growth and jobs.
As President of ECOFIN I have chaired three council meetings so far in Brussels, as well as representing the council at various bilateral and multilateral meetings with the EU Commission, European Parliament, G-20 Finance Ministers and social partners. We have made significant progress at these meetings and I will say a little more about that later. In addition, in April 2013, I hosted a very successful informal meeting of ECOFIN in Dublin, where political agreement by EU Finance Ministers was reached on extending the average maturities of EFSF and EFSM loans by seven years for Portugal and Ireland. In addition, we had a good discussion on enhancing long-term growth prospects as well as how we might enhance long-term financing, including in the context of SME funding. We also had a good discussion about some taxation matters. As I am in the Chair representing the Presidency, the Minister of State at my Department, Deputy Brian Hayes, takes the Irish seat at these meetings for the six months.
Turning now to the ECOFIN meeting next Tuesday, I understood that this committee has already received the draft agenda. Members will see that it is a very full agenda. I now propose to outline the key issues that are likely to arise, while taking into account that some of these may change on foot of ongoing work at official level in the meantime. Indeed, the draft agenda members have in front of them has already changed since the one circulated late last week.
The ECOFIN meeting will begin on Tuesday with an informal breakfast meeting during which Mr. Herman Van Rompuy will meet with the Finance Ministers to tell us more about what he is planning for the next European Council meeting. The formal ECOFIN meeting will start with a discussion on current legislative proposals including the draft banking resolution and recovery directive.
The Irish Presidency set out an ambitious programme in financial services. The priorities on the financial services files for the first half of the Irish Presidency were based on the priorities set out in the December European Council conclusions, including agreement on a single supervisory mechanism, the capital requirements directive and on banking recovery and resolution. We also undertook to progress work on the markets in financial instruments directive. Our strategy has been to pursue a strict prioritisation agenda and to focus resources on the most significant dossiers. This has been a successful strategy and we have made considerable progress to date with agreement on two of the key banking union files, namely the single supervisory mechanism and capital requirements directive. On the consumer side, the mortgage credit directive has also been concluded. We plan to continue our efforts to advance discussions on the banking resolution and markets in financial instruments directive files. We are making progress on these and hope that we can advance matters on banking resolution during this month.
The discussions on Tuesday will then move to tax issues, including the savings tax directive and savings tax agreements. We undertook to progress all of the above tax dossiers in our Presidency programme and there have been a number of significant developments to date on them. The January ECOFIN meeting saw agreement that the financial transaction tax could be introduced in the 11 member states which have signalled they wish to enact the measure. A formal Commission proposal for a directive implementing enhanced co-operation in the area of financial transaction tax was published in February 2013. Ireland, as members know, is not one of the participating countries but we are committed, in our role as President, to act as an honest and impartial broker in the discussions. Council working party meetings on this issue are ongoing.
At the informal ECOFIN meeting in April, there was a useful discussion on recent developments in the international tax area on tax fraud and tax evasion, including the pilot initiative announced by a number of member states under which they will work more closely together and automatically exchange tax information. I expect that this issue will be also addressed by President Van Rompuy at the breakfast session before the formal meeting begins and I expect that there may be a short discussion around that. Work has been ongoing at council working party level by officials on measures to prevent VAT fraud and these are due to be discussed further at the next ECOFIN meeting. My expectation for the May ECOFIN meeting is that there will be agreement on the negotiating mandate to allow the Commission to initiate discussions with third countries on the savings tax directive. It is intended that tax anti-fraud issues will be discussed at European Council level at its next meeting later this month.
Our Presidency programme also sought to ensure the effective implementation of the European Semester process which included agreement on the “two pack” of economic surveillance measures and to work towards a more effective Economic Monetary Union through supporting the development of a time-bound road map for further economic and fiscal governance measures and some of these items feature on Tuesday’s agenda.
Some of these items feature on Tuesday's agenda.
This European semester began during the Cyprus Presidency, with the publication of the annual growth survey in November 2012. The bulk of the work, however, fell to Ireland to take forward and complete by the June 2013 European Council. Our key objective is to ensure all relevant Council formations continue to work in a co-ordinated and consistent manner towards a thorough preparation for the May and June European Council meetings. The publication by the Commission of its in-depth reviews into the existence of macroeconomic imbalances in some member states marks the beginning of the second, more country-specific phase. At the ECOFIN meeting next Tuesday, the Commission will present the results of its analysis into the macroeconomic imbalances procedure to identify countries where economic risks may exist and the Council is expected to agree conclusions on that process.
On deeper integration of economic and monetary union, European Council President Herman Van Rompuy was mandated by the Heads of State and Government at the European Council in December 2012 to present a time-bound roadmap to the June European Council addressing a number of issues on deeper integration of the EMU, including ex antepolicy co-ordination of major economic reforms, proposed contractual arrangements for competitiveness and growth and a solidarity mechanism to fund the reforms undertaken pursuant to those contracts. Further to his request that the Council provide input into the debate on EMU, the Irish Presidency is working closely with President Van Rompuy in co-ordinating discussion on EMU at the various Council formations and providing feedback to him after each discussion.
A discussion on the issues to be considered in the roadmap took place at the ECOFIN Council on 5 March. Views appeared to converge more on the issue of ex anteco-ordination, while more uncertainty and diverging views were evident on the issue of mutually agreed contracts and even more so on solidarity mechanisms. The Commission is currently engaging with the Council formations on its latest contribution to the discourse. It has recently published communications focusing on its short-term objectives of ex anteco-ordination of major reforms and a convergence and competitiveness instrument. The ECOFIN Council at its meeting on 14 May will discuss the latest Commission communications. The Irish Presidency will continue to work closely with President Van Rompuy and I look forward to his report to the June European Council.
The ECOFIN Council on 14 May will also have a short report and discussion on the ongoing work of the G20 and the IMF and World Bank, including the recent meetings last month in Washington. Finally, we will have a short discussion and adopt conclusions on climate finance.
The final item on the agenda is an issue that relates to the annual EU budgets. The draft amending budget will be before the Council to seek political agreement on a supplementary budget for 2013. This is not an easy process and is linked to the wider seven-year budget negotiations taking place with the European Parliament which the Tánaiste is leading. The Taoiseach and the Tánaiste had a good meeting on Monday with the Presidents of the Commission and the European Parliament, which will hopefully help to advance that process further during our Presidency. At that meeting it was agreed that the negotiations on the MFF and the draft amending budget will proceed in parallel and that nothing is agreed until everything is agreed.
On the budget for 2013, the Commission has brought forward a proposal for an increase in this year's budget of €11.2 billion in payment appropriations. The Commission's reasons for the amending budget are twofold. First, there is a need for additional appropriations to finance payment claims carried over from 2012 which must be honoured in 2013 and, second, there is a need to cover all expected legal obligations in 2013 and so avoid an abnormal carry-over of payment needs into 2014. Negotiations within Council on the amending budget have taken place under the Irish Presidency. The initial Commission proposal was considered unacceptable and the Irish Presidency has put forward a compromise that would see a two-stage process to commit to an amount and then agree to return to the matter later in the year for payment of outstanding amounts. The issue is due to be further discussed at ECOFIN next Tuesday.
My objective at ECOFIN will be to obtain political agreement on this matter, notwithstanding the budgetary difficulties facing member states, in a way that ensures the continued smooth functioning of the EU budgetary system. This will be challenging on this occasion.
The theme of the Irish Presidency is stability, jobs and growth, and in that context we set ambitious targets for the ECOFIN Council on financial services, the EU budget and economic governance and taxation. There are still two months remaining in our Presidency and we will continue to work on the various dossiers before we hand over to the Lithuanian Presidency. In the last two months of the Presidency, in respect of the financial services agenda, we will continue to work towards a Council general approach on MiFID and bank resolution and recovery, as well as related work on the deposit guarantee scheme. We will also seek to finalise agreement with Parliament on the market abuse regulations. We also intend to engage on regulations related to central securities depositories and packaged retail investment products and the transparency directive, as well as commencing work on the anti-money-laundering directive and the bank accounts package.
There has been agreement at Council on a mandate for the Presidency to negotiate the multi-annual financial framework budget for the next seven years and we are working towards an agreement with the European Parliament during our Presidency. In agreement with the European Parliament, this work is being taken forward in parallel with the negotiations on a draft amending budget for 2013 in the ECOFIN Council formation. We have achieved agreement on the two-pack of economic surveillance measures and are successfully progressing the European semester process to the European Council in June of 2013.
With regard to taxation, we achieved agreement at the January ECOFIN to allow those member states who so desired to go ahead with the financial transaction tax. There is a significant anti-fraud and anti-evasion tax agenda for the May ECOFIN. We have been building towards this in our negotiations in the Council working party at official level. This agenda will feed into the May European Council discussions on tax evasion and tax fraud.
In our Presidency, we must be realistic about how quickly we can advance the European agenda. That said, both at ECOFIN and in the various official groups that meet under the level of Ministers, we have been very active in ensuring the debate and policy activities move beyond the crisis. While I believe we have been successful, we must acknowledge that the issues are complex and will not be settled in our six months.
I thank the committee for its attention and for this opportunity to set out the policy work at European level, particularly what is planned for the next ECOFIN meeting. At this point I will be happy to respond to any questions or observations members may have.
I welcome the Minister and his officials and thank him for that comprehensive opening statement. I will focus on the Irish dimension of some of the issues the Minister outlined.
Following on from the informal ECOFIN meeting in April in Dublin, where the Minister secured political agreement on the extension of the loan maturities under the EFSF and EFSM, what are the mechanics of having that decision formally implemented for Ireland?
The NTMA will be the driver of the process and will have discussions with the European authorities to reprofile the outstanding debt using the flexibility of the extension on the maturities. If we think of a graph of the debt, some years there are peaks and some years there are troughs. The idea is to have an even profile of debt repayments by taking the tops off the peaks and increasing the troughs.
That is, in general terms, what will happen. The agreements have been made and the National Treasury Management Agency will engage with the funds and try to reorganise our debt profile to our best advantage. My objective from a policy point of view is to ensure NTMA sales of Irish paper in the market become a matter of routine, as they were before the crisis, rather than being a news event. We should have a steady profile and be able to fulfil our borrowing requirements with a couple of options each year without any of the drama that has been attendant on visits to the market in recent times.
If I can focus on the ongoing banking recovery and resolution work, one of the outstanding issues is the common resolution regime in cases where banks fail. One item under consideration is to apply a bail-in mechanism to those with more than €100,000 on deposit who are currently outside the deposit guarantee scheme. This type of bail-in was applied in Cyprus following the failure of the initial proposal to impose a levy on those holding less than €100,000 on deposit. At this stage, is it likely that a bail-in of deposits of more than €100,000 will form part of the resolution regime? What is the Government's attitude to this proposal?
A political discussion will take place on Tuesday to give political guidance to our working group. This group will then take the process further. There are differences of opinion among member states on this matter and for this reason nothing has been fixed yet. We took possession of a Commission paper on the issue and produced a Presidency paper. The resolution framework is designed to deal with all types of bank problems, including insolvency. The directive simply sets out the order of creditor preference. It represents an improvement on the current position in this country for depositors where they currently rank on a par with senior bondholders. If we had another case of a bank going bust, as occurred with Anglo Irish Bank, the first people at risk would be the shareholders whose money would be burned. Subordinated or junior debt would be next in line to be burned in accordance with the requirement on banks to either pay their creditors or return to solvency. The next in line would be senior debt, of which there are several categories and, as such, a hierarchy.
As the Deputy will recall from his party's time in government, all the advice to my predecessor, the late Brian Lenihan, was that senior debt and deposits rank pari passu under the law. That remains the advice to me. This means that senior debt and deposits are on the same line if one is organising the hierarchy of credit in the bank. The Irish Presidency's proposal, which may or may not be agreed as there are different views on it, is to give deposits preference and thereby place senior debt above depositors in the hierarchy. If accepted, the proposal will improve the position of depositors in the banking system.
The Deputy will recall that there is a bank guarantee in place across the European Union which guarantees deposits of up to €100,000. Given that no such guarantee applies to deposits above this figure, this means in theory that deposits of more than €100,000 are at risk in every European country. To return to the old debate, one of the reasons the European Central Bank would not allow the Irish authorities to move against senior bondholders was that, according to the advice available at that time, to do so would have required them, by law, to move against depositors outside the guarantee because senior bondholders and depositors were on the same line. It was a policy matter with the European Central Bank not to touch senior bondholders on the understanding that such a course of action protected all depositors. If there were to be a bail-in, we will seek to provide additional protection to deposits, even those in excess of €100,000. This means depositors would be ranked below senior bondholders in the hierarchy. The Deputy should note, however, that we are discussing an extreme scenario, one where we have a repeat of the Anglo Irish Bank case. Separating the sovereign from the banks removes the risk to the taxpayer but means some risk would accrue to depositors, albeit at the end of a long line.
That matter is being negotiated. Ireland is one of the countries that has resolution legislation in place. Deputies Michael McGrath and Pearse Doherty participated in the debate on the bank resolution Bill and will recall that it establishes a fund by means of a levy on the financial institutions. The first step on the European policy of resolution is to have resolution mechanisms in place in all eurozone countries, some of which still do not have the relevant legislation in place. Once this is done, each eurozone member will have a fund. The next step will be to establish a fund at European level. Whether this fund could be used to recapitalise banks as well as resolving them or such a function would be one for the European Stability Mechanism or both funds could be used as a source of recapitalisation, has not yet been decided.
What has happened on banking union is that commitments have been made in principle. Furthermore, the Irish Presidency has succeeded in securing agreement with the European Parliament on a single supervisory mechanism. Having got that bit across the line, we are working on the resolution issue. While most of the detail has been agreed, agreement has not yet been reached on the hierarchy for the bail-in mechanism I have described, starting with the shareholders. Another area on which agreement has not yet been reached is the source of moneys other than those that are internal to a bank, in other words, whether these would come from the resolution fund, if such a fund is established in Europe, or the European Stability Mechanism.
To put this issue in the context of the Government's objective to use the European Stability Mechanism to deal with the legacy issue of the pillar banks and Permanent TSB, what are the remaining steps that have to be agreed? The Minister stated agreement has been reached on the single supervisory mechanism and the focus has shifted to the common resolution regime and some other issues which need to be resolved. When will we reach the point where, irrespective of legacy issues, the ESM will be in a position to recapitalise banks? Once we reach that point, Ireland's case on the legacy issue of the pillar banks and Permanent TSB could be discussed.
It is very hard to predict when we will reach that point, although a timeline was set out for the single supervisory mechanism, resolution and the empowerment of the ESM. The timeframe is more or less in line with what was planned last summer and we are moving along. It will be next year before the single supervisory mechanism is implemented. Regulations, protocols and a handbook must be drawn up and an institution must be established in Frankfurt to supervise the banking system. Thereafter, this institution will have to delegate to some of the domestic banks the power to regulate, albeit on the same mandate as that under which Frankfurt will regulate. A great deal of logistical work remains to be done once the legal work has been completed. It will be well into next year before we reach that point.
My final question relates to tracker mortgages which, while not on the agenda of the ECOFIN meeting, are tied up with the overall bank debt negotiations. I raise the issue with the Minister in light of the cut in interest rates announced by the European Central Bank last week and the continuing upward drift of variable rates. The gap between variable and tracker rates for mortgage holders is growing.
There was a suggestion earlier in the process that as part of the overall negotiation, we would seek to warehouse tracker mortgages underpinned by funding from the ESM or possibly the ECB. The theory was that such a move might improve the funding position of the banks and take some of the pressure off the variable rate customers whom the banks are looking to squeeze time and time again. Is that a live part of the negotiations that are taking place? Perhaps it is in the background. Is the tracker issue still being considered as part of the overall attempt to put the banking system on a sustainable footing? It seems to me that the issue will have to be dealt with. The banks are haemorrhaging losses on such mortgages. They have to impose additional fees and charges on variable rate mortgages and SMEs in order to increase their margins. I know it is not as simple as offsetting one against the other. There is no doubt that the tracker situation has put the banks under enormous pressure. Is that still being actively worked on?
There are discussions about the matter. It came up again in last week's discussions with the troika. A report in one of the German newspapers yesterday or this morning suggested that the European Central Bank would buy assets like tracker mortgages as part of some kind of warehousing arrangement. It was written as if it was a briefed story. One can never be sure about the provenance of these things - whether they are founded in actual policy or whether somebody is-----
I thank the Minister for his presentation. I will pick up on a couple of aspects of it. I will begin by focusing on the banking recovery and resolution process. One of the proposals ECOFIN will be dealing with is the bail-in proposal mentioned by the Minister. It is to be welcomed that depositors will not be given the same ranking as senior bondholders. I would like to focus on the role of the ESM in recapitalising banks. Is it not the case that if the bail-in proposal is adopted by the EU, the ESM will hardly ever be used? The shareholders will be the first to take the hit, followed by the junior bondholders, the senior bondholders and the depositors. The ESM will not step in until the end of that process, when those options have been exhausted. Is that the Minister's reading of the bail-in proposal?
It is not clear yet. A number of policy papers are being discussed almost in parallel. Work is being done on what the functions of the ESM would be, in respect of the banks, and how the detail of that would be worked out. There has been a series of political discussions at a series of Eurogroup meetings. Those discussions are giving guidance to what is, in effect, a drafting committee. The committee is preparing a paper on the ESM and will bring it back in due course. It does not want to be totally out of kilter with the political views of Ministers. It has happened in the past that drafting committees have been set up, only to fail to get political support for the drafts they produced. A kind of political guidance is being provided in parallel with the ongoing discussions. That is one aspect of the matter.
Deputy Michael McGrath mentioned the BBR depositor preference, which is running as well. The logistics of setting up a single supervisory mechanism are being considered at the same time. There is also some talk of having a resolution fund as a European fund, rather than being the sum of the sovereign funds. That is purely at the concept stage. Very little work has been done on it so far. I cannot help the Deputy other than by giving him a description of what is going on. It is difficult to say where it will land.
Under any of these options, in respect of which the Minister for Finance is giving this group political direction and his own opinions, would the ESM recapitalise the banks before there would be a bail-in of depositors?
I am interested in the political direction that the Minister is giving. Is it the position of this State that the ESM should recapitalise before depositors are asked to contribute to recapitalisation of the banks?
Our policy position runs from the meeting of Heads of State and Government that took place on 29 June 2012. We agreed to a banking union, to the separation of the sovereign from the banks, to the taxpayers' risk being taken out of the equation and to the ESM being the primary source of capital for banks that require capital. We agreed that it would apply retrospectively. That is our policy position. As there are so many pieces in the formation of the policy, it is difficult to predict with any degree of accuracy where they will land. I do not want to cause any confusion by describing the Irish policy position while also describing the process as we move towards a final policy on these matters.
I appreciate that. The Minister has set out the Government's overarching policy position. The bail-in is one of the outstanding issues that will have to be agreed at the ECOFIN meeting on banking recovery and resolution. The Minister outlined how the working group will take that process forward. As a member of this committee, I would like to know what the Irish position on this is. It is a very clear question. Is it the Irish position that the bail-in of depositors would happen prior to the ESM contributing to the recapitalisation of a bank?
I thought it was quite clear. There are two different situations. The first of them involves an insolvent bank that has gone bust. Creditors have to be paid. There is a sequence of bail-ins. It happened in the Netherlands recently. It happened here with Anglo Irish Bank, only the wrong decisions were taken. In the second situation, the banks are stress tested and it is decided that they require some capital. I do not think the ESM would be the first option in such circumstances. I will mention Bank of Ireland as an example. I should say it does not require additional capital. It has 14.4% core tier 1 capital, as against a requirement of approximately 9% across the Union. I do not want to raise a hare in this regard.
If it needed additional capital, the first thing it would do is go to its private shareholders to ask for extra capital from its owners. That would be the first move. They might decide to go to the market to raise capital. I would like, somewhere on the high priority side, to see the ESM being a source of capital for banks that require capital. I would not see the ESM as a provider of capital to banks like Anglo Irish Bank that went bust and were no longer trading as banks. I would see that being resolved through the resolution legislation we have put through the House.
That is fair enough. I would like to focus on another aspect of this issue before I ask some other questions. We have seen the situation in Cyprus. I know we are dealing with the here and now in terms of the banking situation. At a later stage, the stress tests may or may not show that additional capital is required. When the ratios increase as a result of future directives, the banks may need capital. What we agree now will be implemented in the future. We do not know where the banks will be. We do not know what the position will be in such cases. We have seen the situation in Cyprus. When the ESM did not recapitalise the banks, there was a bail-in of bondholders and depositors over a certain limit. Is it Ireland's position that the ESM should recapitalise banks before depositors are asked to contribute to the recapitalisation of banks?
Cyprus was a very difficult situation. It differed from any other banking situation in Europe. I do not think it should be used as a template for action in Europe. I do not want to use Cyprus as the starting point for this. I am saying that if banks have to be resolved because they are bust and they are not going to trade again, that is a different situation from the situation of a bank that requires additional capital.
I have described where the sources of capital would be. In the case I have outlined, I would like to have circumstances where a bank could draw on the European Stability Mechanism before going next or near depositors. Our discussion on Tuesday will improve the position of depositors because those holding more than €100,000 on deposit currently do not have any legal right to protection. By changing the order of priority and giving depositor preference, we will improve the position of depositors. There is disagreement about this and for this reason I am not sure where it will end up.
Many people in this State believe there is a moral crisis at the heart of Europe, austerity is not working and Ireland would be in a better position if the commitment made last June had been fulfilled. That view was echoed this week by no less a person than the President. Will the Minister state at the ECOFIN meeting that the process is not working and a change of direction is needed to assist the State and its citizens?
Our view is that the process is working very well here. There is empirical evidence to show that is the case. The deficit is being systematically reduced ahead of target, our debt is being made sustainable and the economy is in its third consecutive year of growth. However, I agree with the commentators who argue for greater concentration on growing the economy and creating additional jobs. The Taoiseach made this the theme of the Irish Presidency and introduced the issue for discussion at the European Council more than 12 months ago. The theme of the Irish Presidency is jobs and growth. The Government's position is that implementing the programme is only part of what we need to do and we must take additional measures to contribute to growth and job creation. This is not, however, a substitute for the programme but a supplementary aspect of it. The view I am expressing does not diverge from that expressed by anyone else who has spoken.
That which Europe is demanding of Irish people is morally wrong. The moral crisis arises from citizens being pushed to the brink to rescue financiers and large banks and from the transfer of wealth from some of the poorest in society to financial institutions in order that they can be bailed out for behaving recklessly. The European Union has advanced arguments for this course of action and the Minister, as president of ECOFIN, is not arguing for a change in direction.
I have laid out what we are doing. We have advocated additional measures and succeeded in securing them. A greater concentration on growing the economies of European countries is needed and this requirement must be reflected in domestic and European policies. If, however, the Deputy believes this will be a substitute for the corrective measures that are being taken, he is wrong. The model has been tried.
The Ceann Comhairle ruled that it is not appropriate for the Houses of the Oireachtas to discuss the views of the President. For this reason, I do not propose to get into that space.
Piling deficit upon deficit and debt upon debt is not a solution. Whatever else we do, we must deal with the deficit and our debt must be sustainable - that is the starting point. After that, we can build on jobs and growth strategies, as we have been doing with reasonable success. According to the European growth projections published by the European Commission earlier this week, Ireland will have the third highest growth rate in the European Union this year. We never said we would turn around the frightful mess we inherited within two years. The measures we are taking are successful and we have made significant progress. Nevertheless, I agree with all of those who argue that simply taking fiscal and monetary measures along the lines we are doing needs additional policy work and we are doing that.
Listening to the Minister's response, I get a sinking feeling of the sort one might have had if one had watched Nero fiddle while Rome burned. His assessment that we are making progress and the process is working, whether in this country or more generally in Europe, is not one that would be shared by the vast majority of people in this country, the rest of Europe and, increasingly, mainstream, middle of the road economists and analysts. The Bruegel Institute submitted a report either to the European Council or ECOFIN in which it stated current policy was not working. Moreover, the President of the Commission, José Manuel Barroso, recently stated that austerity had reached its limits, while the European Commission downgraded its growth forecasts for Europe. A clear pattern has emerged in the downgrading of growth forecasts and upgrading of the projected increase in unemployment. It is that the austerity experiment, which was first tried here and subsequently extended to Greece and Spain with disastrous consequences for all three economies, is now being applied across Europe where it is having a similar effect. Evidence that these effects are beginning to impact on Ireland in a manner that was entirely predictable is provided by the most recent figures from the purchasing managers index, which show that manufacturing employment and output in Ireland have recorded their largest declines in four years. Is it not the case that this is a direct result of the European economy beginning to contract?
Is it not the case that the European Commission recently indicated that unemployment will be higher than anticipated and the European economy is moving into a second quarter of recession?
The "patent cliff", as it is known, is the principal reason for the projected decline in exports. Patents held by the pharmaceutical industry in Ireland are running out and generic medicines around the world are replacing high value patented medicines. This is hitting Ireland disproportionately. However, the other side of the export indices shows that growth in service exports is in double digit figures and continues unabated. The export of services across the service sector is one of the main drivers of the economy.
I am aware that growth in service exports has counterbalanced the decline in manufacturing exports but I put it to the Minister that when a country’s manufacturing begins to decline it is in serious trouble. In recent years, when we pointed to the weakness in the domestic economy the Minister repeatedly stated that, provided we remained competitive, our thriving exports, most of which go to Britain and the European Union, would be our way out.
Now, precisely as we predicted, the austerity applied in Ireland and subsequently extended to the rest of Europe is causing the European market to contract and this contraction is hitting our manufacturing sector. Is the Minister seriously suggesting that the contraction that is taking place in the rest of the European economy will not impact on Ireland or choke off exports, the sector the Government repeatedly states will save the economy?
I have said it here several times, and to Deputy Boyd Barrett, that our model is export-led growth. Because our model is export-led growth, if our customer countries are in decline, we will sell less. I gave the Deputy the statistics. We export about 20% to the United States, 20% to the UK, 40% to the rest of Europe outside the UK and 20% to the rest of the world. What is happening at present is that the United States is back on a very strong growth pattern. The emerging markets are growing very strongly and world growth will come in around 3.4% or 3.5% in 2013, but the UK and Europe are showing very low growth rates and, of course, that is affecting us. The main difficulty with the statistics to which the Deputy referred has to do with key pharmaceuticals running out of patent. I said a year ago that this would happen, because the IDA has been predicting it, and it is an open secret. We have a couple of advantages. One is that we export many food products and many medical devices. Both of them are inelastic in demand. I am sure the Deputy is familiar with the term.
The Minister is not addressing the point I am making. The Minister is right. There is some growth in the American economy, in Asia and so on, although there are worrying signs of what could happen in Asia. The difference between the United States and Asia is that stimulus is taking place in the United States and investment is taking place in Asia. In contrast, in Europe the austerity policy is being applied. We are cutting back on investment and spending, the European market is contracting, unemployment is rising and Britain and Europe are our biggest trading partners. Looking at the macro situation, it is evident that the policy being pursued by European governments, including this Government, is failing Europe, driving it further into recession and guaranteeing at best that we do nothing to make a dent on the enormous unemployment crisis and at worst that we are making the unemployment crisis even deeper. Is not that what is happening in Europe?
There is no point in blaming the medicine, the Deputy should blame the disease and applaud the medicine. The medicine is being applied to control debt and get deficits down. The Deputy can argue about the pace of that. Now they are loosening up a little in Europe and giving certain countries more time to deal with excessive deficits. That is fair enough. There are many other things that could be done in Europe. I am very vocal in Europe. I am not saying that the set of policies being pursued is perfect. All I am saying is that one cannot get away from reducing deficits and controlling debt as an opening position.
To expand on the medicinal analogy, the Minister sounds like a drug addict who is in denial, who has got to do something about the problem but continues to give himself lethal injections of the poison that is killing him.
Why is it that the Minister is so specific on debt and deficit targets? The Minister is so specific on the processes for achieving what he calls stability and utterly non-specific in terms of giving targets and timescales for addressing the unemployment crisis. How can he say the Government is taking growth and jobs seriously when he does not have anything like the projections for reducing unemployment that he has for reducing the deficit? We know exactly what his plan is to reduce the deficit and debt. He has forecasts extending three or four years, but the targets will drop by a certain amount and, of course, the targets are never met, but none the less he has very specific targets. Where are the specific targets for reducing unemployment either in this country or in Europe? Where are the specific targets for increasing growth?
There is the jobs policy which is being driven by the Minister, Deputy Richard Bruton. It has more than 200 specific targets and is working to a timeline. The Deputy should get a copy of it. It is very detailed. It is on a timeline, has hundreds of specific targets and is working.
Has the Minister got a target for reducing unemployment to 5%, for example? Does he have a timescale for that? Has he got a target for saying we are going to get from 430,000 unemployed to 100,000 unemployed over a specific number of years?
If the Vice Chairman would allow me to use up the time in the way I choose, I am asking why, if the theme of the Irish Presidency is jobs and growth, the Minister does not put it to European finance ministers that we need to be more specific on targets for generating growth and employment across Europe in the same way as they are specific about imposing targets for deficit and debt reduction?
As I said, of the 27 European Union countries the Commission is predicting that Ireland will have the third highest growth rate this year. This is the third consecutive year of growth in the economy, and growth generates jobs. The unemployment rate was at 15% when we came into office. It is now at the rate of 14% and it is going down progressively. However, there are some intractable problems in the jobs and labour market, in Ireland, one of which is the fact that the skills of the people who became unemployed quickly, the 200,000 who lost their jobs between 2008 and 2010, were related to the building industry and we are not going to regrow the building industry to the point where it was more than 20% of GDP. We are working on it.
I thank the Minister. I shall refer briefly to some of the discussion that has taken place in the past 40 minutes. In these committees, an element of groundhog day has started to develop where the leading spokesperson for the Opposition starts with some reasonable questions and it disintegrates into terminology such as waffle, drug addicts in denial and Nero fiddling.
We have seen this previously, before the promissory note deal and before the maturities were extended by seven years. I believe that when the Minister leaves his current job, he has a good future ahead of him in fiddling, because the results to date have been very positive for Ireland. In fairness to some Opposition Deputies, they have been consistent in the hope that the Government and the Minister would fail, but that has not been the case. It is disappointing that they introduced the sort of language they did. I compliment the Minister on his restraint and on how he handles the Opposition's comments, particularly those of Deputy Boyd Barrett, who has never had anything positive or constructive to say since I became a Member of the House.
The agenda deals with-----
There is one thing he does not seem to get. When I studied economics in UCC, one of the first things we were taught was that income must equal expenditure. The most misunderstood quote in Europe currently is that Europe is moving away from austerity. This does not mean that countries that have excessive deficits are moving away from having balanced budgets, but perhaps it is about encouraging European countries that have a large surplus, which have been very restrained about how they put money into the economy, to start spending.
On a different issue, it now seems certain we are not to be part of the financial transactions tax that is to be implemented in 11 member states, many of which are in the eurozone. Does the Minister see that as the end of the matter? Is there a potential benefit for Ireland due to the fact that many of our competitors or friends within the eurozone will now have a tax on financial transactions while we will not? With regard to tax unity within Europe and the taxes being discussed, can I take it that these do not concern issues such as corporation tax and that such issues are not on the agenda currently?
There is one other issue I wish to raise, but I will come back to it later if we have time.
We had a discussion on the financial transaction tax at the first meeting I chaired in January in Brussels. There is a legal power within the treaties whereby if a group of countries wants to advance a particular policy, it can move ahead under what is called enhanced co-operation. Some 11 countries signed up to follow that route. That is only the start of the matter, not the end of it, because they must now come together, engage with the Commission and bring forward a policy document which reflects the consensus view.
The discussion on the financial transaction tax is not just among the 11 who have signed up for it. Everybody participates in the discussion, even those of us who did not sign up to it. In the treaties, it is made very clear that any measure taken by way of enhanced co-operation cannot interfere with the Single Market. I note the UK Government has already signalled that in respect of the financial transaction tax it may take legal action, because it thinks it may interfere with the Single Market. Therefore, there is many a hurdle to be cleared before there is a financial transaction tax.
As far as we know from proposals made in France, Germany and Austria, which were made separately from the united front they are now showing, they are talking about something akin to a stamp duty on transactions. We have that already. We have a 1% stamp duty on transactions on shares. The UK, although the biggest objector to a financial transaction tax, has a 0.5% duty. If the tax is something along those lines, it will not really matter. However, I presume the tax will be extended beyond the buying and selling of shares into other financial instruments. Our position is that if a financial transaction tax was introduced by the G8 at its meeting in Enniskillen and it applied everywhere in the world, we would have no problem with that. However, our difficulty is that if we had a financial transaction tax and the UK did not, activity would move from Dublin to London. With regard to whether it would be an advantage to us if the other European countries went ahead with it, any advantage would be marginal. If something was done in the United Kingdom, that would be an advantage, but while we are in the same space as London a financial transaction tax would make very little difference.
On the other tax issues, on Tuesday we will discuss – and I think we have agreement on it – a mandate to provide information on non-national deposits in banking systems. We want to negotiate with five non-European countries on the provision of information - Switzerland, Liechtenstein, Andorra, Monaco and one other. We will make progress on that. Those who were holding out on that were Luxembourg and Austria, but during the week I had conversations with the finance Ministers of both countries and we have moved them along, so they will now move on that.
With regard to corporation tax, a Commission paper remains extant with regard to a common base for corporation tax, but there is a wide disparity of views across the Union on that policy paper. I do not see significant progress towards a decision. There will probably be discussions on the issue, but none have been planned for the Irish Presidency. The issue may arise towards the end of the year.
On the changing of the hierarchy with respect to debt, will the Minister address the issue of whether there is a danger this will drive up borrowing costs? Fianna Fáil mentioned the issue of tracker mortgages, which arose earlier. The banks have a keen interest in seeing this issue addressed. However, these mortgages are a contract between borrower and lender and are not much different from other contracts such as those between landlord and tenant. When the Minister talks about warehousing of tracker mortgages, does he see any change in the contractual agreement that exists between borrower and lender? In other words, would it be possible to increase the cost of a tracker mortgage in some way in contravention of the contract that already exists?
No; the contracts will be maintained. The idea that is being discussed is that the trackers would be removed from whatever institution is involved and put into a separate institution. Rather than crystallising the debt from mortgages that are not washing their faces, we would let them run out. They would be warehoused in a separate entity so that the debts are not crystallised. Over time, tracker mortgages will pay their way. That is the general notion.
If the hierarchy was left as it is now, it would make no difference. The change being made is to give a preference to depositors of amounts over €100,000 so that they will rank below senior bondholders. There was concern among some member states that because senior bonds were being treated as higher on the hierarchy, that might affect the price of bonds and would increase interest rates.
A policy paper has been done on this by the Commission which suggests that it is only marginal. The Commission is briefing members before the discussion next week. The message is that their concerns are not well founded and that any affect would be marginal.
I thank the Minister for his detailed statement. He asked for observations and questions. I will make one observation and then put some quick questions. I strongly support the Minister’s position on the primacy of deposits. It seems like an odd thing. It does not pass any common sense test that people who put a few quid in the bank should be on a par with professional investors. I fully support anything the Minister is doing there. It would be great to see some detail on how that algorithm might work. Will shareholders go first and, if so, then what? Will it be a 50% cut for junior creditors or a 20% haircut to senior creditors or a 5% cut? It would be interesting to know whether the plan is for senior bondholders to take a full hit and only when they are exhausted would there be a move on to depositors. Will there be a sharing but less of a haircut for depositors because of their primacy? I full support what the Minister is doing in this regard.
We were at the conference in Brussels yesterday on the blueprint for the EMU. It was very interesting and one thing that struck me was that there were people there from the Commission, the Parliament and the ECB. There was great confidence in the new tools of which there are many, including the six-pack the two-pack, the competitiveness instrument and many other new tools. It struck me that there was some group-think going on. There was almost an over-exuberant confidence in these tools.
One of my macroeconomics professors was a man called Jeff Frankel. He said to us on our last day at our last lecture that everything he was teaching us was wrong. This man used to advise Clinton and he was on the economic management council. He was a smart cookie. His point was that macroeconomics is in its infancy. He said that five years previously the material he was teaching to his students was different from what he taught us and that five years on it would be different again. The point was that if one wishes to stay on top of macroeconomics one must keep upgrading one’s knowledge and changing the modelling and so forth.
Given the amount of detail and scorecards and so on, the way Europe seems to work is that once we get these things agreed, it is rather difficult to secure change because there are 17 or 27 members. It is simply an observation for the Minister to consider for ECOFIN. He may wish to emphasise that these things must be flexible because the banks will always find ways of getting around the metrics. While I broadly support some of these tools - there are some good ideas contained in them - I do not see any provision for flexibility, such as, for example, annual reviews or reviews every two or three years to determine whether the banks are managing to circumvent what we are trying to measure them on. They will put a vast amount of resources into doing exactly that. That is simply an observation for the Minister. Some flexibility in how that is supervised in the coming years would be very useful.
The issue of pensioners being wiped out in IBRC is a conversation for a separate day. I realise it is nothing to do with ECOFIN, but part of it is relevant. I gather a decision has been taken by the liquidator that the pension funds, which were deposits in, for example, a six-year deposit account, are not covered by the deposit guarantee schemes. That is something to bear in mind. Does the Minister agree with that position? Will the Minister be representing the view at ECOFIN that pension funds, even if they are not strictly deposits, should be covered by the European deposit guarantee scheme?
I thank the Deputy for his observation and comments in support of the changes which the Irish Presidency is advocating on where in the hierarchy of deposits over €100,000 should fall. That is important. The second observation related to economic and monetary union, how it has developed and the over-enthusiastic confidence of some of its supporters. What we really have is a series of elements that Deputy Donnelly has described and which in their totality come close to a full fiscal union, because they are all rules about budgets. Rather than looking at the parts, if we look at them together they represent fiscal union. The difficulty I see is that we want to ensure that they are implemented as drafted. We had the Stability and Growth Pact previously. Then, when France and Germany exceeded the limits it was not applied. It seemed to amount to rules for small countries. If we want to go back to the start of the problems in Europe one could base them on the non-implementation of the Stability and Growth Pact in 2002 or 2003. This is one of the reasons that people like Wolfgang Schaeuble is so set on having things done by treaty. He wants to be able to have these matters enforceable in the European courts. He always says that he prefers a treaty, that is his position. That is why we had to go through the stability and growth treaty we put through in May 2011.
I agree with the observations of Deputy Donnelly. The Deputy referred to the need for flexibility. The way the conservation is developing at official level and at COREPER in advance of Tuesday’s meeting is that a group of countries are looking for more flexibility. They do not want the rules to be too tight. I am unsure what way that will fall on Tuesday.
I understand what the Deputy means. There is certainly a discussion strictly on the bank recovery and resolution proposal to the effect that there should be flexibility and national discretion such that the Sovereigns would not be tied into every detail of the wider European policy and that they would have local discretion. Anders Borg, the Swedish Minister, telephoned me yesterday. Sweden had a banking crisis in the early 1990s. They found that the most effective approach was to take banks temporarily into state ownership. Then they were able to work it through and sell them profitably subsequently. He asked for time on Tuesday to make that point and whether we could give national discretion to provide for taking banks into state ownership on a temporary basis as a method of resolution, as well as what is on the sheet.
The debate is continuing on these matters. I am suggesting that if the concept of flexibility is built in, it is possible to have supplementary national measures which would add to the toolbox available to all euro member states or European Union member states in the banking union.
Deputy Donnelly asked a question about pensions. I replied to a written parliamentary question from Deputy Donnelly about a particular constituent. I am relying on the liquidator's view of the law and his obligations in the way he treats various customers or former customers of IBRC. His definition, based on the help of the Central Bank, of what is and is not a deposit is the key issue. Only deposits up to €100,000 have the guarantee. If they are not deposits according to the definition of the Central Bank then he cannot honour the guarantee on them. There is a difficulty with that.
Exactly, there is a serious difficulty. Let us put that case aside because this is not the forum for an individual case.
A very serious issue arises if the Minister, going in as President, sees that a ruling has just been made here about pension funds. I am not talking about a basket of equities but money that a guy has deposited in the bank which is deemed outside the remit of the scheme and he will not even get €100,000. What would be the Minister's position in that situation? Does he agree that would be the right situation for the Europe-wide deposit guarantee scheme? I do not. I think this is a dangerous decision because it tells anyone who has money in recognised pension funds that they are not covered by the €100,000 guarantee.
The €100,000 guarantee is common practice across the Union. Every country has it and it is standardised at €100,000. There is a possible difference of opinion on the definitions of a deposit and a pension. I do not want to give the Deputy a quick answer without getting advice and checking it out, particularly with the Central Bank. I can respond to the Deputy later.
I accept that the Minister cannot give an answer now. Notwithstanding the individual, about which, I have very strong feelings, if that decision is allowed stand it is, economically speaking, very serious because this guy put €450,000 into a six-year savings account. He was able to get out his 25%. It was taxed as the pension funds were taxed at 0.6% a year so it is cash recognised as a pension. Will the Minister examine that decision closely because it sends out a very chilling message to people who have pension cash in their banks?
I thank the Minister for his presentation. I too would like to make a few observations and then ask one or two questions. The observations follow from the blueprint for a deep and genuine EMU conference yesterday to which Deputy Donnelly referred. One thing came across forcibly to me, especially from the first session which was introduced by José Manuel Barroso, followed by Olli Rehn, Jeroen Dijsselbloem and Victor Gaspar both finance Ministers whom the Minister will meet next week. The point was developed in Sharon Bowles's presentation. She is always first class because she is robust, has clear thoughts and clear expression, using language we can understand. That is in contrast to Mr. Barroso's presentation which was very turgid, very foggy, aspirational, full of hypothetical language, abstract ideas and disconnected from the world and the Europe in which we live. In the Europe in which we live there are 20 million people unemployed which is a very serious situation and derives, as is now admitted, from banking messes across the eurozone.
The Cypriot and Irish banking messes are actually quite similar. They both arose from the collapse of asset values on their balance sheets. In the case of Cyprus these were Greek bonds which were unrealisable and therefore there were losses. In the Irish banks it was loans to the property, housing and construction sectors and other businesses which collapsed causing losses. Mr. Yves Mersch, who is an executive member of the board of the ECB, also gave a presentation. By a slip of the tongue he said that the cases of Ireland and Cyprus were different because in Ireland's case it was a bailout and in Cyprus it was a bail in. In fact the ECB must have been conscious when our system was collapsing that it needed to do something to avoid the domino effect of the contagion that would assuredly have happened. The mess was left in Ireland and with the people of Ireland. That is wrong. I made that point in the break-out discussion that followed and it can be seen in the recording of the conference.
I said it was wrong that €31 billion of losses in the case of one bank should have been converted into loans to that bank to redeem bondholders and the residual financial damage was inflicted on the Irish people. This was done circuitously, through a promissory note which re-inflated a busted bank. After that explanation to the 500 people present there was a strong round of applause, not for the fact that I had said it but because the knowledge had come into the debate in clear and understandable English. That is what we thirst for in Europe.
There will be an opportunity when we have the stage next week to explain these things. The banking system is still buckling at the joints across the eurozone and in the developed countries of the financial world. Sharon Bowles, who is on the finance and monetary committee, agreed that they are only beginning to understand the amounts and scale of balance sheet and off-balance sheet contingency liabilities in the shadow banking world and in the exposures that the traditional banks have off-balance sheet. These are very big, through re-hypothecation of financial securities and assets, which are being re-mortgaged four and five times, especially in London where some of the people who understand this and take the trouble to try to measure and assess it are quite scared by the scale of what is going on there.
Let us go from those general principles and observations to where we are at in our own case. It looks like there will be further bank recapitalisation. That is not a strange suggestion to anybody who is honest in their thoughts. The reason is that the mortgage loan losses are only now being acknowledged and recognised. Fiona Muldoon told us about the SME difficulties, of €50 billion of loans half are under stress and impaired. The figure for losses in the banking system started off at €23 billion. Had that been adhered to the banks would have just about been kept out of State control. I got my date wrong. It was on 17 September 2009 that I presented the previous Minister for Finance with a grouped balance sheet of the six banks and an eight page document describing what had gone wrong in the loan to deposit ratio. That is the ratio across the eurozone that showed all the banks that failed and continue to fail and just about survive how it went wrong. That is the doom loop between banking and sovereigns because banks take on the bonds that sovereigns issue and when they are not collected or their yields go high and their values fall their balance sheets start buckling. It will take people with a bit of mental stature to stand up and explain these things in easily understood English and not using all the hypothetical, abstract words, long sentences and polysyllabic words that have obfuscated and caused fog. We want clear home-grown language such as Sharon Bowles uses.
I have two questions, first, how much capital do our banks need? Provision has been made against the transfer of €16 billion in loans from IBRC to NAMA. What are the existing provisions and what more will be needed because I do not believe they will be collectable at the net book values of the loans? Today there is an interesting article by Martin Wolf, which TheIrish Times has reprinted from the Financial Times, in which he examines what has been happening, led by the biggest economy in the eurozone, Germany, and why its rigid adherence to the chosen path of deficit control and insistence that there be a pan-European solution is inherently contradictory, cannot work and ought to be stopped. It is a very readable article and I commend it to the Minister.
The Minister mentioned on our own patent-----
When the Chair speaks to him the Deputy persists in thinking that he is the only person in the room allowed to speak.
When the Chair asks you to finish, I mean it. Once I have asked the Minister not to reply, it means you will be left listening to yourself.
I said "observations". A year ago the Minister mentioned the patent cliff, which is valid. A year and a half ago I presented him with a paper, the real effect of debt, which has now focused all minds. It was dismissed as kindergarten economics. I will leave it at that.
It is too soon to assume that the Irish banks need additional capital. The position at the end of 2012 was that the core tier 1 capital of AIB was 15.1%, that of Bank of Ireland was 14.4% and that of PTSB was 18%. When the stress testing was done in Spain and, more recently, in Cyprus, it was not done for 10.5% core tier 1 capital as was done in Ireland when we did stress tests. Stress testing for 9% was done. PTSB is double the capital requirement. As the banks look more closely at the impaired debt of SMEs and on the mortgage side, one will find they are well provisioned. AIB, for example, has €12 billion for impaired debts, which is a lot of capital.
They are assertions. We will see, in due course, whether the banks need more capital. If they do, they do. At the current time, I have no evidence that the banks need more capital. They are very well capitalised, in fact they are the best capitalised banks in Europe and were capitalised at 10.5% core tier 1 capital when the norm in Europe is 9%. If we do further stress tests we have been assured by the troika that we will be stress tested at 9%. There is a reasonable cushion.
I welcome the Minister. Regarding the financial transactions tax, the former head of the NTMA, Michael Somers, is worried about the fact three or four banks in the IFSC have handed back their licences. Is that connected to the tax? We say we are against it, yet we are presiding over the committee which is thinking of introducing it. What feedback does the Minister have from the banks who want to leave, given that, I understand, about 22,000 people work in the IFSC? I am interested in the observations of the Minister on the departing banks.
There are about five references on page 5 to fraud, evasion and so on. As the Minister knows, increasing concern is being expressed in the literature that they are minor issues, but the damage done by the tax avoidance industry, with massive accountancy firm and tax lawyers, may exceed that. Will Ministers address the tax avoidance industry, which is huge throughout the OECD? Would the emphasis be better placed on tax avoidance rather than fraud?
I refer to the EU budget. It is not clear what our position is. Are we in favour of the €11.2 billion mentioned by the Minister? He mentioned a compromise but it is not quantified.
I thank the Senator. The references to fraud arise from the agenda we had earlier in the week. There has been huge VAT fraud across the EU. We were scheduled to discuss an initiative on its elimination on Tuesday but it has been deferred, probably until the June meeting.
The European authorities are focusing on tax evasion because of the savings directive I mentioned and countries like Lichtenstein, Switzerland and so on. As a result of their rules on confidentiality and secrecy, they prefer to pay a withholding tax rather than reveal information about deposits from non-nationals and their banking systems. They are now moving towards transparency. Those holding out were, as I said, were Austria and Luxembourg. I spoke to both Ministers during the week, and they have now agreed to move and change the mandate. The mandate is for the Union to negotiate transparency rules with the five non-EU states which are used for tax management purposes. We are making significant progress on that.
On the EU budget, there are two budgets, one which stretches to 2020, which the Taoiseach discussed with the Tánaiste on Monday in Brussels, and a supplementary budget to pay the bills for 2013. The Parliament has tied the two together. What is up for discussion on Tuesday is the budget for 2013. The agreement between ourselves and the Commission is to aim for a figure of €11.2 billion. It is like a Supplementary Estimate. Some other countries - the creditor countries - think the amount is too high.
We want to establish the principle in order that we can engage with the Parliament on the wider issue as well as the supplementary budget. We want them to agree the principle of splitting the €11.2 billion and suggested a figure they could agree to, for example, €7 billion, and revisit it later in the year and agree the remaining figure. We think by splitting it that way, they will have agreed to the principle of a supplementary budget and the drawdown of a significant amount of it. Otherwise, there will be a hangover that will run into 2014 and there will be increasing difficulties. The Parliament is willing to engage again with a full discussion, not only on this but on the full multi-annual financial framework.
It does not have any impact on what Michael Somers was talking about. After the financial crisis in America, banks pulled back from various parts of the world. One set of advice will tell one that it was part of the shake-out of the banking system. People pulled back from Dublin, as they did from other financial centres. Others will say that when the pendulum of regulation swung from soft touch regulation, it swung too far, too fast, and that there is now over-regulation in the Irish financial system. I am not sure whether that is true but it is something that is repeated by people in the industry. It is something we have brought to the attention of the Central Bank. I do not think anyone would criticise anybody after what happened in Ireland for being extra diligent with regard to regulation. It is not a great space in which to make an argument. There is obviously a mean point where regulation is the best to be found anywhere, without affecting business. The discussion takes place in that space, but it is nothing to do with the financial transaction tax.
With regard to the discussions on Tuesday on the European semester process of the economic surveyance measures, and working towards a more effective economic and monetary union, the Minister referred to a time-bound roadmap for future economic and fiscal governance measures. Will he be able to send a report to the committee on that?
We can, but it is an item that will not be discussed at any great length. It will probably be brought up by President Van Rompuy at the informal breakfast session.
It is a very packed agenda. It is a rolling discussion about the EMU. Deputies Donnelly and Mathews have a better insight into it after the seminar yesterday in Brussels than anyone who will attend ECOFIN on Tuesday. We will supply any available documentation to the committee.
I have two brief questions for the Minister. The last ECOFIN meeting agreed an extension of the maturities relating to the EFSM and the EFSF. There will be additional surveillance of Ireland until 75% of these loans are repaid. The draft regulation states that the Commission shall conduct, in liaison with the ECB, regular review missions in the member state under post-programme surveillance to access its economic, fiscal and financial situation. I ask the Minister to translate what this will mean. The extension of maturities means it will take longer before Ireland reaches that 75%. What does this mean in practice?
RTE reported today that a European official said there would be a principal statement about whether direct recapitalisation of Irish banks would be permitted at the June meeting. Can the Minister clarify the situation one year on from the principal statement agreed last June?
My understanding is that we will be on the hook for about 1% of €11.2 billion, €110 million approximately. Is that €110 million already included in the 2013 Estimates or will it be an additional item? My second question is to pick up on the financial transactions tax, FTT. Has an impact analysis - a cost-benefit analysis - been carried out? If so, is the Minister in a position to release that information to the committee? As part of the single resolution mechanism, the Commission will undertake a Europe-wide asset valuation of all the banks, essentially another stress test. Will we do one first? If so, when will we know if the banks need any extra money? We have the €100,000 deposit guarantee scheme in place. Is the plan for Ireland that this will be a funded or an unfunded scheme?
I have a question about the proposed banking resolution regime. I agree with Deputy Donnelly that it is a positive development to make a distinction between depositors and speculators or professional investors-----
In the Minister's opinion is this shift largely to do with what happened in Cyprus and the intervention of the Cypriot people, where the original plan to deal with the bank financial crisis there was quite different, namely, to raid people's savings of under €100,000? However, as a result of a popular intervention, that policy was changed and bondholders, rightly, came into the firing line. That policy is now being applied generally as a result of events in Cyprus. If that is the case, is there not a case for us to say that if we have accepted that senior bondholders should take a hit and if that is to be the new resolution regime which will be applied across Europe, we have a case? People may take the view about the European Stability Mechanism, ESM. I am less interested in the ESM than us having a moral case on the back of what has happened in Cyprus and this new proposed regime to say that we want some write-down. Can we not ask for some write-down, given that senior bondholders did not take the hit in the Irish situation but Europe has now rectified that mistake?
I refer to the Minister's comment about the deeper integration of the economic and monetary union. Given what happened the last time, is this a group of people one would trust with running the economy for the next while? I read in The Irish Times yesterday that some German people are doubting whether it is a worthwhile proposition. It certainly has resulted in 25 million people being unemployed. There is a lot of uncertainty in the United Kingdom as seen in the recent election results and something similar in Italy. Is there any recognition that we took a few wrong turns and that pursuing the same policies is a case of a kick and hope exercise?
In the case of the deposits of €100,000 across the eurozone, the pari passu situation that obtained legally in Ireland could have been set aside just as the deposits above €100,000 were set aside in Cyprus. It was an act of financial cowardice that the scale of the problem was not dealt with. Deputy Boyd Barrett is correct. The retrospective understanding or admission that Irish people have been put into the breach for the saving of the euro system means that the euro system - rather than the ESM or any of the other funds - on a singularly unique case, could take a hit-----
Not a million miles from Senator Barrett's point, I refer to item 12 on the agenda. The Minister stated that the EMU may not be discussed. I refer to the introduction of convergence and the competitiveness instrument. What form might that take, given that our competitiveness has improved so much over recent years and also that peripheral countries need to try to hold some competitive advantage? Should we be fearful that convergence in the European context might actually mean a lack of competitiveness for countries like Ireland?
There will be an extension of maturities and additional surveillance. However, there are so many other things. Deputy Donnelly referred to the two pack, six pack and various oversights. There is a lot of oversight coming from Europe now in any case. It has been overtaken by events. I do not think it will add any burden to us in addition to all the other fiscal rules that have applied to Ireland and every other European country as we move forward. I did not know about the statement on direct recap. I will look at it later. Deputy Donnelly asked about the €11.2 billion.
It will be from the Central Fund. There is already about €23 million in the Central Fund for this purpose because we knew that some additional costs would arise. The total annual cost would be in excess of €100 million, possibly €112 million. It will depend on when it comes in.
No. We are in the month of May. It will depend on from when this will be effective. The figure of seven will be on the table as a proposal. We are looking for something extra but there are always numbers like that over and back. Only ten days ago, the Central Bank notified us that it had extra excess profits and that instead of giving us something over €1 billion, there is about another €120 million or €125 million. There are pluses and minuses in the budget over the year. We keep a general eye on it but it is not that precise that one would be too concerned about it because of the pluses and minuses in it.
On the question of stress testing, Government policy is to align our obligations in this regard as closely as possible with the general stress testing of the European banking system. Two stress-testing exercises will be undertaken in Europe next year. In January the European Central Bank will commence an assessment of the values or asset quality of Europe banks, while later in the year the European Banking Authority will also carry out a stress-testing exercise. The date of the latter undertaking is not yet fixed.
We have no specific plans at this time. However, much of the Deputy's analysis is correct in that the root cause of the Irish crisis was a banking crisis. Whatever add-ons one assigns to it, that was the root cause. As such, the troika will not sign off on Ireland's exit from the bailout programme without a re-evaluation of the banks which shows they are adequately capitalised. That is part of the exit programme but the timing is an issue. We may be asked to do our stress testing somewhat ahead of the European banking system but not before 2014. We have agreed with the troika that the exact same ground rules for stress testing will apply in our case. In other words, we will not have to do a more onerous stress test than other member states, as was the case in the first months of 2011. We will be stress tested under the same rules applying top other countries but perhaps a month or two ahead of them.
Our intention is to exit the programme in the sense of being fully funded in the market. However, the stress testing of the banks is the condition we must fulfil to achieve that. Our policy is to ensure our banking system is normalised such that we are in line with the other European banks in advance of banking union. I do not want the banks in Ireland to be treated once again as an exceptional case, with all that such entails.
I will clarify that for the Deputy. I recall seeing such a document but rather than being a full evaluation, the focus seemed to be on the effect the tax might have on competitiveness. I understand a full cost benefit analysis was not done, but some work was carried out.
Given that the new bank resolution regime has established that senior bondholders can take a hit and following events in Cyprus, have we not got a case for claiming some level of write-down given that we took the hit for bondholders?
There is general acceptance across Europe that a mistake was made in respect of Ireland. That has been openly and publicly stated, including by the German Finance Minister, Mr. Wolfgang Schäuble, three weeks ago.
The EU would undoubtedly argue that it has already done a lot for us. Such issues as the promissory note, the extension of maturities and the granting of loans without taking a margin would be mentioned. We would be reminded that we are now being charged an interest rate of 3%.
Is the Minister saying that he does not consider us to be in a position to seek further concessions on foot of what is a fundamental shift in policy on the part of the European Union?