Professor John FitzGerald:

I thank members for their invitation. It is a pleasure to attend. I will address three of the modules that have been identified and try to answer questions on the fourth module, economic policy and integration.

I will make a few brief remarks on the first module, financial integration. This is important for the creation of a single financial market in Europe. The costs of the disintegration of the Single Market are high. For example, pequeñas y medianas empresas - small to medium-sized enterprises, SMEs, in Spain - are paying interest rates that are 3% higher, under similar conditions, than those paid by SMEs in Germany. There are also problems in that regard in Ireland. It is impossible to have a level playing field with competitiveness in Europe if firms with the same risk characteristics are paying higher interest rates in one place than they are in another. If one visited a branch of Bank of America in Palo Alto in the US with a set of risk characteristics, one would get the same terms as one would from a Bank of America branch in Newark or New Jersey. We do not have that situation in Europe. For this reason, banking union is necessary.

We refer to banking union in terms of our legacy debts. In a paper that I published with colleagues from the National Institute of Economic and Social Research in London, we considered the costs of a European banking system versus national banking systems. The former makes a sizeable difference for all of Europe. It is important that we make progress. By European standards, it should be rapid.

Once European regulation is in place, there must be a European resolution system. If the regulator screws up, the costs of a European failure cannot be imposed on a national entity. The costs must be socialised across the EU. A range of steps must be put in place. By 2020, I hope to see similar credit conditions for firms in Ireland as obtain in France, Italy and Poland.

On budgetary integration, my inclination is to do less rather than more where possible. However, we saw how the bond market vigilantes were unleashed on us. Since there was no European system to deal with the crisis, the bond markets priced Ireland out of the market and wrote us off as no-hopers in 2010. Our colleagues in Europe helped to rescue us. Europe has put in place a system that is better than using the bond market vigilantes to police fiscal policy, but they are always out there. The current set-up is not ideal, but it is better than the alternative.

We have changed the rules of the Stability and Growth Pact. I am unhappy with what occurred in this regard and in which respect we needed to pass a referendum. The rules that have been put in place across Europe would not have prevented Ireland and Spain's disasters, as they focus on problems in fiscal policy. The single best indicator of a pending crisis in Ireland, Greece, Portugal, Spain, Lithuania, Latvia and Estonia was the balance of payments current account. This is one of the measures that the EU uses. One reason for its omission is that the symmetry would imply that countries running large surpluses should take remedial action as well as countries running large deficits. This failing weakens the process that has been put in place.

One can make a mistake relying on rules. We obeyed the Stability and Growth Pact. That was the problem. When the IMF and the EU visited the ESRI, we asked whether they would give Ireland a speeding ticket in 2004, 2005 and 2006. They replied that they could not, as it was obeying the speed limit, namely, the Stability and Growth Pact. Had there been no pact, the IMF would have been making more noise about our mistakes in 2004, 2005 and 2006. An interesting paper by Dr. Jim O'Leary of NUI Maynooth goes through the advice given by the IMF and the EU and identifies this problem.

I wish to make a final remark on budgetary integration. I have gone through the blueprint produced by the European Commission and President Van Rompuy's statement. Only once does counter-cyclical fiscal policy appear, and that is in respect of the suggestion of setting up an insurance fund. The elephant in the room is that European fiscal policy is profoundly pro-cyclical. Any basic economics 101 class would teach that this is not what should be done. In February, as part of the EUROFRAME group of institutes, including two German institutes - the Kiel Institute for the World Economy and DIW Berlin - the Centraal Planbureau in the Netherlands and the national institute in London, we analysed the stance of fiscal policy last year, this year and next year in the eurozone at an aggregate level. The effect of fiscal policy this year will be to reduce the growth rate of Europe by 1.5%. Europe would be growing by 1% this year, not falling by 0.5%, were it not for an inappropriate fiscal policy. There is nothing in the European Commission's proposals to bring about more co-ordination of fiscal policy. When there is a cyclical downturn in any standard economy, one pumps money into it instead of removing it. Ireland and Spain have no choice, but aggregate fiscal policy should be run in Europe's interests in the standard way as set out in a basic textbook. That there is nothing in the EU documents on this is a failing.

We do not have answers on my final point, but it is a considerable risk for Ireland. By accident or design, the UK has decided to consider leaving the EU. The political implications will dominate the economic ones and I will leave them to politicians. The UK is unlikely to apply for associate membership, as it would need to obey all of the EU's rules on the Single Market without being at the table when those rules were decided. This is not an option for the UK if it leaves. In that case, we would need to impose the common external tariff on everything coming from the UK. This means a customs barrier on the Border with the UK on this island.

The economic implications for the UK and Ireland are considerable. I suspect that the vultures are already gathering over the UK's economy. The IDA is probably knocking on doors in the City in London and inviting companies that would prefer to be in the EU to come to the safety of Dublin. The French vultures will be gathering around British aerospace in Bristol, where the wings of the Airbus A380 are made and from where they are taken, with great difficulty, to Toulouse to be assembled. Why not do all of that work in France? Nissan produces cars for Europe. Suddenly, it will be subject to the common external tariff.

There would be major problems for the UK and potential opportunities for Ireland, but it is a lose-lose situation. What would happen to public procurement? Irish firms selling to British firms are currently treated equally as EU firms. Will British firms start buying British? What rules will govern access for agricultural produce? Will they be different, making access difficult? This island has a common electricity market. Will we need to erect customs barriers to check the electrons going through the wires? This is unlikely, but it would disrupt us. In terms of energy security, all of our gas comes through a pipeline through the UK. The rules of the EU mean that, if there is a gas shortage, Irish people must be treated fairly like people in the UK. If the UK is not a part of the EU, how can we ensure energy security?

There are major issues for us. There would be some wins, but probably many losses. I have no answers. We should be considering this matter.