Professor John FitzGerald:

In terms of what Deputy Donohoe said about the big issue - that is, that we have been so caught up in the crisis that we have not really thought about what comes after - the same is true of Europe in terms of its thinking on fiscal policy. It is about dealing with the current crisis. To some extent, because we are reaching a certain stage, maybe we can start to think again. If one comes from a mendicant country, people expect one to put the Irish case and one finds it very difficult to talk at a European level. Hopefully, we are re-establishing our credentials to talk at a European level.

On the current account balance of payments, if one goes through the Dáil debates in the 1950s, it was the big issue. People wrongly said it would not be a problem with monetary union. Olivier Blanchard, who is the chief economist in the IMF, wrote a very nice article in 2001 in which he contrasted Ireland and Spain and said Spain had a current account deficit which was not sustainable and that Ireland had a surplus and was doing okay. He was right at the time but I felt he was a bit gung-ho in 2001 because things were beginning to head in the wrong direction. He has been consistent. The European Commission now realises it must pay more attention to this.

On the question of fiscal policy and whether Germany or other countries should reflate, this is a problem. If we are going to have co-ordinated policy, that should probably happen. However, my German colleagues make a valid argument that the German economy is rather like a supertanker that is beginning to turn. Labour costs are rising in Germany because of a very tight labour market and over time the German economy will gradually price itself in such a way that the current account surplus will fall. I would not advocate policy in Germany to bring down the current account surplus. However, if we are going to have co-ordinated policy in Europe, it should be to reflate the European economy, which would involve the countries that have a surplus doing something about it. Frankly, that is not going to happen now.

The question is really whether we will have agreement for a co-ordinated policy in place for the next crisis. On that, an important decision was taken by the French Government in May when President Hollande announced that France was not going to and should not meet its target and the Commission agreed. Instead of making further cuts, France was going to let what economists refer to as "automatic stabilisers" work. I see this as a major breakthrough. What the IMF has said in its most recent report and every report for Ireland is that the country has set its target in terms of cuts and that it should do the cuts and make the increases in taxation. However, if it does not meet the targets in terms of borrowing requirements, it should not do more. In March last year, the central planning bureau in the Netherlands produced a report saying the Netherlands was not going to meet its target. On the same day, an article written by the bureau's director was printed in the Financial Times saying the Netherlands should not meet the target. The government disagreed and then collapsed. Another election took place, followed by a further round of austerity - the wrong policy.

On the issue of a weakening national banking system, there is a potential problem. In banking crises, if the issue can be swept under the carpet and growth is achieved, it will all go away. Our problem was too big. It was an elephant in the room and there was no sweeping it under the carpet. The policy across Europe has largely been to sweep the problem under the carpet, but this policy has come unstuck in Spain. I am not sure we can maintain this policy. A bank may need capital, but it is only if it is insolvent that bondholders and others will be burnt. It is a question of putting more money into the bank and whether it comes to the private sector.

We need to think about what type of banking system we would like in 2020. Currently, banks in Ireland and across Europe borrow at different rates, because they have different risks. The cost of borrowing for Irish banks is very high, relatively, and if, for example, Deutsche Bank took over AIB, it would be able to fund itself at a much lower cost. Therefore, while it might not make money on tracker mortgages - on which our banks are losing hugely - it would not lose money on them. It is not that we would let banks go to the wall, but a more integrated system would mean a world where bigger and stronger banks gobble up smaller banks. This is what is happening in the US. This might be better for Europe and would be the way to produce a European banking system. However, we need a lot of things to happen first.

There are issues such as not having national banks. For example, Poland faced a major problem in the current crisis. It came through without any fall in output, but its banks were foreign-owned. The Austrian regulator said that Austrian banks with branches in Poland could not lend money there, but should keep it in Austria. The Poles were faced with the danger that without banks of their own, nobody would provide credit. Contrary to EU rules, the regulators in different countries were saying credit could not be provided in Poland and should be kept at home. It is in situations like this we need a banking union. We need a union so that there is a level playing field. I heard the CEO of UniCredit say he had to charge 2% more in a branch in the Dolomites on the Italian side of the border than in a branch on the Austrian side. That is wrong. We need banking regulation to level the playing field in that regard.