Oireachtas Joint and Select Committees
Wednesday, 13 November 2013
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Forthcoming ECOFIN Council: Discussion with Minister for Finance
We shall resume in public session to deal with Item 5 of today's business, a pre-ECOFIN briefing for November 2013. I welcome the Minister for Finance, Deputy Michael Noonan, and his officials. 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 telephones must be switched off.
I remind witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity by name or in such a way as to make him, her or it identifiable. 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 Houses or an official by name or in such a way as to make him or her identifiable. I ask the Minister to make his opening remarks.
I thank the Chairman and committee Members for inviting me to speak here today in advance of the ECOFIN Council of Ministers meeting on Friday, 15 November, in Brussels. I expect that we will have a busy meeting ahead. A number of key issues will be discussed and hopefully significant progress will be made. I understand that the committee has already received the draft agenda and I will shortly discuss each of the agenda points.
When I last spoke to the committee we had just concluded our Presidency. At the start of July, we passed the baton to our Lithuanian colleagues who are now well advanced in their Presidency term. They have set a theme that we fully support called A Credible, Growing and Open Europe. Friday’s meeting will be their fourth ECOFIN meeting as they held a meeting in July, an informal meeting in Vilnius in September and a meeting in October.
In the Chairman's letter to me he asked if I would provide a brief overview of the proceedings that took place at the October meeting and I shall turn to that issue. The October meeting took place in Luxembourg on 15 October. As Members will all appreciate, that was budget day here and it was not possible for me to attend the ECOFIN meeting. My colleague, Minister of State, Deputy Paschal Donohoe, ably deputised for me at the meeting and there was an extensive range of issues discussed.
The ECOFIN meeting took place just a week before the European Council meeting, so the Finance Ministers were involved in preparing for that meeting. They particularly focused on the issues relating to the development of EMU and access to finance for SMEs. On the latter point, the Council discussed an initiative led by the Commission and the European Investment Bank aimed at facilitating access to finance for SMEs. This is something that we support. The Council also took stock of lessons learned from the 2013 European Semester process and considered possible improvements for next year. Finally, the Council also covered the outcome of the G20 and IMF-World Bank meetings that had taken place a few days before the October ECOFIN meeting and adopted Council conclusions in preparation for the upcoming UN Framework Convention on Climate Change.
That morning, as usual, Ministers held a breakfast meeting to review the economic situation. They also discussed backstop arrangements for banks in the context of the asset quality review and stress test exercise and the proposed single resolution mechanism, SRM. They also discussed how to accommodate public investment in the preventative arm of the EU’s Stability and Growth Pact.
The October ECOFIN also formally adopted regulations creating a single supervisory mechanism, SSM, for the oversight of banks and other credit institutions. Members might recall that agreement on the issue was reached earlier in the year during the Irish Presidency. The SSM will be composed of the ECB and the supervisory authorities of the member states. It will cover the euro-area as well as the non-eurozone countries that chose to participate. The ECB will assume its supervisory tasks 12 months after the entry into force of the legislation, subject to operational arrangements.
I shall turn to the ECOFIN agenda. Members will see that it is a full agenda and I suspect that it will be a long meeting. I shall outline the key issues that are likely to arise and afterwards I will be happy to take questions and observations from committee members.
First, I remind Members that this is a draft agenda and there may still be changes between now and the meeting in terms of content and the order of the discussion. In addition, work is ongoing at the level of officials so there can also be more substantial changes in terms of how the discussions will evolve.
The formal ECOFIN meeting is scheduled to commence at 10.30 a.m. on Friday. Earlier that morning, as usual, we will have a breakfast meeting during which Vice President Rehn will comment on economic developments following the publication of the European Commission’s autumn forecasts on 5 November. I expect that he may also provide an update on other Commission publications due this week such as the annual growth survey and the alert mechanism report, which marks the beginning of the next Semester process. There will also be an informal session that will cover items relating to banking union and I shall address these issues shortly.
According to the agenda the first items to be considered are the legislative deliberations which will, as normal, take place in public session. There are two issues to be discussed, savings taxation and the standard VAT return. The savings taxation file was last discussed at ECOFIN in May of this year. The aim of the EU Savings Directive is to enable interest payments, made in one member state to individuals resident for tax purposes in another member state, to be made subject to effective taxation in accordance with the laws of the latter member state. The Lithuanian Presidency hopes to reach agreement on the matter by the end of the year. Some member states still have difficulties with the file and I suspect that we might come back to the issue again at the December ECOFIN meeting.
With regard to a standard VAT return, the Commission will make a presentation and there probably will not be much discussion on this point at the meeting. The Commission see this as a business-friendly initiative and generally we are supportive of such measures. We will need to be vigilant regarding the outcome of the discussion as it might necessitate changes to our relatively simple VAT return form.
The next item for discussion is the fourth Anti-Money Laundering Directive. The Presidency's intention is to present a state of play paper and to assess the responses from member states. There are a number of open issues on the file and progress at official and technical levels has been slow. The intention is to finish the file by the end of the year.
As members will know, we are working hard on banking union at the ECOFIN. This week I anticipate having a long discussion, possibly late into the evening, on banking union and the single resolution mechanism, SRM. The task of completing all aspects of banking union is urgent if we want to break the link between the sovereign and the banking sector. This is a priority issue for Ireland.
As I mentioned earlier, the single supervisory mechanism was formally adopted by ECOFIN in October. This is an important step in creating a banking union for Europe. Last June the European Council decided that, in transition towards the SSM, a balance sheet assessment will be conducted, comprising an asset quality review and subsequently a stress test. This is to ensure that banks are adequately capitalised in advance of the ECB taking control of supervision. There will be discussion on this point, and in particular on how to address any capital shortfall if it were to materialise.
Another banking issue, the single resolution mechanism is also on the agenda for Friday’s meeting. This is the next essential step in creating a banking union. The October meeting of the European Council underlined the commitment to reach a Council general approach on the issue by year end. The Presidency is aiming for a general agreement on the issue at this week’s meeting. There are still a number of open issues such as scope, financing and governance. We will actively work to ensure that as much progress as possible is achieved on Friday. Our view is that it is important that the SRM should have a broad scope covering all banks that have potential to cause systemic difficulties either within individual member states or to the Union as a whole. We support the Commission’s proposal in this regard as even relatively small distressed banks have been the source of considerable systemic difficulties.
Broad scope is also important to ensure a level playing field for European banks. In addition, in our view, the ESM should be the clear public backstop for the SRM. This is particularly important in the early years when the single resolution fund is being built up.
Under the heading of any other business, the Presidency will, as normal, provide an update on other key financial services dossiers. This is an information item and I do not expect a major discussion on any of the items at this particular meeting.
The first non-legislative issue is the EU’s contribution to international accounting standards. In April 2013, Commissioner Barnier appointed Mr. Philippe Maystadt as a special adviser with a view to strengthening the European contribution to the international financial reporting standards setting process. Mr. Maystadt will present his report on the EU’s contribution to international accounting standards to Ministers. It is likely the report and its recommendations will play a significant role in shaping the conclusions of the expected Commission review of the international accounting standards regulation.
I understand the banking union item at this stage on the agenda could be to allow the Presidency update on the earlier discussions. The final items listed relate to EU statistics. The objective of the discussion will be to adopt Council conclusions on the annual statistical package, including the report on information requirements under EMU prepared by officials. The conclusions emphasise the role of high quality statistics and emphasise the importance of statistical independence. At the moment, nothing has been signalled under the any other business heading in this section.
We have a busy meeting on Friday. We will debate a number of key issues that are very important to Ireland and the EU. We will work with the Presidency and our colleagues from the other member states to ensure that progress is made. I thank the committee members for their attention and, at this point, I am happy to respond to any questions or observations that committee members may have.
No, it does not apply. There has been a lot of speculation about the events in Newbridge. PTSB was our final option and we would have preferred if it was resolved within the context of the wider credit union movement. It is our policy and the policy objective of the Central Bank to maintain a credit union presence in Newbridge, whether by way of a strong credit union establishing a sub-office there or interested parties in Newbridge coming together to re-establish a credible Newbridge credit union.
After the ECOFIN meeting, Ireland will be exiting the bailout programme. With regard to the European semester and the budgetary situation, we are now in the system proper in 2014. Does the Minister have any thoughts he wants to share on how the Oireachtas or parliamentary dimension will operate as part of the budgetary cycle as it is the first year proper in that system?
I had communication from the secretariat yesterday and I replied that if it is satisfied regarding the committee's objective of briefing on European issues, officials will brief the committee on agenda items in advance of every meeting. I will personally brief the committee on a quarterly basis. We can go through all the issues. With regard to the budgetary process, I am open to suggestions. Now that budgets have been brought forward to mid-October, it gives us greater scope. Post-budget, there is a longer period of time when matters reflected in the Finance Bill can be discussed. The Second Stage of the Finance Bill was a pretty good discussion. By extending the time into yesterday, we had almost 11 hours of discussion. If members have suggestions on alterations to the budgetary process, I am not averse to coming in before budgets and listening to the views of committee members. I and my officials listen to the views of interest groups such as the ICMSA, the IFA, trade unions and IBEC. I will meet all the big interest groups myself and it is a reasonable request if the views of colleagues, on a cross-party basis, can be given to me in a formal setting some weeks before the budget so that I can reflect on the committee members' advice and see what I can include. I am not able to give a response until budget day so it will be a listening and debating exercise rather than arriving at conclusions.
With regard to the standard VAT return being worked upon as part of the ECOFIN process, can the Minister explain to us whether it is coming from the Commission or the SME sector? The Minister indicated concern about this because it could create a layer of bureaucracy in the system we have, which is quite simple.
It comes from the Commission but I do not want misinformation going out. It is about the format of filing VAT and has nothing to do with VAT rates. There are some complicated VAT return systems in other countries. The objective of the Commission is to simplify and standardise the VAT returns process across the Community. In that context, we have a very simplified VAT return form and my interest is that anything that is standardised does not make our VAT filing system more complex. We have a very good system.
Ireland is strongly supportive of the simplified VAT return form proposals, which can lead to a reduction in red tape and administrative costs for business. The prospect of a standard VAT form across the Union holds benefits for business and the Single Market in general. In this regard, Ireland broadly welcomes the proposal. However, since Ireland already has a very simple VAT return form, we will seek to ensure the appropriate balance is achieved between any additional burden on business and the benefits that a standard VAT return form can deliver. In developing our position on the dossier, a stakeholder group is being convened representing business interests and tax practitioners with a view to ensuring any concerns and issues arising are identified by Irish businesses and communicated to us to be fully understood.
Can the Minister give us the state of play of the single resolution mechanism? What is the Minister's understanding with different member states on how it will further progress? Can the Minister provide clarification in regard to the banking sector and how it can be levied after a resolution situation?
The single resolution mechanism is being put on the agenda. We were notified of it rather late and we think it will go late into the evening on Friday because it is one of the crucial policy aspects that must be discussed. It runs from, and underpins, banking union. The issues that arise include the scope and whether it will apply to important banks or all banks. The Irish position is that it should apply to all banks because we have seen that quite small banks have caused systemic problems across European Union, which has led to a fear of contagion. It is not necessarily big banks that are troublesome.
I will read the briefing note. We welcome the single resolution mechanism as the next essential step in creating the banking union. We must press on to complete discussions on the single resolution mechanism by the end of the year. Taken with the SSM, the proposals will be an important step to achieving the objective of breaking the link between the bank sovereign and the banking sector. It is important that the SRM should give have a broad scope, covering all banks that have the potential to cause systemic difficulties, either within the individual member states or to the area as a whole.
We support the Commission's proposal in this regard as even relatively small distressed banks have been the source of considerable systemic difficulties. Broad scope is also important to ensure a level playing field for European banks. We strongly support the creation of a single resolution fund. It will assist in achieving the objective established by the Heads of State and Government of breaking the link between the sovereign and banking sector. The single resolution fund should have the capacity to borrow from private sources and to raise ex-postlevies from the financial sector.
It is also important that there should be clear safeguards in the event that a call on funds has fiscal implications for member states. The economic sustainability reference model, ESRM, proposal cannot be concluded until there is clarity on the backstop arrangements. It is our view that the ESM should be the clear public backstop for the single resolution mechanism, SRM. This is particularly important in the early years when the single resolution fund is being built up.
On governance arrangements, we need to strike a balanced representation in the executive board of the SRM which includes member states' interests but in constructing this, we must be careful we do not adversely affect effective resolution decision making. On timing, we should aim to have the deadline set by the European Council and reach agreement on this proposal to allow time for conclusion of trialogue negotiations with the current EU legislative term.
Not every country would share the Irish position so there will be quite a debate on this. Some countries would regard it as sufficient that the scope would apply only to the very large international European banks. In respect of the resolution fund, some countries would be of the view that rather than relying totally on a centralised European fund, each member state who is party to this should have its own resolution funds and that resolutions should be conducted by a combination of the funds in the sovereign funds rather than a centralised European fund.
There will be a debate about the backstop arrangements as well. Quite clearly, we see the ESM as the necessary backstop arrangement but there will be a view here that once the fund is built up if it is a centralised European fund, as time goes by and one has a fully funded fund, there would be no need for a backstop at that point. The question of whether one would continue with the ESM acting in a backstop role or whether after the ten-year build up of the fund, the ESM would drop out of the arrangements and the fund in effect would be strong enough to operate without a backstop, will also be up for debate. I am outlining the Irish position. There are very strong alternative views from powerful member states.
The Minister and his officials are very welcome. In the context of the significant date this country faces next month with the formal exit from the bailout programme, will Ireland's exit from this programme come up for discussion in any format at ECOFIN or will the Minister take the opportunity to take any soundings or have any discussions on the margins of the formal meeting concerning issues relating to our exit, such as the modalities, mechanics or the issue of a precautionary credit line? Will those issues be discussed formally or informally?
There will be no discussion of Ireland's exit at ECOFIN. Of course, there are two meetings. Tomorrow sees the Eurogroup meeting. It is in the context of the Eurogroup that country-specific issues like that would be discussed. There is a standard item where there is a review of countries in programmes of one sort or another. In the normal run through of agenda items, in discussions on the state of play in Greece, Portugal, Spain and Ireland, there is an opportunity for me to give the information about Ireland and for a very short discussion. I always speak to colleagues on the margins. On this occasion, because of the imminence of the Irish exit, I will be speaking to many people on the margins, particularly those I have not met in my round of talks over the past couple of weeks.
Is 15 December still the formal exit date or is that affected by the two-month extension we received for drawing down the final tranche of funds under the programme? The Minister might explain what happened in respect of that and how that came about.
It is just a technical arrangement to ease the drawdown of funds that we do not need up-front so that does not lengthen the programme. There is nothing mysterious about the date of 15 December. The European programme ends on 9 December while the IMF programme ends on 15 December or maybe vice versa. The date of 15 December is the third anniversary of one component of the programme and then the programme is over. It is not that we are picking a date, that it is pre-Christmas or that there is a big hoopla about this. It just happens to be the anniversary of the signing of the programme in the first instance. To be precise, the technical arrangement for the final drawdown going into early February does not affect the ending of the programme. It is just an arrangement that has been made to allow us full access to the full amount of money promised. The anniversary date is simply the anniversary date but we will be making our decisions clear and announcing them before that date.
So the Minister is not going to avail of the additional two-month window in terms of the drawdown deadline in respect of the decision he is going to make on the precautionary credit line? Is it still his intention to have that decision made by mid-December?
That is right. There is linkage being made between the technical arrangements for drawdown into February and as if the programme was being extended into February. It is not. The programme ends in December and it is purely a technical arrangement to access money due to us under the programme. Of course, we will draw down the money that is available to us under the programme but we do not see that as an extension of the programme. We will make our decision clear in advance of 15 December.
Can I ask the Minister for an update as to where we are on that question of the precautionary credit line? What issues have yet to be teased out by Government? I know the Minister has had a pretty extensive round of consultations with key stakeholders and taken many soundings on board. He still has a number of weeks in which to make a final decision. The markets seem to be quite calm on the question of whether or not we take such a credit line. What are the factors that the Minister is weighing up in respect of whether or not it is a good idea to adopt one?
There are advantages both ways. I do not see big downsides. I do not see downside risk on either approach but I see advantages both ways. Having consulted with the principals of the troika and a number of European colleagues, we are reflecting and I am reflecting in particular on what way I will advise the Government. The factors relate to what is in Ireland's best interest. There is a window now where things are calm internationally - calm in Europe and Ireland. The interest rate reduction announced last week by the ECB obviously reflects back into interest rates in general. Consequently, we seem to be in rather a benign window. If we had a precautionary programme, we would face this decision again next year. I cannot predict what things will be like next December.
These kinds of considerations relate to what is to Ireland's best advantage, what is the most risk-averse way of proceeding and how we as a national Government control events to make sure our judgment has been taking all the facts into account. I am reflecting on that and in due course, I will advise the Government. Of course, I will be talking not only to Government colleagues but to the Central Bank and the NTMA, which has been assessing market sentiment.
The Minister knows my view on that, which I have put forward in a non-adversarial way. I think the downside of not opting for a precautionary credit line is more considerable. I take the Minister's point that we might have a better prospect of a clean exit now as opposed to in 12 months' time.
We will be out one way or another. My next point relates to the SSM, the ESRM and all the acronyms people will find it hard to get their head around.
In very simple terms, my understanding is the ECB will be taking over supervision of the larger banks, including five in Ireland, this time next year. Before it does so, it wants to ensure these banks are in a healthy condition. In that context, there is a two-part process. The asset quality review or the balance sheet review is ongoing and full stress tests will commence next year. I ask the Minister to put that matter in an Irish context for us. As I understand it, the asset review is ongoing. When is it expected to be completed and what will we find out from it? When is it expected that the full stress tests will happen here? Allied with this, if an issue arises in terms of a capital shortfall in any of the banks, one presumes the ECB will not want to take on responsibility for the banks until they have been fully repaired, not just in Ireland but also across Europe. I raise this issue in the context of the fact that the Minister has outlined that the Government's view is that the backstop should be the ESM.
I will read the note on this issue first. As the committee will be aware, in June the European Council indicated that it was in transition towards the single supervisory mechanism. A balance sheet assessment will be conducted comprising an asset quality review and, subsequently, a stress test. The purpose of this exercise is to ensure banks are appropriately capitalised. This is seen as an important exercise by the ECB, as it wants a clean bill of health for the banking sector in advance of it taking control of supervision in November 2014. The committee will also be aware that a similar exercise is being carried out on domestic banks by the Central Bank as part of our troika commitments. It is expected that this exercise will be finalised by the end of November, but it is not expected that the results will be issued publicly, unless required to be released by banks to comply with market obligations.
As a programme country, it was always part of the programme that, around the time of our exit, we would have asset quality reviews and stress tests. We obtained the agreement of the troika that the asset quality review would take place in the autumn and I believe the phrase used with regard to the stress tests was something like "in close proximity" to the European stress testing but in advance of it. The political and financial risk we identified with this arrangement was that we could get ourselves into a position where we would have to conduct the reviews and tests twice. We had our agreements with the troika, but then during the negotiations on banking union it was agreed that, for prudential reasons, asset quality reviews and stress tests across the European banking system would be required. It would, therefore, be a case of double jeopardy if we had to conduct the reviews and stress tests once for Irish reasons and again for European reasons. As we wanted to avoid this, during my last visit to Frankfurt the banking authorities agreed that they would monitor and become involved in the asset quality review here in an advisory capacity. It was agreed that we would do it once, that we would not have to do it a second time. It was further agreed that the stress tests, rather than being conducted in advance of the European general round of stress testing, would be part of the Europe-wide process. That is the arrangement and we have had no indication that we will require additional capital.
As well as this, while the ECB has issued guidelines on the nature of the stress testing, it has not fully nailed down the absolute conditionality yet. We are not quite sure what the position will be in that regard. The last time we stress-tested, for example, we had to stress-test against a core tier 1 capital requirement of 10.5% and provided funding well in excess of that figure. When Spain and Cyprus stress-tested, they were required to do so at a figure of 9%, but the European rules that have been issued state 8% core tier 1 capital is sufficient. The ECB has not yet defined what financial instruments will constitute core tier 1 capital; therefore, we still do not have the full picture. If the ECB varies what is counted as core tier 1 capital, a figure of 8% might not be an advantage. We are not quite sure about this, but the matter will be clarified as the months go by. The position is that we will stress-test in the same round of stress testing the entire European banking system. We have no evidence from the Irish Central Bank that we will require extra capital, but a lot will depend on the rules for the stress testing and whether they will be more or less rigorous than those already applied to our system.
Picking up on the last point about the criteria that will be laid down for the stress testing, we have had discussions before about the core tier 1 capital requirement being reduced to 9% and now 8% and the advantage this could afford to the State in the context of stress testing the banks. When does the Minister expect to receive the detail of the financial instruments that will be included in core tier 1 capital to be made available to the State which will give an indication of whether there is cause for concern?
Probably in the next couple of months but certainly well in advance of stress testing of the European banking system. I will give the Deputy one example of what I am talking about. Tax credits arising from losses in the banks are regarded as core tier 1 capital. Of course, there have been a lot of losses in the Irish banks which means that there are a lot of tax credits available. During the Basel discussions a suggestion was made that tax credits would no longer apply as core tier 1 capital. The terms of the Basel discussions will come into operation in 2017. In the next round of discussions, however, allowance was made for a phasing-in period. Initially it was agreed that tax credits would be allowed until 2024, but that has not been absolutely nailed down yet. If the Irish banks could avail of tax credits until 2024, no additional problems would arise. The Deputy will notice in the Finance Bill that one of the measures I included involved the removal of the prohibition on the banks from freely using their losses because I had this consideration in mind. We have still not received definitive advice from the ECB on what instruments will finally contribute to the 8% core tier 1 capital that will be required. It is not a dramatic crisis issue or anything like that because the stress tests for the European banking system will not take place until late October or November next year. There is a long lead-in time. I am simply alerting the committee to the fact that there are still decisions to be made on the protocols for the stress testing and the particular issue of core tier 1 capital. We are watching matters very closely in the Irish interest.
I note that there is no evidence, particularly from the Central Bank, there would be any need for additional capital in the Irish banks at this point in time. Obviously, we do not know what criteria will be used for the stress tests, but if additional capital is required in any of the banks as a result of the stress tests prior to October next year, how would it be sought? Would it be by way of a bail-in, since the rules will not apply until 2015, or how would it be provided if such an issue arose?
The European Council indicated in June that where capital shortages were identified across the European banking system, they should, in the first instance, be covered, in line with established processes, by the banks themselves through private funding or profit retention within a given period. As we exit the bailout programme, we are going to align ourselves fully with the norm in Europe. We see exiting the bailout programme not as a big dramatic event but as a normalisation process whereby we are back again as a fully fledged, independent member of the Eurogroup and the eurozone. We will follow the advice coming from the Commission in this instance, with reference to what was indicated at its meeting last June.
The first step would obviously be that the banks would try to fill the capital hole themselves.
It is unlikely that AIB or Permanent TSB will be owned by shareholders, whether that is the ESM or in the market and that the State may be its majority shareholder. In the event that these banks cannot raise money in the markets, does the burden then fall on Irish shoulders again?
The problem with a hypothetical discussion like this is, as I have already said, there is no advice from the Central Bank that there will be any capital requirement. The longer we discuss the issue, it gives credence to the theory that there will be a capital requirement. We will be off again with another, "'We'll all be rooned," said Hanrahan, "Before the year is out."' It is not like that. The Irish banks are strong. There will be a round of stress testing in the autumn. The advice from the Central Bank is that has not yet identified a requirement for additional capital, but of course there is always the possibility that additional capital will be required where we will align ourselves with the European norm. If there is a capital requirement, in the first instance, private funds and profit sharing will be the way to go.
To develop the conversation further, Deputy, questions such as "do I think?" only give rise to speculation that would be adverse to our interests.
With respect, Minister, we are sitting in the finance committee of our Parliament. The Minister has outlined the first step. I simply want to know if the next step is that finance must come from the State's coffers or if there are other proposals. There is a great deal in the mix in terms of the ESM, bail-ins post 2015, etc. I do not want a long drawn out discussion - it is not what I want to focus on. I just want some clarity on that aspect. In the event of a bank not being able to raise money, would it fall on the shoulders of the nation or from what has been negotiated in Europe? Is there potential for a collective approach?
There is no advice from Europe to the effect of the Deputy's comment but, of course, within the Irish banks, there is always the potential for a rearrangement of provisioning. We have the CoCos within the banks and so on. After profit sharing and private funds, rearrangement of provisioning by the use of CoCos and so on would be the next step in the process. As I have said, I do not want to give rise to speculation about something about which we will have no information until the stress tests take place.
That is fair enough. No one knows at this point in time. We must rely on the Central Bank's information. We will wait and see. I wanted to deal with the process.
In terms of both the ECOFIN and the Eurogroup meeting, the Minister made no reference to the potential retrospective recapitalisation of Irish banks. I wonder where this sits at this point in time. The Minister will be familiar with the statements of leading people in Europe in the past while. We are well into this process; it is 17 months since this was announced by the Eurogroup. We have the letter from the Taoiseach, Deputy Enda Kenny, to the leaders in Europe on the importance of Ireland's return to full market financing. Is it sustainable that this commitment would be implemented? My view, and I hope this will become a reality, is that there should be a re-financing of as much as possible of the funds we put into AIB and Bank of Ireland. It is also my view that the door seems to be closing since that statement on 17 June last year. I raised this issue with the troika when they were last here.
They said that as they shift ahead, the potential for this is very slim because of political circumstances and the rest. I wonder if this is still on the agenda. I note the Minister stated that he does not want to tie the pillar banks to the ESM and there is a potential for selling shares in the market. Is this still being aggressively pursued as it was suggested back in June 2012 by the State?
ECOFIN does its business in an ordered fashion. It has a defined agenda for its meetings. I was asked to discuss the ECOFIN meeting on Friday and the agenda items. The question raised by Deputy Doherty is not an agenda item for Friday's meeting. I can see the Deputy's point of view, but if we are to have meetings every quarter along these lines, I do not think it would be fruitful that they would turn into a general trawl of Government policy on items that are not on the ECOFIN agenda.
That is fair enough. The previous speaker asked a question that is not on the agenda of the ECOFIN meeting and the Minister answered him in saying that it is not on the ECOFIN meeting but there is a second meeting, which is the Eurogroup meeting at which country specific issues are dealt with. The Minister then went on to answer the question. If he wants to stonewall me on the retroactive recapitalisation of Irish banks, that would be fair enough, but he must be fair to speakers from Opposition parties who have an entitlement to put questions. If the Minister is going to take a position at this finance committee that he will deal only with agenda items of ECOFIN, then he needs to be consistent in responding to other political parties and those who are not members of political parties on that matter. The Minister has given the view that it is possible to ask questions on the second meeting that will take place this week. It has been the norm for the Minister to answer questions on Eurogroup as well. If he taking that approach with me, that is fair enough.
I answered Deputy McGrath's question because the issue he raised will be addressed at the Eurogroup meeting. The issue about which Deputy Doherty inquired will not be addressed at the Eurogroup meeting because it is not on that agenda either. What I am trying to say to the Deputy is that if we are to have fruitful discussions at these meetings, where the Deputies and I exchange information on a regular basis each quarter and the committee members are briefed by officials before every meeting of ECOFIN and the Eurogroup, we need to do it in an orderly fashion. If Deputy Doherty wants a Punch and Judy show about other issue, I do not think this is the forum.
I do not want a Punch and Judy show. The credit line is not on the agenda of the Eurogroup. As the Minister informed the committee, the agenda of the Eurogroup is specific country issues, in which there is a trawl through of the situations in Spain, Greece and Ireland. As the Minister said, that gives him an opportunity to talk about exiting the bailout. The question I am putting to the Minister is whether he will take that opportunity to talk about what was the game changer, the seismic shift 17 months ago, the retroactive recapitalisation of Irish banks, particularly in light of comments of senior leaders in Europe at this point in time that the chance was slim and it is very unlikely that retroactive recapitalisation will take place.
In the interests of goodwill and to help the Deputy's campaign for the leadership of his political party, I will read the note I have on it.
It has been agreed by the Eurogroup that retrospective recapitalisation of banks on a case by case basis can be considered once the direct bank recapitalisation instrument comes into force. However, there is a long way to go in the negotiations and each case will be considered on its merits. It would not be appropriate for me to prejudge the outcome at this early stage. There will be no discussion on this at either the Eurogroup or at the ECOFIN meetings.
That is not the way the system works. This is like the Dáil. If one tables a question on one thing, one is out of order if one raises another thing. We stick to the agenda and we do not have a punch up at any other business. We deal with the agenda items. This is not an agenda item.
He is a master at this. The Minister will attend two meetings for which we have the agenda and it seems entirely legitimate to ask questions about both meetings in advance of them. The idea that there is some kind of iron wall between the Thursday and the Friday meetings does not make sense to me. On Thursday, at 10.30 a.m. there will be a macro-economic dialogue at political level. That seems to be pretty open as to what can be discussed in terms of the overall economic situation in Europe and how we fit into that. We will then have the Eurogroup meeting and then there will be the ECOFIN meeting with the agenda items he has gone through and which he clearly wants to focus on, so that we do not discuss the other stuff. Even in terms of the ECOFIN meeting, the main agenda item which will be discussed for ten or 12 hours is banking union.
Is the Minister telling us that it is not relevant to a discussion on banking union to discuss the retroactive recapitalisation of banks? I put it to the Minister that it is absolutely legitimate to raise it in that context because in so far as this issue has been presented to us, the whole narrative has been that if we sort out banking union, if we make progress towards banking union, then we will get some retroactive recapitalisation support for our banks which will lessen our debt burden. I do not see why the Minister cannot raise it in the context of discussing the progress on banking union which he is reporting. If he cannot do it there I certainly do not see why he cannot discuss it in a macro-economic dialogue at political level. I ask him to clarify why he could not raise it in one or other of those contexts.
The proceedings will start on Thursday morning, 14 November, at 9 a.m. with an informal meeting with representatives of the European Parliament to discuss issues related to banking union and other financial service dossiers. The people attending that meeting are members of the European Parliament and the two Presidents, the Lithuanian finance Minister who holds the Presidency and the Greek finance Minister who is the incoming President. The rest of the member states will not be represented and our interests will be looked after by the Commission. I will be in Dublin while that part of the process is happening. At 10.30 a.m. there will be a meeting with the social partners - employer and trade union representatives - to discuss the macro-economic issues. Again it will be the current President who is the Lithuanian finance Minister and his successor, the next President, the Greek finance Minister.
The Eurogroup meeting will meet at 15.00 hours. Mr. Dijsselbloem will chair the meeting and he will run the agenda. We will address the items on the agenda. This will be the same procedure at the ECOFIN meeting. The Deputy is so used to getting up and saying whatever he likes in committees such as this and in the Dáil, that he does not understand procedures where a chairman will follow the agenda strictly and not give the sort of latitude the Deputy is given here.
The Minister is telling us that issues of vital interest to this country cannot be raised at a two-day series of meetings on what is happening in the European economy. I do not accept that. It seems we have to be such good boys and girls that we cannot breach protocol and we cannot raise issues of vital interest to us.
I specifically asked the Minister why, in the context-----
-----of a discussion on banking union can he not raise the issue of retrospective recapitalisation of Irish banks, another word for a bit of debt write-down. Why can he not do so?
Because the discussion on banking union is at 9 a.m. in the morning with the European Parliament and with the present President and the next President of the Eurogroup. It is not at the plenary session which I will be attending.
It seems we are such good boys that we cannot raise the issues that matter to us. We are allowed ask the Minister about the discussions at the Eurogroup meeting where he will give the reports. He indicated that the different countries will give their reports. Is that correct?
No. The way it works is that there is a regular agenda item. It goes through the programme countries and it may refer to other countries as well where there may be particular difficulties. The Commission reports, the European Central Bank and the IMF comment and then the particular member states reply to the comments made. This is a very brief process. In the case of Ireland the comments will be of the general nature that Ireland is doing fine and is preparing for exit. In the case of other countries there might be a longer period of discussion depending on the current state of play and any difficulties they have. These are well ordered, well chaired discussions which do not always give freedom for raising matters.
On the particular issue raised by the Deputy and by Deputy Pearse Doherty, as I said in the briefing note, it has been agreed by the Eurogroup that retroactive recapitalisation of banks on a case-by-case basis can be considered once the direct bank recapitalisation instrument comes into force. That makes it very clear that in the first place the direct bank recapitalisation instrument is brought into force and after that, the discussion is on how retrospection might apply.
Deputy Doherty has made the point that we were told the same at our meeting with the troika, that it was very unlikely we would get it. That is what we were told. To my mind, that is a very big problem for us. With the mountain of debt we have, the so-called exit from the bailout is a mirage. I ask the Minister for clarification. I ask if I am correct in assuming that under the fiscal treaty, as soon as we exit this programme, we have to start to move towards the debt and deficit reduction targets of the fiscal treaty and these are pretty stringent.
Everybody knows the European rules. We have debated them several times. The Deputy is not actually asking me for any information about the ECOFIN meeting on Friday which is the purpose of this discussion today. The Deputy is grandstanding like a long-playing record on the issues on which he has majored for three years and where he has been proved wrong on every prediction he has made.
The prediction that we would have to default, that there was no choice but to default, that we would be Argentina and Iceland, that we would all be ruined, that we are banjaxed.
That was not a prediction. I advocated that we default. By the way, I still advocate that we default on debts that are not ours because the Minister will not even ask these people for the reduction. It is entirely legitimate when the Minister is going to a meeting with European finance Ministers for us to ask if he is going to raise the issue of the debt burden around our neck and ask for some relief. What the Minister has made absolutely clear in his very masterful, clever way of trying to talk down the issue, is that he is not going to ask for that.
I disagree. He has said it is not allowed, that it is not on the agenda, therefore, we cannot raise it. In my view it is entirely legitimate, in the context of our exit from the bailout, which the Minister is trumpeting, to ask him to clarify what obligations we will be under from EU treaties and EU rules, when we exit the bailout.
I thank the Minister for his attendance. It is obvious from the agenda that issues relating to banking union are forward-looking. There has been much discussion about supervision and resolution. I have a question about a matter that is rarely discussed. We have put in our own backstop provisions and also lending targets and obligations for our banks. A number of banks have left the Irish market. I ask about the issue of inter-European competition and bank lending, as opposed to just resolution and supervision. Is there any discussion at these meetings about how banks could be encouraged, by virtue of having the backstops, to improve the way they interact in other European member states?
Will lending targets and other targets be stitched in to how they function as has been the case in Ireland?
Yes, this is generally in the debate on the provision of credit. It is an issue I dealt with in great detail last night in the House. Certainly the European banks can set up in Ireland and provide lines of credit but the general position on the European banking system is that because of the crisis and the deleveraging which had to take place right across the world, and particularly in Europe, the banking industry in Europe is smaller than it was and there is a difficulty in the provision of credit in certain countries. One approach to that is to strengthen the Irish banking system, which we have done, but another approach is to follow the American example and not to rely so massively on the banks providing us credit and look for alternatives to the tradition of banking system for the provision of credit. We have about €2.5 billion available in the Irish economy from non-bank sources, ranging from situations such as Dell computers getting a banking licence to enable it not only to put information systems into companies but to finance it. That is one alternative. Another is Silicon Valley Bank which has a branch in London and a presence in Dublin, which is putting $100 million on the table for venture capital for small start-ups in Ireland. There are three funds that have been negotiated with the National Pensions Reserve Fund and some lending funds. That is on the record from my speech last night. I gave all the examples of that as well so there is a general movement.
In the European context the most fruitful source of finance is the European Investment Bank. About 18 months, countries contributed extra capital to the European Investment Bank and the net position is that the additional capital leveraged up allows it to lend about €180 billion extra over the next ten years across the European Union. My general secretary is now on the board of the European Investment Bank and we are accessing additional funds there. For example, it has put €250 million into both Bank of Ireland and Allied Irish Banks to fund SMEs. While the source of the funding is the European Investment Bank we are using the pillar banks as a conduit for delivering that money to the SMEs. We will build on this. The idea is that we continue to build on this. The European Investment Bank management will come to Ireland again before Christmas and look at various projects. We think it will be a fruitful source of funding and that is the way it should be.
The Minister mentioned that there will be a discussion on the broader macroeconomic situation. I am aware that Commissioner Ollie Rehn commented in The Economist magazine last week. We are all aware of procedures for countries in deficit but there are large European Union countries that have moved into excessive surplus and Ireland, as much as any other country, requires European growth. Is there growing pressure in the EU to encourage countries with excessive surpluses, for example Germany, to take measures to improve European growth and growth within its own country?
There is a general debate. Commissioner Ollie Rehn got involved in that debate, according to an article I read last week. The economic theory underpinning it is that if the periphery countries in difficulty are all running fiscal programmes to reduce their deficits and move towards balanced budgets and surpluses and if at the same time the strong creditor countries are running very large surpluses, all of Europe, as an economic unit, will run a very big current account surplus. I saw figures showing that the big current account surplus was headed for about 3.5% in 2014 which would be a very significant surplus, the effect of which would be to make the euro stronger than, maybe, would be desirable under market conditions. Therefore, there would be a very strong euro which would adversely affect exports. That would be the economic theory and that the European Union internally should have a greater balance between the deficit countries and surplus countries because in the medium term it is tenable for the whole unit to run surpluses in a manner which would excessively strengthen the euro, strengthen the currency, which would adversely affect the European model of export led growth. That is the general theory. A discussion is taking place on the issue but I have not seen any proposals yet.
On the legislative deliberations, the savings, taxation and interest payments, is there an analysis of how that may affect our budgetary position and is there a broader concern that any changes would drive money out of European Union banks altogether?
We would not be in the forefront of this debate but as the Deputy is probably well aware that if there are wealthy people in a country such as France or Germany they are liable to have a lot of savings in countries such as Switzerland or, maybe, Luxembourg but that is not the only example. That adversely affects tax take in those countries. Therefore, it is more of an issue for such countries, than for us but, obviously, we will participate. There would not be a great incidence of Irish savings which would need to be taxed elsewhere but there is movement now and there is more transparency in countries, such as Switzerland. It appears now that it will be possible for the savings directive to be implemented. Therefore, if one is a citizen of France and has a lot of money on deposit in Switzerland there will be a mechanism whereby the income from one's savings will be taxed in that country if not in the country of one's residency.
Before I call Deputy Arthur Spring, I ask the Minister to revert to an issue raised by Deputy Dara Murphy, the position with the German trade surplus, on which there has been much commentary. Mr. Paul Krugman also had an article on it last week in which he stated that the German economy was benefiting from a cheap euro. I understand the Commission is due to publish its opinion on member states' draft budgets on Friday and that this may address the issue of the German trade surplus. The question is whether the German situation will be raised as part of the national budgets when the Minister is at the ECOFIN meetings.
A Eurogroup meeting is taking place on Friday week. The agenda item is the budget and budgets in Europe. I do not think it will come up tomorrow or Friday but I would think it will come up the following week.
Yes, the general position is central to what I was saying to Deputy Dara Murphy, that it is in that space. If one does not correct problems within one's own control, I am speaking as a European rather than Ireland, then the markets will correct it. What will happen is that the euro will strengthen for the point against competitive currencies which will make costs very dear in Europe and reduce exports. It is quite complicated and the impact would differ from sector to sector in individual economies.
If one is importing a great deal for manufacture or importing a great deal of energy, as Ireland does, then there are pluses and minuses to a strong currency.
We need to see the impact on a specific sector in a specific country to decide whether a weak or strong currency plays to our advantage.
There are three issues I wish to raise. I presume there will be discussion on Friday in regard to the standard VAT return. When people hear the European Union talk about standardisation and taxation, they are concerned. Are some of the countries bordering Germany considering the idea of a standardised VAT rate? Has that been discussed or is there any sentiment towards that? It is a concern for some people that we might see a standardised VAT form being issued, although some people want this. Will the Minister elaborate on this issue? I presume this will relate to the transport and food companies.
The discussion is about standardising the form and the format of returns. There is no suggestion that there will be a standardised VAT rate. However, VAT is already controlled by European directives and we are quite limited with regard to what we can do in the area of VAT. For example, when we were discussing the 9% VAT in the hospitality area, people were suggesting that we should put restaurants and hotels on a 9% rate and other groups on an 11% rate. One of the rules under the directives is that we can only have two lower VAT rates. We have rates of 13.5% and 9%. I often hear the suggestion that I should reduce some areas to a 5% rate. We cannot have a third lower VAT rate. There are significant restrictions in that regard, but Europe will not dictate to us what rate should apply in particular areas.
Is there anybody within the group pushing for change? For example, in the area of corporation tax we have seen some of our fellow European citizens push for a change in our corporation tax. Is there any sign that anybody is pushing for a change in regard to VAT or is the change strictly for administration purposes?
That is good to hear. I believe the Minister and some of his colleagues were able to achieve the break on the promissory note and on the interest rate notes without these being formally on the agenda of ECOFIN. Can I presume we are still trying to do something about recapitalising the banks from the ESM and that this is not being done through ECOFIN?
It will be discussed by the Eurogroup and then it will move on to ECOFIN. An order of discussion has been set out now. As I said, the direct bank recapitalisation will come into force and then there could be discussion on it.
That might seem like good news, because we got the deal on the promissory note and on the interest rate.
With regard to sentiment towards Ireland, the Minister said that the attitude taken by many is that Ireland is doing fine. I have heard this from many organisations and from colleagues within the social democratic movement. However, I believe there is an overly optimistic view in the international window as to how Ireland is performing. When one explains the disconnect between individuals and the country, politicians internationally feel we have a lot further to go. Last month, an article in The Economist focused on the level of personal indebtedness that exists throughout Europe and said this would be the next wave that will hit the continent. The article highlighted Ireland as being one of the most personally indebted countries. This factor is being lost on the international community when we are trying to focus on our solution. Is there anything being done to change the current sentiment regarding Ireland or must it be kept positive to try to build confidence all the way?
Political sentiment in favour of Ireland is very strong across Europe and in the G20, particularly in the United States. Market sentiment is also strongly in favour of Ireland. We had people in London talking to the main group of investors who invest in Ireland and sentiment was very strong towards Ireland. Market sentiment in the United States is also very strong. This is not to say that the Deputy is not right in his assessment that this is sentiment towards the country as an economic unit. We all know what Irish people have suffered in the course of the adjustment that had to take place. We still have a lot of work to do in this country.
With regard to the levels of personal indebtedness, these move rapidly. A run of statistics published by the Central Bank earlier this week showed that personal indebtedness in Ireland had been reduced by €10 billion in third quarter. Getting a movement of €10 billion in a quarter demonstrates how fluid the situation is. I know we have many individual difficult cases and that many families are finding life very hard, but generally what is happening here is that people are paying off debt at a rapid rate. This has a macro-economic effect of reducing demand in the consumer market. While we have a lot to do yet, I see signs of increased demand in the market since the budget. I hear all sorts of anecdotes from all parties here in this regard. People who live in Dublin say it now takes them another quarter of an hour or 20 minutes to get to work. Other people talk about all the trucks on the road. There is significant soft debt in the system over the past two weeks which suggests there is a general perception of a pick-up.
Yes. I believe that when the European Union looks at Ireland, it looks at it from a macro-economic perspective. One of the barometers that might resonate with Europe is the level of emigration. Perhaps we should ask the French or Germans what would happen in their countries if 8% of their population had to emigrate to find work someplace else? We need to impress this human dimension upon the European Union to get the breaks we need in the ESM etc. It is unfortunate that the overwhelming attitude towards us currently is that we are doing fine. This is too positive. I urge the Minister to think about and convey that if he sees fit.
Yes. The sentiment coming from abroad is always a kind of overview. Outsiders do not always have the precise details on sectors or individual hardship. They only have an overview and must rely on the macro-statistics, which are very strong.
On the issue of emigration, last years figures indicated that between 80,000 and 90,000 emigrated. However, there was an inflow of almost 50,000 people. There is constant flux in this area, with movement to and fro. As the economy picks up, many of the young people who have emigrated will return, particularly if the trend follows the pattern of the emigration of the 1980s and early 1990s. By 1994, people were returning to jobs here. We always have some emigration.
We must also remember that we are in a European economic zone and that we have a common currency. Since 1922, we have had a free travel area with the United Kingdom. While we are a rather small island country, we are in the same labour market in Europe. Therefore, one should not be surprised if people move to another part of the labour market within an economic region. It is quite common for people to move over and back to the United Kingdom. Many English people came here during the boom and many Irish people moved to London. Many people move back and forth.
One of the things I impressed upon the troika in regard to emigration was that Irish people emigrate to the Anglophone countries, Canada, America, New Zealand and Australia more than we do to Germany, Spain or elsewhere.
I thank the Minister and his colleagues. We are all concerned about the cost to the taxpayer. In that context, does the Minister anticipate a cost to Irish taxpayers in regard to the single resolution mechanism and single bank resolution fund? When does the Minister anticipate retrospective recapitalisation will happen? When will the banking union be in place that will allow the type of discussions that need to take place happen?
This is the backstop we spoke about earlier. The fund will be built up over a ten-year period. Certainly in the meantime and maybe indefinitely we will need the European Stability Mechanism to act as a backstop to prevent any shortfalls from a series of burst banks across Europe coming back to hit European tax payers. We will go the ESM route as a backstop. That is the policy but it is not all firmed up yet and that is one of the key discussions we will have on Friday.
The first issue will be the scope of the application of the resolution fund, whether it would apply to the 6,000 or so banks in Europe or just to the very big banks in certain sovereigns. There is a strong view in some countries that there should not be a central fund but that there should be a series of sovereign funds which in the event of need would combine to resolve difficulties within banks. Either way, whether it is organised nationally or centrally, it is the industry that will pay the levies to build up the fund, not the taxpayer. If there is not enough money in the fund and a big international bank goes bust before the fund is built up over ten years, the backstop position that we want is the ESM. These are the decisions that need to be made on Friday.
We will leave it there for the moment. I told Deputy O'Donnell that I would accommodate him and he has been accommodated.
I thank the Minister and his officials for appearing before the committee this morning. I remind members that we have some administrative matters to deal with in private session when the Minister has left. I suggest that we now go into private session and allow the witnesses to leave the committee room while members remain. Is that agreed? Agreed.