Richard Bruton (Dublin North Central, Fine Gael)

The measures the Minister intends to introduce on Committee Stage are probably of more interest to us than much of what is already contained in the Bill, so I look forward to Committee Stage with interest.

There is no doubt we are entering a period of considerable economic uncertainty compared to recent times. In the past couple of months we have seen what would have been previously unthinkable — a run on a bank where many depositors have money saved, the wipeout of 30% of the value of financial stocks on the Irish Stock Exchange and a credit crunch which is continuing to exercise its grip across Europe. The economic uncertainties in those markets are compounding difficulties we face domestically.

It must be noted that these events have not come out of a clear blue sky. The warning signs of Ireland's vulnerability have been evident for some considerable period but the Government has chosen to ignore them. We are well past the time where one could call this credit crunch an early warning or a wake-up call. We have been aware of this vulnerability for a considerable period and now require a comprehensive strategy for economic renewal to move the economy away from its high reliance on debt finance and the property sector. This reliance has not only driven very high prices in those sectors but created problems in traditional sectors such as exports, on which a small, open economy depends for its survival. We must recognise that the economy is entering a challenging period.

Ministers will argue that the glass is half full whereas commentators will argue that it is half empty but no one can pretend that the challenges facing the economy are not much more serious than official Government statements admit. If the economy fails to make a series of significant transitions, the progress made to date will be endangered.

For the past two years, the Central Bank has almost been a lone voice in spelling out the financial vulnerabilities which have built up in the economy. Last year, credit growth increased by 30%, an extraordinary rate, while dependence on debt, which currently stands at two and a half times gross national product, is far in excess of all other countries in the European Union. These statistics clearly demonstrate a vulnerability.

For some time, the Central Bank has been pointing out that the concentration on property as a basis of lending is twice as high among Irish financial institutions as it is among their counterparts in other European states. In addition, the property market, which is considered to be significantly over-valued and is experiencing the double squeeze of rising interest rates constraining affordability and historically low rental yields, is clearly in a vulnerable position.

In recent years, the Central Bank has been relentless in pointing to the widening funding gap in financial institutions. In 2000, 77% of lending by financial institutions was covered by domestic retail deposits. This figure has since declined to 54%, far below comparable rates in the rest of Europe. As a result, Irish banks are particularly dependent on the inter-bank market. For this reason, when the rates in the inter-bank markets increase far above the ECB rate it is bad news for Irish financial institutions. It is not surprising, therefore, that their stock values have been hit.

We must prepare to tackle the issues. As the Minister noted, we can console ourselves that sub-prime lending is at very low levels here and the banks, by and large, have been exercising a more prudent approach to stress-testing mortgages than has been the case elsewhere. While these factors provide a certain cushion against the possible consequences of the credit squeeze, we must await events in the coming months to determine the extent to which this squeeze, which has its origin in commercial paper of questionable value, will bite home. The Central Bank has provided strong reassurance on this issue but I presume central banks and financial regulators in other countries are providing similar reassurances about their respective financial institutions. Third quarter results produced by two banks today show considerable exposure which had not been predicted. As Alan Greenspan colourfully explained, we will only know who is swimming naked when the tide goes out. It will take time to discover who holds the securities whose values have been severely questioned.

Apart from these financial challenges, the economy has economic vulnerabilities with which we must get to grips. The most recent inflation figures in the HICP, the harmonised index of consumer prices which compares prices across Europe on the same basis, showed that Irish inflation, excluding mortgages, is running at 50% higher than the rate in the rest of the eurozone. This is a serious indication that Ireland is not only the dearest country in Europe but the gap between the cost structure here and those of other eurozone countries is increasing at an accelerating rate.

According to today's third quarter returns, the increase in Government expenditure, at 18%, is three times higher than the rate of tax revenue growth, at 6%. This difference is a consequence of the Government paying more heed to the needs of the electoral cycle than to those of the economic cycle when it framed its strategy in the most recent budget.

In recent years, our competitiveness has been significantly damaged across a wide range of areas, notably in public utilities under the control of Government or subject to Government regulation. Ireland's loss of export market share for four years in a row is showing up in strains on our balance of international payments. Productivity growth is at one of its lowest rates in more than 20 years, a reflection of the strength of the economy's dependence on the property sector. Furthermore, productivity has slumped in trading areas, which are crucial sectors for small open economies.

A review of the 2002 to 2006 period of the strategy on climate change, another major challenge coming up the track, shows that it achieved 0% of the Government's target in terms of climate change adjustment, an extraordinary figure. While the current Minister for the Environment, Heritage and Local Government may not believe climate change will go away, his predecessors believed the chalice would pass them if they kept their heads in the sand.

The Government must set out a strategy to tackle financial issues and other, more serious underlying challenges coming down the track. The first of these is the financial issue. As the Minister noted, the European Union is examining our deposit protection scheme. The British Government has signalled its intention to raise the deposit protection cover from €35,000 to €100,000. In such an eventuality, why would people hold money in Irish accounts if they could enjoy much greater protection by depositing money in accounts in the United Kingdom? We must underpin confidence in the banking system, offer consumers protection and ensure we do not find ourselves out of line with our nearest neighbour.

While I welcome the provisions regulating sub-prime lenders, I wonder whether it is sufficient to apply consumer codes to their operations. The legislation will introduce suitability tests obliging sub-prime lenders to check the suitability of applicants for loans. We also need to know about the fitness to trade of those involved in the sub-prime market. I am not sure the code the Minister is extending to this sector addresses prudential issues and fitness to trade in a manner that provides the necessary reassurance.

The Minister did not advert to the need to examine the regulation of the relevant securities or the rating agencies which have been at the heart of how these securities have been valued. The European Union appears to be holding back on revealing its hand in this area in which conflicts of interest are clearly rampant. Much of the problem with the sub-prime market is that those who write the business tend to sell it on within six months. Questions arise as to whether a person who writes business he or she will no longer hold six months later will consider the long-term security of loans. While I do not propose prohibiting the repackaging and selling on of mortgages, much greater testing of the robustness of those writing the business is necessary. Selling business within six months of writing it creates the contagion problem because business originating in the United States may be held by a bank in Japan or a pension fund in Ireland. One does not know where it ends up. Rather than clog up the whole system, we must go back to the origin and ensure that mis-selling does not occur and proper standards apply.

The rating agencies used to be independent bodies providing stock ratings but are now in the business of advising those seeking to have their stock rated on how to get a good rating. As such, they take a position on two sides of the argument. Much of the prudential controls operated by the Central Bank and Financial Regulator are based on these ratings. For example, the Ormond Quay company was given a triple A rating, better than any Irish bank, but its parent company needed to step in with €17 billion when its rating went down. The Minister is right to extol the strength and broad balance of our banks, but Ormond Quay had its eggs in a narrow range of baskets. There are question marks over the agencies and how people sell their business.

I do not know much about the casual occurrence of many Irish people remortgaging their homes to buy properties in emerging countries. Who protects consumers where people set up property schemes in local hotels? It is questionable to give five-year rent guarantees for areas where the average wage is so low that the typical person cannot afford to pay the rent for that long.

Other than the sub-prime market, are there sectors in which there is potential misselling? Perhaps "misselling" is too strong. Are people walking into commitments with their eyes closed or without enough information and making commitments that have considerable implications for their financial stability and that of the underpinning system? I do not want to raise hares, but there is a great deal of business taking place in which people commit large sums of money. Do we need to examine some of these areas to determine whether they need minimum consumer protections of the sort the Minister believes should be extended to the sub-prime market? The maximum protection in terms of a deposit scheme is 90% or €20,000, whichever is smaller. The British will move ahead of that, as should we.

While the Bill's provisions regarding credit unions are unclear, the Minister is proposing changes to how much the unions can lend. Greater flexibility has been an issue for some time and talk of deposit protection raises the question of protection in credit unions. I am sure that, like me, the Minister has received representations from different groups within the credit union movement. Some stated the current system is robust while others stated it was anything but robust. The regulator is not happy with the situation and there have been long meetings to determine whether a robust system can be developed. As a matter of urgency, the Minister must bring those meetings to a conclusion and come up with a system in which we can have confidence.

Everyone is reviewing the matter, which we have known to be problematic for some time, and we must move rapidly. Senator O'Toole is tabling legislation in the other House. I do not know whether it is the best way forward, but I suspect the Minister is seeking a solution short of legislation to make the savings protection scheme work and to have it and its rules seen to be transparent when intervention occurs. As much of the scheme is discretionary, people do not know who is protected. There must be clarity in this regard. The Minister has raised the issue in his legislation and he must move on it as quickly and calmly as he can. I hope that before the Bill's completion, he will reassure the House that the situation is being dealt with and the system is robust.

Newspapers have questioned the soundness of the Irish regulatory system in respect of Ormond Quay, a German company. I have been led to believe that the criticism is unfounded, the company was regulated in Germany and the Irish authorities co-operated with German oversight in a proper way. As some newspapers have made a considerable meal of the matter, the Minister needs to make a clear political statement to the effect that the system is working adequately.

According to the Minister's press release after the ECOFIN meeting, the EU believes there is work to be done in respect of the co-ordination between regulatory authorities in different jurisdictions. Will the Minister advance this work in an Irish context to ensure robust systems for co-operation? Many companies established here do not have Irish banking licences and, as such, are not regulated here, but they are important to the Irish economy. If there is any suggestion of their not being properly overseen, the Minister should make a clear statement expressing confidence in the system. He should reassure people that the system works well, there are proper levels of co-operation and information is properly used and acted on wherever appropriate.

The Minister has endorsed the way in which our system, a two-headed body in one institution, overcomes the UK's problem where the regulator, the central bank and the Treasury move in different directions. The ECB does not intervene directly in markets and depends on central banks responding when it wants to intervene. It has been successful to date, but the chain is only as strong as its weakest link. While everyone might look smugly at the UK and its apparent difficulties, it is important to ensure at EU level that the links in the euro chain, the central banks, have been stress-tested. We should not pretend there are no difficulties elsewhere.

More needs to be done to show Ireland is dealing with financial threats than the Minister has stated. The credit crunch has not been resolved at European level and credit here or among our main trading partners could become very tight. We must respond to this issue rapidly to ensure the credit crunch does not develop into a credit crisis.

It is time for a comprehensive strategy of economic renewal like the Culleton strategy of some years ago. Ministers and others talk about competitiveness, but we must show that we are doing something about it by taking measurable actions in critical sectors. The Government has not driven the productivity and efficiency agenda in the public sector with the necessary purpose. We have lost ground in that respect, fudged the issue of reform and delayed in delegating responsibility for outcomes and holding people accountable. We are behind the eight ball compared to other countries. We must confront the excessive costs, many of which are generated in Government-regulated sectors. We cannot continue to pretend this problem will not bite us.

Climate change challenges are making the situation worse due to our high reliance on oil for a number of critical utilities, but there are inefficiencies in how we regulate and detect irregularities in the markets. Ministers must set targets to reduce inflation to EU levels and below in critical areas of domestically generated costs. We require also a much clearer statement of the investment priorities to be adopted.

There is scope in the forthcoming budget to accelerate investment in good, robust projects. It appears the building industry will have a capacity which was not there previously. To justify the acceleration, the Minister must agree to the publication of the appraisals of the projects. People must be properly and publicly accountable for delivery. It is unacceptable that NDP appraisals continue to be done in secret on the basis of a pretence that they are in some way commercially sensitive. The data must be published and Ministers and others must stand over projects and ensure they perform in accordance with the appraisals. The issue must not be fudged as it has been in the past. The planning model must be reformed. In cases like that of the school in Balbriggan, we continue to see complete incompetence in departmental planning. There was a failure of planning to match obvious growth to future need. Where houses are built, children will follow. The failure has to be cracked. We must see measurable action whereby we can establish whether change is taking place.

We must see measurable action also in the reskilling of workers. We know that 30,000 people may lose their jobs in the construction sector. They will not be easily reabsorbed in manufacturing where the traditional employment outlets are also drying up. General operative positions are not available. We must get set clear targets on reskilling and deliver them.

We must become early movers in critical areas. The programme for Government states that we are to cut compliance costs by 25%, but the Government has not measured their current level. It has not set out the benchmark or starting point which is to be cut by 25%. The benchmark has to be stated so we can know next year by what percentage costs have been reduced. What areas is the Government to tackle and how will valuations be conducted to ensure that the reduction is by the intended 25%? Does 25% in this context mean anything? It must if it has been included in the programme, in which case we have to see it. The time for rhetoric on the challenges we face is over. We need Ministers to sign up to measurable targets in the key areas which are crucial to Ireland's long-term competitiveness. It could undermine the great success we have had if Ministers fail to square up to their responsibilities. Most of the challenges we face are not primarily the responsibilities of individual businesses, they are the responsibility of Government to deliver.

The Minister says one of the aims of the Bill is to create a more competitive Stock Exchange. I have been told that we are a long way behind the eight ball in stock exchange efficiency. If an individual wishes to trade on the stock exchanges in other jurisdictions, he or she may do so directly through trading websites. The commission may be €10 per trade as opposed to the percentile commissions which apply here. If the Bill is intended to achieve greater harmonisation of conditions of trade, the Minister should compare the performance of the Irish Stock Exchange in this context with exchanges in other countries. It is not sufficient to introduce the Bill with a sage nod to suggest we are doing everything the EU asks. We must set measurable targets to achieve harmonisation and liberalisation in the markets we say we are addressing. If we do not ensure Government accountability, functioning measures and tangible differences, the Opposition will not be doing its job.

I look forward to Committee Stage on which I notice there will be all sorts of debates, including one on ministerial pensions. The Bill contains quite a rag-bag of provisions. Given the indication that there will be ministerial amendments on Committee Stage, I anticipate an interesting debate.

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