Leo Varadkar (Dublin West, Fine Gael)

I wish to share time with Deputy Reilly.

One of the strangest things about politics is that one never knows what is going to happen on any particular day. I thought today was going to be a quiet day as I had only two meetings to attend and a few phone calls to make. Then came the opinion poll last night followed by a phone call at 11 p.m. informing me that AIB was to be effectively nationalised today and asking if I would be available for a meeting this morning.

Earlier today I read an article, not about opinion polls or banks in Ireland but about the fact that today Germany paid the last instalments of its war reparations from the First World War, the war from 1914-1918. I did not realise Germany was still paying those reparations. I had thought the reparations had partly led to the Second World War and had all been forgotten after that. However, seemingly that was not the case. Germany paid its last instalment to France and Britain today. It occurred to me that there has been an economic war in Ireland and that we, the Irish people, even though we were not participants in it, have become the losers. On our bill now is between €50 billion and €65 billion that will be given to the banks. What this means is interest payments of, say, €1.5 billion to €2 billion per annum forever, namely, 3 to 4 cents on every euro earned in my lifetime, the lifetime of my children and, potentially, the lifetime of their children. I saw the similarities between the war reparations which Germany is now finally paying.

After two years of austerity, pay cuts, tax increases, cuts to services and bank bail outs, the public and the country are no better off than we were at the start of all of this. When one has had in place for two years a set of policies from which one does not see results, one must ask if they are working or if they are right. They are not right and they are not working, of that I am becoming increasingly convinced. Let us look at the Government's banking policies to date. First, we had the guarantee, which was two years old yesterday. The guarantee did not cause the losses in the banks and they would eventually have had to be dealt with some way or other but it did at least give the Government a timeframe, a two year period, to sort out the banking system but it did not do that. All the guarantee did was buy time, time that the Government should have used to restructure and recapitalise the banks but did not do so. That is the real failure, not the guarantee which, because it was too extensive, did limit the Government's policy options. The real crime was the Government's failure to restructure and recapitalise the banking system in the two-year period since the banking guarantee was introduced. The first Government recapitalisation of Allied Irish Banks and Bank of Ireland took place just before Christmas 2008. I recall the time because I travelled to RTE to discuss the matter on "Morning Ireland". It announced another recapitalisation in early 2009 followed by the nationalisation of Anglo Irish Bank and the effective nationalisation of Allied Irish Banks and Irish Nationwide Building Society. The establishment of the National Asset Management Agency has been followed up with today's announcement of a third recapitalisation, which does not include the recapitalisation of AIB, INBS and EBS under the NAMA process, and a de facto fourth nationalisation.

The Government must be honest and stop denying that its policies are not working. The €45 billion figure announced today is not the end of the matter because until such as time as we accept that the current policies have failed, it will be necessary to put more money into the banks. The Minister for Finance, Deputy Brian Lenihan, stated that today was a final staging post and provided certainty and clarity, while the Minister of State, Deputy Mike Mansergh, argued that we have finally hit the bottom. I have seen enough over the past two years not to believe either statement. The Government told us that the cost of Anglo Irish Bank would be €4.5 billion. The final figure will be closer to ten times that estimate than seven times the estimate.

The Government argued that the establishment of the National Asset Management Agency would result in a wall of cash feeding into the economy. This did not transpire. It also called that Bank of Ireland and Allied Irish Banks were well capitalised, strong and fundamentally sound when that was clearly not the case. No one who has been awake for the past two years would possibly believe that we have today drawn a line under the cost of the bank bailout. Now that the State owns Allied Irish Banks, it can start to go through its books. I believe it will find that the bank is in a much worse state than we have been given to believe and that its developer and commercial property loans are as bad as those of Anglo Irish bank, and that its mortgage books and credit card debts are full of serious holes. I suspect the House will be informed in a few months that €10 billion was not sufficient for AIB and the bank may need €20 billion. The argument then will be that having spent €60 billion, why should we not spend another €60 billion.

The flaw in the Government's approach to the banks is its underlying philosophy that bank debts are State debts and Irish people must bear the burden of the losses and debts the banks have run up. The Government argues - sincerely, I believe - that if we do not take the debts of the banks on our shoulders, we will not be able to borrow the money required to run public services. It genuinely believes this to be the case even though it is clearly not true because despite having taken the debts of the banks on our shoulders, we cannot borrow money for public services. Ireland will not even go to the markets until January. I am not convinced the markets will be open to us when we go to them in January. The evidence for this is available. The Government was wrong on this matter because, having taken the debts of the banks on our shoulders, we are no longer able to borrow to pay for public services.

Essentially, the Government has torn up the rules of free market capitalism. While I accept that some of the over-exuberance of capitalism helped cause the crisis, the Government has essentially socialised the losses and debts of the banks by offering socialism for the banks and no one else. It should have applied the basic rules of capitalism and required that the banks enter resolution, the bondholders become the owners of the banks, have a debt for equity swap and in some way negotiate down the bonds. That should have been the principle but the Government's principle has been to keep the show on the road and maintain the same old banking system as if nothing had happened. Even the idea of keeping 10% of the bank in private hands for the sake of it does not make any sense. Why pretend that the banks can go back to the way they were when that is not possible?

The Irish people will not be able to pay the bill. We are informed the final bill will be €45 billion. I believe it will be higher, as do all of those who have been right in the past two years. I believe it will €50 billion, €60 billion or perhaps €70 billion. We cannot afford to pay it and should admit that. The price of the banking collapse in this country is huge compared to collapses in Britain, the United States or Germany. What we have here is much more akin to the banking collapse in Iceland. We should be honest and admit that and stop pretending that we can pay the bill.

We must accept that Government policy is not working. We must end the denial, face up to the truth and deal with the problem. This will require making four policy changes. We need a new banking system. While it is possible that Bank of Ireland may be able to continue in some form and, over time, restore its position, it is clear this is not possible in the case of the other banks which are all effectively in State ownership. The Government must accept this and merge the State banks, break them up and rebuild them or take whatever action is necessary to carve out new banks from the four nationalised financial institutions. It must tell shareholders that their money is gone and creditors that they will lose much of their money. It must carve out new banks that will lend money and reinvigorate the economy. That is all the Government can do at this stage.

The economy also requires stimulus. Deputy Simon Coveney and other members of my party have shown how to do this without borrowing, for example, by using money from the pension fund or generating money from the sale of State assets.

We also need to improve cost competitiveness in this country. I hope we do not end up having to do this by leaving the euro. If we do not improve cost competitiveness, we will fall out of the euro, possibly in a very dramatic way.

The fourth step is to reduce the deficit but this must be done over time. We need to accept that we will probably not be able to achieve the 3% target by 2014. We must be honest in this matter to members of the public and the rest of the word. While the idea of having a four-year scheme is welcome, when people see the details of the budgetary consolidation programme they will decide it would be impossible to implement it without destroying the economy. We need to consider this issue and discuss it with our European partners, the International Monetary Fund and others who can help us rectify our financial position. I am certain that today is not the end of this matter and the House will be told some time in the future that we have more war reparations to pay.

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