Brian Cowen (Laois-Offaly, Fianna Fail)

The whole question of improved governance in general and of surveillance and monitoring within the euro area is part of the review being exercised by President Van Rompuy's task force since spring of last year when the Greek crisis arose. The outcome of those discussions and the recommendations that have been adopted bring forward the specific legislative proposals I outlined in my previous reply. They indicate the determination by the euro area and the EU to bolster confidence in the currency.

The purpose of the creation of the currency in 1999 was about maintaining price stability. Over the past 11 and a half years the rate of inflation across the euro area has been less than 2% - 1.97% - so it has fulfilled its function of providing price stability across the market. It is a much better performance in terms of price stability than would have been the case when one considers the experience of various and disparate national currencies in the previous 40 year period. That fundamental mandate for the currency is being maintained and achieved. There is a monetary confederation in regard to monetary policy. There is also a fiscal confederation, in other words, the need to keep budgets in balance to avoid pressure coming on the monetary policy. This is particularly the case where one sees, as a result of the financial and economic crisis, the questioning of, or the way in which sovereign debt is now being viewed - a way that was not the case before 2008 - which brought about the problems with which Greece had to contend. That is an indication and reinforces the need for correction in fiscal policy across the euro area to bring it back to the 3% deficit.

What is the 3% deficit when one thinks about it? Why was that figure picked? It is, so to speak, the average capital investment programme seen in the euro area. Borrowing for capital with a visible return in investment is seen as the correct thing to do. However, one is required, in time, to ensure that on the current side one achieves balance. What is brought in in taxes has to coincide with expenditure policies. That is the way fiscal policy mechanism is going.

The difficulty for Ireland has been that we had a time when we were in surplus, well within our deficit requirements and were seen as one of the best in the euro area. Our debt-GDP ratio was down to 28% or 29%, and, taking into account the National Pensions Reserve Fund, cash reserves and the NTMA, was probably 12% net. We were in that position but as a result of the financial and economic crisis we saw a very quick depletion of our revenues, to the tune of 35%. In the meantime, we have had the full year effect of all the adjustments we have made since summer 2008 when this thing hit us very hard and we started to make adjustments. There was the September 2008 budget, with a supplementary budget in April 2009, followed by the December 2009 budget which covered the fiscal year 2010. There has been a €14.5 billion adjustment from 2008 to date but because of reduced growth prospects in the assessment of both the world economy and our own situation, we have had to indicate there is now a further €15 billion adjustment required to meet the 3% target. The growth assumptions, both worldwide and within the economy, cannot be justified in the current circumstances. They were in line with international median figures as late as December of last year and fed into the budget figures.

A lot is happening this year. The Greek crisis had an impact on sovereign debt markets. There is a reduction in prospects for the American economy and there is turbulence in the bond markets, all of which have fed into this period of instability. Market sentiment has changed and deteriorated. The Deputy will recall we are pursuing the same budgetary policy which is being held, as the end of October returns confirm, with tax revenues above profile, expenditure within control as envisaged. Although it is working out broadly as we have predicted since last December and in spite of our getting much kudos for the adjustment we made, namely, the one that was contemplated for this financial year, the fact that market sentiment is deteriorating shows there are other factors at play. It is not a loss of confidence in the domestic budgetary policy for this year but the current requirement to take into account the deteriorating factors require us to do more than had been envisaged for the next three years. We now have to put forward a credible pathway to show how we will do that. That is a very important factor in restoring confidence. That is our position. The important point is that the hole in our revenues means that we are borrowing for current as well as capital purposes. In the good times we were even able to pay for capital out of surplus cash and were not even borrowing for capital purposes. We were able to reduce the national debt as well. However, the situation is totally changed and we have to close that gap between expenditure and revenues, knowing that export-led recovery, which is not as labour intensive as domestic-demand recovery, is the way back. The traditional sectors, domestic consumption, retail and construction are precisely the areas in which we see significant rises in unemployment. In fact, other sectors of the economy have competed very well, relatively speaking, despite the increased exchange rate deterioration vis-À-vis the euro and sterling. The exposure of the indigenous sector to the UK market, primarily, mattered as regards other markets. Nonetheless, we still saw a much smaller reduction in our exports compared to other advanced economies because we are not into heavy engineering exports and all the rest.

We have to try to improve sentiment towards Ireland and talk factually about the diversified strengths of this economy, which are far different from those we had in the 1980s when we faced a crisis of this nature. As regards even our debt repayments schedule going through this correction period to 2014, it is not like the 1980s where 26% of the revenues went on debt interest. It is a debt repayments schedule that is similar to the revenues in the 1990s. We need to emphasise these points so that people do not get information that is not accurate, and sentiment for Ireland does not deteriorate in a way that is not justified. We know the overall position, but we must be fair to ourselves and highlight those aspects of the story that are credible and should be articulated. The facts are with us on those issues.

I am sorry for the elongated reply, but the point, essentially, is that the question of financial credibility and how Ireland is being viewed, means that the coming period is important for us and we must work together as best we can. I do not expect people to agree on all these matters, but in terms of the overall picture, the problem with the bond markets is an issue for us all. We must do everything we can to avoid giving a perception about Ireland's future that is not justified, so that we can manage our way through this.

The final point raised by the Deputy is a fair one, namely it is a responsibility of leadership within the European institutions to ensure that everything we say and do as we finalise this permanent crisis mechanism does not have the unforeseen consequence of our not achieving the objective of setting up the mechanism in the first place.

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