Paschal Donohoe (Dublin Central, Fine Gael)

I would like to pick up on some of the points made by Deputy Murphy. She made a fair point when she asked what is the vision, or the end point, of the current crisis. If there is not clarity, two things result. First, people's confidence is undermined, here and now. Second, it becomes difficult to evaluate any proposal because we do not know where it will end. I agree with some of the points made by Deputy Murphy in this regard, although I disagree strongly with her in other areas. As I listened to her and other contributors, I was struck by how well they summed up the tensions faced by the European project. Those tensions are clear and emotional and, taken together, they pose a clear threat to the survival of the euro and of the political institutions beyond it.

I will point to two of those tensions. First, people who are in bailout programmes do not want to be in them but countries that are paying for them do not want to pay for them either. This clear conflict throws up a stark contrast when one meets people and politicians from many of the countries that are funding the programmes in which countries like ourselves are residing. People in those countries do not want to pay for programmes. They do not want to hand over money to other countries. At the same time, we do not want to be in a programme. We would rather get out of it. Second, there is a clear tension in the euro and the eurozone itself. Everyone who is inside the eurozone wants to stay in it, but not every country in the eurozone has the same idea of what it means to be a member of the eurozone and not all are willing to live up to the expectations of membership. Because those two tensions are in play, the euro is facing a real crisis of legitimacy. If those tensions are not resolved, the euro will not survive. That is one of the reasons I campaigned for the treaty. I see it as a prerequisite for the kind of change that needs to take place if the euro, as we know it, is to survive and prosper.

At the heart of what we are discussing is the fact that the euro, as it is constituted at present, is an unfinished currency. For so long, the European economy was awash with cheap, global credit and experienced the benefits of a booming global economy. Because of that, the fault lines in the euro were invisible, ignored or not acted upon. Of the two fault lines, which are still there and whose consequences we are grappling with, one is political and one is economic.

The political fault line is in the fact that some members of the eurozone were happy to accept the benefits of membership but did not accept that any costs or responsibilities would be associated with it. We saw this clearly in what happened to the Stability and Growth Pact. More seriously, the chimera of economic growth, fuelled by cheap credit, allowed companies, governments and unions to take their eye off the ball when it came to the things that really mattered. Productivity, competitiveness, good living standards and managing people well were all ignored, due to that.

The economic fault line with which we are now grappling is that we had a currency union without a banking union. The fateful mismatch between those two elements was the cause of much of the banking difficulty we are now experiencing. We still do not have a Europe-wide banking deposit guarantee scheme that is credible and clearly understood by everyone. We still do not have a Europe-wide banking regulator and we still do not have a Europe-wide banking resolution scheme that enables countries to deal with and manage what happens when a bank fails. The absence of those elements of a banking union, alongside the existence of a currency union, created a horrific mismatch within which all the difficulties we are now dealing with bloomed.

A common thread in both those failures was the fact that national Governments did not want to give up power in these areas. They did not want banking regulation to leave their jurisdictions. The same was true of fiscal policy. Governments set up rules that they themselves would obey. When those rules were breached, national political decisions outweighed the existing rules. All of those decisions were made for reasons of national economic sovereignty.

We now find that the danger to our own economic sovereignty is far worse than we could have imagined when those decisions were made. We must now be completely honest as to what the solution to these difficulties should be.

One of the core reasons for our current difficulty is that we did not have an architecture that completed the single currency zone. We did not have a banking union or the right rules and institutions for national budgets. We are kidding ourselves, potentially to great historic cost, if we imagine that anything less than fixing those deficiencies will substitute for dealing with this crisis. It would be a delusion, with consequences that we would rue for decades to come, not to face up to how we should deal with the two mismatches that occurred when the single currency zone was set up.

Now, unfortunately, is the time when we must face up to the consequences of that mismatch. Greece faces the prospect of a disorderly default on its budget, and I hope that country can avoid it. It would be a catastrophe for Greece, and for us. Some European political leaders who should know better are talking about the prospect of a country leaving the eurozone. We see what is happening in Spain, where the banking system is too big to fail but too expensive for Spain to save on its own. Because those mismatches were not dealt with when the eurozone was established, we are now dealing with those terrible consequences.

The Governor of the ECB, Mario Draghi, referred to this last week when he said the ECB on its own cannot fill a political vacuum. That vacuum must be filled. The two building blocks that need to be put in place are a banking union and a fiscal union. Each will be very difficult and will pose huge challenges to countries like ourselves. The lack of either, however, will prevent the putting in place of a comprehensive response and solution to a crisis that could wreck our Continent, politically and economically, for decades.

The banking union would have four components, which many people are now beginning to talk about openly. They are a banking recapitalisation fund, a fund for deposit insurance, a central regulator and a clear and established process for handling bank failure. This may sound bland to us in Ireland, where we have seen how national regulators were unable to do their job of regulating our banking sector. Many people in Ireland would welcome such a vista and those kinds of ideas. In other countries, however, they will be powerfully and strongly resisted by governments and by elements of the banking sectors.

There were sound reasons these things were not wanted in the past, but there is a compelling reason now as to why they are vital, namely, that such a system gives us the best possible chance of surviving a bank run. If one thing is capable of deepening the crisis we are in to levels that are unimaginable, it is the acceleration of a banking run where capital moves out of peripheral economies - I dislike using this terminology - to core economies, and credit and capital continue to flow out of weaker banks to stronger banks. This country experienced elements of that in 2008 and 2009. I struggle to see how any government or European-wide plan would get out of such a cycle once it was unleashed across the entire European economy. I am encouraged by the fact the European Commission and the European Parliament are now talking about these ideas. They were talking about a likely implementation date of 2015. We might not have a euro as we know it now to defend by 2015.

The second element which must accompany the process is a fiscal union. That is essential for the development of some form of European-wide mutual debt plan or eurobonds. I must be careful in what I am talking about because fiscal union and all the issues that could be involved in such could be used as shorthand for people deciding how schools are built in some countries and how much money is spent in hospitals. I do not speak about any of those matters. I speak about a bare but clear form of fiscal union that would generate and allow some sovereign debt from participating countries to be backed up by all countries. A plan has already been developed for that. I refer to the "red debt-blue debt" model which was developed by the Bruegel institute. It has been endorsed by the German Council of Economic Experts and last week was endorsed by The Economist as a clear way of moving forward on a challenge such as we face. It involves participating countries deciding to jointly guarantee new sovereign debt issues of up to 60% of the national income of a country, after which the country would borrow on its own. It is not at all the kind of system that some advocate where a group of countries would be responsible for the entire national debt of all countries. What I speak about is a bare but solid plan where some countries would underpin the ability of other countries to issue debt in return for all of us being able to move out of the terrible crisis we are in.

All of that would be uncomfortable, even the bare plan I have sketched, as it would involve the further dilution of the economic sovereignty we enjoy. In this country's case that could well mean future referenda. Any of the points I have made, such as a new role for the European Central Bank, the creation of eurobonds and a new single banking regulator, would probably require treaty change which in our case would, thankfully, require a referendum. As we contemplate the closure of one referendum campaign, the idea of future ones would make many, not least me, shiver at the prospect. Deputy Catherine Murphy referred to a lack of vision for the future but I have outlined an alternative strategy that I believe would work. It is a feasible future that has difficult consequences for the present and would entail us facing up to difficult choices. If we do not have such discussions now, we will not have the kind of shared prosperous future that for so long we assumed would be the case.

I wish to spell out equally what the proposal is not about. This is not federalism. I do not accept the economic crisis we are in requires a leap to some kind of political federalism where others get to determine Irish neutrality or our policy on non-economic matters. This is not even a proposal for economic federalism. What I do not propose is that any participating country would underwrite the full debt of another country. I speak about a clear model in which sovereignty in some areas would continue to be shared. To borrow a phrase from another part of our heritage and of our present, this is economic unionism, not economic federalism. It is a case of looking at two challenges we must confront and saying the burden and the benefits are so big in each of those areas that we must share them in a way we have not done to date.

I must also be clear in the proposal I make that this is not going to close our budget deficit. It will not mean that the difficulties we have in the gap between our spending and taxation will shrink. It will not mean that the other equal national crisis – the jobs crisis – will be improved by what I propose. I simply suggest that if we do not complete the building blocks of the euro and we do not have a political discussion now on how that will be done, the point will come at which it will be either too late to do them or the vision of other people on how they should be done will be forced upon us. We should avoid either scenario at nearly any cost. The unionism to which I refer is now articulated and debated by many. I hope this kind of thinking is the genesis of some of the things people are now talking about in public, for example, the European Commission last week. I believe this country should play a crucial role in the Presidency and prior to it in talking about such matters with people within the Continent of Europe. If there is one thing small states such as this country have been good at in the past and can be good at again in the future, it is thinking strategically, coming up with new ideas and building consensus on them. We must do that, not just for the sake of people outside of Europe but for our own people, because there must be an end point involving a fair resolution.

I wish to sum up by referring to what an American economics professor, Mr. Andrew Moravcsik, has written in a recent article in Foreign Affairs. He said:

The burden must be shifted from Europe's public sectors and deficit countries to its private sectors and surplus countries. If this does not occur the survival of the euro will be called into question and Europe will face a long-term economic catastrophe that could drain its wealth and power for the rest of this decade and beyond.

I am not sure whether as he advocates that shifting is either possible or even merited but sharing is essential. We are now at the truly dreadful crisis point that some predicted but which I hoped would not come, whereby if we do not fill in the gaps in the designs we put in place decades ago, it will result in their ruin, not just of national economies but of the political vision and values of solidarity and coming together that have been at the heart of the extraordinary progress the Continent has made in the past 60 years.

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