Willie Penrose (Longford-Westmeath, Labour) | Oireachtas source

I am pleased to have an opportunity to contribute to this debate. The House is discussing the economic position almost two years after we were compelled to enter the troika bailout and four years after the collapse of our banking system. If we are to learn how to prevent a recurrence of this disaster, we should reflect carefully on the factors that brought it about. Reckless lending by Irish banks was made possible by participation in the euro, a project whose flaws have threatened its survival. If the euro was to work, the European Central Bank required full powers of monetary policy. However, it was not given such powers and instead became an emasculated version of the Bundesbank with the sole aim of controlling inflation. While the ECB was given the power to set the interest rate for the eurozone, it could not control credit creation by national banks or regulate such banks.

When Ireland entered the euro, interest rates fell and Irish banks could borrow unlimited amounts of money from large German and French banks without any exchange rate risk. Having borrowed this money, they lent most of it to property developers, who created the worst property bubble in post-war Europe. At the height of the property boom, building and construction constituted 15% of Ireland's gross domestic product, compared to a European Union average of 5%. The problem was compounded by the inability of the Central Bank to raise interest rates to dampen the frenzy. The boom inevitably collapsed, leaving a legacy of mass unemployment, ghost estates, the National Asset Management Agency, the Irish Bank Resolution Corporation and the ghoulish spectre of Anglo Irish Bank.

While I do not wish to focus excessively on the past, it is important to understand the reasons for the economic collapse. In September 2008, the then Government was compelled by the European Central Bank to offer a blanket guarantee to bondholders who had irresponsibly lent money to Irish banks. Having also paid more than €1 million to Merrill Lynch for advice, it succumbed to pressure from the ECB and established the bank guarantee, for which Irish people will be paying for the next 50 years. During the same period, Iceland experienced a banking crisis which, relative to the size of its economy, was worse than the Irish banking crisis. While the Government of Iceland guaranteed deposits in the country's banks, it did not provide guarantees to bondholders who suffered losses on their gamble. Despite the dire warnings of the "free musketeers", the sky did not fall in. The country suffered a severe recession but recovered quickly and its economy is growing at a much faster rate than the Irish economy is likely to grow in the next five years. As Iceland is not a member of the European Union, it could not be bullied into implementing a policy that would impoverish people who never gained from the speculation of reckless investors and bankers.

As a result of the Irish bank guarantee, the debt of the covered banks became sovereign and the levels of borrowing required as a result of the guarantee caused interest rates on sovereign debt to rise to levels we could not pay. In November 2010, the Irish Government and citizens had the humiliating experience of hearing the Governor of the Central Bank announce on RTE that Ireland would require a bailout. I recall the event well as I was travelling to County Donegal to take part in a by-election campaign. Ministers had previously denied that a bailout was required and it was significant that the announcement was made not by the Government but the Governor of the Central Bank, acting on instructions from the European Central Bank.

In the snows of the winter of 2010 the troika arrived at Government Buildings to instruct us on how to run our affairs in the interests of German and French bondholders whose loans we had guaranteed. The then Government, in a grim parody of the US educational programme No Child Left Behind, meekly accepted a policy of "no bondholder left behind". The most powerful element of the troika is the International Monetary Fund, whose policies have been compared to bloodletting, the main treatment offered by doctors in the 18th century, when patients who did not die of the disease were likely to die of the treatment. The troika insists on cutting Government expenditure and raising taxes, both policies that make recessions worse. I observed this approach at close hand when I was a member of the Government for nine months. The IMF is hostile to State enterprise and has insisted on the privatisation of profitable State companies. The Government had to wage a battle to ensure the troika agreed to allow the proceeds of the sale of State assets to be used for job creation. It is vital that moneys generated from such sales are used for this purpose.

Ireland has one of the highest rates of unemployment in the European Union and it would be higher if it were not for emigration. I am particularly concerned about youth unemployment as it has damaging long-term consequences. For this reason, I am pleased the Minister for Social Protection, Deputy Joan Burton, has promised to seek EU initiatives on youth unemployment during Ireland's Presidency next year.

It is said that doing the same thing over and over and expecting different results is one definition of madness, yet more belt-tightening, adjustment and retrenchment is the only policy the troika will countenance in dealing with the crisis. I know, having sat at the table with its representatives, that the troika wishes to lower the pay of public servants and reduce social welfare payments. It is as if John Maynard Keynes had not revolutionised economics by showing that output and employment are determined by demand for goods and services and consumer demand is the largest element of overall demand. Free market economists persist in regarding the market for labour as if it were the market for mobile telephones. If the price of mobile telephones falls, demand for them will increase, whereas it is self-evident that if one reduces wages, demand for labour will not increase unless people have incomes to buy goods and services. Free marketeers argue that if we cut social welfare payments, people will have an incentive to take up low-paid jobs. However, as there is already severe competition for even the lowest-paid job, this policy will simply increase poverty and reduce demand.

The possibility of escaping from the chilly grasp of the troika emerged recently as interest rates on Irish Government bonds have fallen and the possibility of being able to borrow again on the open markets arises. The first thing I noticed in government was that Ireland's reputation had suffered severely and our credibility had been severely dented but this Government spent the first six or eight months I was a Member working extremely hard to regain that reputation. That work has paid off, and we must acknowledge that. Commentators outside these Houses frequently blast the Government on the pages of newspapers. It is easy to suggest solutions but people had to work extremely hard. This development has occurred because the all-powerful but ever fickle financial markets thought we were to get a deal on our bank debt.

Chancellor Merkel and her finance Minister dismissed our case initially but the Taoiseach and the Tánaiste have worked extremely hard to get us back on track. We have the conclusions of the summit of 29 June. We are now recognised as a special case with specific circumstances. Francois Hollande, who is not as subservient to Germany as President Sarkozy, has accepted that economic recovery in Ireland will only occur if we can reduce the burden of our debt.

The Taoiseach was awarded the Golden Victoria European of the Year today by a German business group. I hope that when he is presented with that award that he takes the opportunity to remind the Germans that after the most devastating war in history, and in the history of Europe, it was treated with great generosity by the allies and given long-term loans at low interest rates under the London Agreement, some of which have only recently been paid. It should now reciprocate that generosity by agreeing to a much more sustainable approach to Ireland's bank debt, and there are a number of ways that can be done

Domestically, people are suffering at all levels in our society. They are tied to crippling mortgage debt and are in negative equity but that can only be resolved by the banks and lending institutions facing up squarely to the issue and acknowledging that some mortgage debt will not be discharged in our lifetime and beyond. That cannot be done in a blanket fashion but a matrix should be devised and implemented which incorporates financial parameters which recognise that people are genuinely unable to pay as opposed to those who will deliberately not pay. Banks have already been recapitalised adequately to accommodate those situations. Therefore, we cannot allow the ostrich type behaviour of financial institutions to continue to the detriment of mortgage holders who are doing their best. Write-downs must be one of the solutions to be examined in the matrix proposed because many of the people in difficulty are consumers in the wider economy, and that feeds in at a micro level to a depressed consumer demand.

We are doing well in terms of securing foreign investment, achieving record export growth and so on but the collapse in domestic consumption and the impact of that on the retail trade is clearly visible in the significant continuous closure of high street premises. More important, however, is the significant effect that is having in rural Ireland where small corner shops and grocery shops selling provisions being forced out of existence. Many of our rural villages have been devastated. The collapse in trade was precipitated by and contributed to by loss of employment, the lack of employment opportunities, and emigration.

I predict that in the next five years many villages throughout the rural heartlands will be left without a shop of any sort - grocer, butcher, petrol, general provisions - and people will be forced to travel to the next largest town which could be ten or 12 miles away. I know some of those shop owners. They are important contributors to employment, especially in rural Ireland, offering one, two or three jobs, many of them to housewives who are facilitated with a part-time job. In the past year some of them have recorded losses of €9,000, €10,000 and €12,000, and they are being cross-subsidised by people's other incomes. The shops are being run by people who are in effect providers of social services where people in rural areas can go to, be made welcome and discuss issues of concern to them. As a result of these closures devastation will be wrought across rural heartlands, which will lead to further social isolation. We must address that head-on with an array of measures to help arrest this development. We must halve the rates and not impose levies on these premises or consider subsidisation or grant in aid. Otherwise, we will be shedding crocodile tears when the harm is done.

The Taoiseach might inform his German hosts, and indeed masters, that the distinguished US economist Martin Feldman, writing when the euro was being proposed, expressed scepticism about its success but argued that that if it went ahead in the flawed version in which it was actually implemented, its collapse could lead to another war in Europe. Those warnings must be taken seriously. That is the reason we are entitled to a proper deal. We are not begging for it. We are entitled to it because the solution was imposed upon us without our having any input into it.

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