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

The liquidation of the Irish Bank Resolution Corporation and the transformation of the promissory notes are welcome developments and the difficulties faced by the Government to achieve these should not be underestimated. Therefore, the Government should be congratulated on its achievements because they were by no means easy. It is important to bear in mind that the Government inherited the promissory note debacle due to the weakness of the previous Government in capitulating to the demands of the ECB to the effect that the debts of Anglo Irish Bank and Irish Nationwide Building Society be taken on by the Irish taxpayer. We should recall that the Government of Iceland, whose banking system was as irresponsible as ours in borrowing recklessly from European banks, took the view that the people of Iceland should not be burdened with the gambling debts of irresponsible banks and allowed that country's banks to collapse. Therefore, the Government inherited an appalling millstone around the neck of the people that was IBRC and its options to deal with the situation were rather limited. These options have been outlined by Deputy Spring.

People who refer to write-offs do not understand the nature of the treaties and the legal framework in which the ECB operates. The ECB which, at the insistence of Germany, is a replica of the Bundestag, has one objective only, that is, the control of inflation. Therefore, the ECB cannot create money and when it advanced emergency liquidity to IBRC, it insisted that the money be repaid and destroyed. It is difficult to believe that this is what the promissory notes involved but effectively what occurred was that every year the Government would hand over €3 billion of taxpayers' money to IBRC, which would then repay the Central Bank of Ireland. The bank, in turn, would then repay the ECB, which would then use the money to reduce the eurozone money supply. This had precisely the same effect as burning the money. Under the new deal the Irish taxpayer must still repay the gambling debts of the errant banks but under more favourable terms. However, we should bear in mind that the bank debts still constitute a quarter of the total national debt. Had the bank debt not been turned into sovereign debt our debt to GDP ratio would be a great deal more sustainable and we could have resumed normal borrowing by now and escaped the clutches of the troika.

It is a welcome relief that the new arrangements will result in annual savings of more than €1 billion in Government spending from 2014 onwards, but we are still in the vice grip of the troika-imposed reduction of the budget deficit to below 3% of GDP by 2015. This will require more cuts to Government spending or increases in tax in the coming two years unless there is a significant economic growth in the meantime. We should also bear in mind that while the burden of the promissory notes, which is close to 15% of 2013 GDP, will fall as a result of the deal, if we assume a realistic average growth rate of 2% over the coming 25 years the bonds issued to replace the promissory notes will still be approximately 7.5% of GDP in 2048, by which time some of us will be dead and gone and our children will be entering the labour market.

Growth rates will be remarkably important in the coming decade. Some commentators have argued that the real burden of the bonds will fall as a result of inflation. That is natural and correct but since the ECB's primary role is to ensure that inflation never exceeds 3% we should not assume that inflation will reduce the burden of our debt. Some eminent economists argue that the policies of the ECB and the troika are a problem and could lead to deflation, which is a great deal more difficult to resolve than inflation, as Japan has found out during the past decade. The ECB's German-inspired obsession with controlling inflation is not supported by the evidence, which shows that mild inflation is consistent with steady economic growth. Anyway, the deal achieved last week is a good beginning to the resolution of our financial crisis but it is only a beginning, as all speakers have said.

The crisis was partly caused by the flaws at the heart of the euro project. Europe has a central bank with only one objective, that is, the control of inflation, and one instrument, that is, the control of interest rates. A computer programme could implement the monetary policy of the ECB because it could be set to increase interest rates as soon as inflation reaches 2%. By contrast, the Bank of England and the Federal Reserve in the USA can take into account economic growth and unemployment in the setting of interest rates.

While the immediate cause of the Irish banking crisis was of course irresponsible lending to builders by Irish banks, this lending was made possible by the introduction of the euro, which eliminated exchange rate risk when Irish banks borrowed from other European banks. The implementation of a one-size-fits-all interest rate policy by the ECB further fuelled irresponsible borrowing because the ECB kept interest rates low in the interests of Germany although higher interest rates were required in Ireland to dampen the fever of borrowing. In the absence of altering interest rates as a policy instrument much more effective financial regulation was required, something, of course, we did not get. Instead, in Ireland the light-touch regulation beloved of those in the Progressive Democrats and their acolytes in Fianna Fáil led to virtually no regulation as the RTE documentary on Irish Nationwide Building Society showed recently.

When the euro was introduced many distinguished economists argued that in the absence of fiscal union and centralised bank supervision there was a danger of the crisis which eventually occurred, and it happened on a scale which justified their worst fears. Europe is only now establishing a centralised system of regulating banks and a fund to rescue failing banks. I believe the European Stability Mechanism has not been given the resources necessary to be effective. While it holds the Presidency of the EU Council, Ireland should press for an effective ESM and demand that the ESM shoulder some of the cost of rescuing Irish banks.

Ireland's GDP is less than 2% of the EU GDP yet we have taken on approximately 40% of the cost of rescuing EU banks. This is grossly inequitable and must be addressed at EU level. While the Irish banks were irresponsible borrowers, many French and German banks were irresponsible lenders and yet they have escaped their responsibilities. Ireland should insist that when the ESM is fully established it takes on a substantial portion of Irish debt. Thus far the EU handling of the banking crisis has involved privatising the gains of banks. There is now consensus among economists that the European project will be deemed to have failed unless the EU becomes a monetary and fiscal union similar to a federal state.

Last week, we witnessed the usual political haggling over the EU budget. The United Kingdom wants the benefits of EU membership without its costs and it succeeded in reducing the budget by almost €1 billion. The EU budget constitutes less than 2% of EU GDP.

In the US federal expenditure is 20% of GDP. This level of federal spending allows the US to operate a coherent monetary union in a way that is impossible in Europe with its current structures. The only alternatives for the EU to avoid periodic crises of the type we are experiencing are either to proceed to full monetary and fiscal union or to abandon the euro and return to being a free trade area.

While we have been focused on resolving bank debts for the past three years, less attention has been paid to the issue of household and small business debt. The Personal Insolvency Bill is a brave attempt to deal with this issue and I look forward to its speedy implementation. However, it will only work if the banks are compelled to deal decisively with the debts on their books. The Governor of the Central Bank recently expressed frustration at the tardiness of the banks in dealing with this issue. They need to be sharply reminded that they have been rescued with taxpayers' money and that they should deal speedily with the personal debt on their books to ensure an adequate supply of credit to the small and medium enterprises on which our economic recovery depends. Let us get on with the job in hand.

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