Paschal Donohoe (Fine Gael)

I welcome the Minister to the House and thank him for his update on the conclusions and decisions from the European Council meeting. I want to register a concern about a number of the decisions and conclusions that came out of this European Council meeting. In doing that, I am deeply mindful of the fact that if it was not for the support the European Union has given our country over recent months and throughout the year, we would be in a more difficult place than we are currently. What is in our economic self-interest is also in the economic self-interest of the eurozone and, therefore, of most of the European Union. Our future prosperity and economic security and their maintenance are as much in our interest as they are in the interest of our European neighbours. With that in mind, it is incumbent on people who are deeply interested in what is happening in Europe and how it will affect Ireland to state their concerns.

There are three different areas in which the conclusions of last week must be cause for concern for Ireland and for where we find ourselves at this time. I want to focus on the declaration of conclusions produced after the European Council meeting, in particular, the second conclusion which relates to the setting up of a permanent crisis mechanism to safeguard the financial stability of the eurozone.

It contains a certain sentence which will further affect the difficulties our country is currently experiencing:

The European Council welcomes the intention of the Commission to undertake, in close consultation with the President of the European Council, preparatory work on the general features of a future new mechanism, [including] the role of the private sector, the role of the IMF and the very strong conditionality under which such programmes should operate.

This wording has had the effect of further spooking the people we need to invest in Ireland. It indicates the European Union will over the next several months put in place a mechanism to manage countries which cannot cope with their level of national debt. A consequence of this mechanism could be that private investors and bondholders in such a country in question take a hit. This is a concern for a country such as ours that is so deeply dependent on the support of the capital markets. Those who would invest in Ireland are not clear whether this would affect the current bonds they hold or future bonds they may acquire.

One consequence of this European Council meeting will be to make the current difficulties we have in raising capital even more fraught. One only has to look at the briefing notes and media comments by fund managers and investment analysts to see the evidence of this concern. In today's Financial Times, for example, the head of fixed-income research at a large bank stated:

The German move ... has reminded investors that there is not a never-ending pot of money for state bail-outs. If the weaker eurozone countries cannot turn round their economies, then investors may have to pay up.

This has further increased the anxiety and worries people have about their willingness to invest in what are now termed peripheral states. It is in Ireland's interest that the discussions and process of establishing this mechanism are done promptly. The last thing Ireland needs when it returns to the capital markets in January is any anxiety being further heightened by decisions made at European Council level regarding the hit financial investors could take if an economy finds itself unable to deal with its level of debt.

The European Council meeting made proposals for strengthening the Stability and Growth Pact. My interest in this area stems from producing a report for the Joint Committee on European Affairs on this before the summer recess and which was published in July. The Council proposed sanctions against eurozone member states can be triggered if a state's deficit goes ahead of the 3% level of national income, if an economy's gross debt, as a percentage of national income, exceeds 60% at any point, or if the conduct of a member state's fiscal policy presents a threat to macroeconomic stability. A specific example was given by the European Commission in a document that preceded this meeting that grounds for sanction could be if a country's public expenditure growth exceeded its predicted future national income growth. The Council proposed changing the mechanism by which these sanctions could be triggered to default. This means that if the European Council wants to levy a sanction against a member state, it must vote for the sanction not to happen as opposed to the sanction happening. This was referred to as a semi-automatic trigger.

In my report, I pointed to two difficulties that would arise from these changes. First, how willing would the European Council be to vote for significant sanctions against a member state? Second, was the sanction agenda going too far given how alert the bond markets are to any budgetary issues a member state may have? My concerns about the political feasibility of these sanctions materialised in last week's meeting when France and Germany decided not to implement the proposal from the task force on economic governance. The new agenda being wheeled out by the European Council President, Mr. Van Rompuy, and the Commission suffered its first blow. Both countries said they wanted more of a role for political discretion regarding the application of sanctions. We have seen the role played by political discretion in the application of sanctions in that no country has ever been sanctioned before.

My second concern is whether the increase in the number of sanctions proposed will actually sow the seeds for the failure of the proposed new Stability and Growth Pact mechanism, just as the last one failed. While regrettable, it is easy to see the European Council and Commission deciding to sanction, say, Ireland or Greece. Would it be willing, however, to sanction Italy, Spain or Germany? How will the sanction agenda really work? Is it credible when it is asked whether it will be applied to medium and large-sized economies? The European architecture has only to decide not to apply these sanctions on one occasion and the credibility of the entire mechanism is completely undermined yet again.

We are now operating in an environment in which the bond markets, having been asleep for the past ten years, are now hyper alert. If any single member state shows signs of budget difficulties or a lack of fiscal sustainability, the bond markets will levy the sanctions. They are doing this to Ireland, telling us they do not have confidence to lend to us at a rate of interest we are willing to pay.

Would the European member states not be better off combining a more narrow sanction agenda - but one that has a greater chance of being implemented - with the fact that the financial markets are already daily sanctioning member states if they perceive them not to be fiscally prudent or have problems that would undermine their future economies and their ability to meet their obligations as eurozone members?

I have touched on two economic areas, one of which concerns whether what happened last week has inadvertently deepened the difficulty in which we find ourselves. My other point was to raise concerns about the credibility of proposals under the Stability and Growth Pact. I question whether the sanction agenda has gone too far and whether a narrower but better applied agenda might be the way to go. My view is that is what will come to pass anyway.

My third concern is about an issue at the heart of Ireland's standing within Europe. So many of the small to medium member states' economies have played a role in trying to provide a counterpoint to the Franco-German alliance. The latter alliance has also played a role in powering Europe forward. When we get to the Council table, however, our credibility has been undermined by the economic difficulty we find ourselves in at the moment.

In his speech the Minister of State referred to a Franco-German statement preceding the European Council meeting, which placed further emphasis on the decisions and conclusions made at the Council. My concern is that the Council decisions and conclusions reflected what the larger member states want. The ability of other member states to put their own viewpoints forward is under great pressure because of the economic difficulties they are in, including ourselves.

A consequence of what occurred last week has been to make our own challenges even greater. We must be willing to speak up and make these points. It is in our economic interests to continue to participate in the eurozone in a credible manner, which the financial markets are willing to support. That is also in the interests of the European Union generally and of the eurozone.

I look forward to the Minister of State's response to the concerns I have raised.