Thursday, 16 February 2012
EU Fiscal Compact Treaty: Statements, Questions and Answers (Resumed)
I welcome the Minister of State, Deputy Lucinda Creighton, back to the House for the resumed statements on the EU fiscal compact treaty. On the last occasion she was in the process of replying or about to reply. I understand the taking of further questions was not provided for on the Order of Business on that day and that the Minister of State will now complete her response to the questions raised on the last occasion. Therefore, there should be no further interventions.
I thank the Leas-Cathaoirleach and Senators for their generous invitation to come back to the House. It seems as if I am spending more time in the Seanad than in the Dáil these days, but that is certainly not a complaint. I very much value the opportunity to do so.
On the last occasion many questions were asked and in going through them I will provide as much detail and clarity as possible.
I will begin with questions posed by Senator Terry Leyden who asked specifically if the provisions of the intergovernmental treaty would apply to Ireland as soon as it left the programme on 1 January 2014 or if they would apply at a later stage. The answer is clear. Post-2015 when we emerge from the excessive deficit procedure, there will be a three year transition period and the obligations under the fiscal compact treaty will not kick in until 2018. That is not an interpretation of the treaty; it is also set out in the six pack of measures agreed between member states last year. In the annex to the six pack it is clearly stated in regard to Ireland that all the provisions will come into effect in 2018. The transition period has been designed to give breathing space to countries in excessive deficit procedures and allow them an opportunity to emerge from the very difficult decision-making associated with meeting all the obligations provided for in the programmes in which Portugal, Ireland and Greece are participating and some time to adapt. That is the flexibility we set out to achieve. It makes eminent sense that there be an opportunity for countries to adjust.
Senator Terry Leyden also asked if the treaty was geared towards ensuring a referendum would not take place. I began to address that question at the end of our session last week. The answer is no. Members may not believe my assurances, but I am not aware of any government setting out in international negotiations with the objective to deliberately avoid the holding of a referendum. That certainly was not the case in this instance. Legal advice was sought, as is always the case in the negotiations on any treaty, be they EU or international. That is the normal practice. It would be grossly irresponsible for the State not to seek and take legal advice on the wording during the process of negotiation.
Senator Katherine Zappone asked a number of questions which I will try to deal with as comprehensively as I can. Her first substantive question was if I could indicate whether any type of mutual insurance mechanism would come on stream after ratification of the treaty. There are many ways by which one could interpret what is meant by a mutual insurance scheme. It was agreed to bring forward and fast-track the European Stability Mechanism - it will be the permanent financial rescue fund of the European Union - on foot of the negotiations between member states to agree the text of the intergovernmental treaty. The size of the fund was also agreed in the course of the negotiations - it now stands at €500 billion and we have a certain expectation that it will be increased. It is contained in the statement of the Heads of State and Government that emerged at the informal summit on 30 January that there will be a review of the amount agreed in regard to the European Stability Mechanism. However, it is anticipated that the fund will be increased in size. We do not yet know by how much, as it will obviously be subject to negotiation. There are rumours in the media, on which Members can take a view. I will not repeat them in the Chamber, but suffice it to say there is an agreement to review the amount. For us, this is hugely important because as the situation in Greece has become more fraught in recent months, the issue of firewalling and protecting vulnerable countries in the European Union within the eurozone, particularly the other two countries in receipt of funding under IMF programmes, has come to the fore.
It is absolutely essential that there be robust firewalls in place.
We can have a debate some other time about the rights and wrongs of how independent is the ECB. I argue that it is too independent and that it should probably be more accountable to the Council and the European Parliament, but that is the framework of how it was established under the treaties. This is something that will have to be reviewed in the future. The ECB, notwithstanding its independence, has clearly responded to the December agreement by issuing the three year loans known as LTROs which have been of major significance in stabilising the eurozone in the last two months and of benefit to Ireland and all other eurozone countries. That very dramatic step by the ECB was in response to the political agreement reached in December at the second last summit. We have seen the ECB accelerate its provision of liquidity across the eurozone since the intergovernmental treaty was agreed at the summit on 30 January. There is a clear link, although we must at all times be mindful of the fact that the ECB is independent. I hope that answers the question somewhat.
Senator Katherine Zappone asked about the form the correction mechanism had to take. She also asked for clarity on the principles of the correction mechanism and whether there would be some flexibility in the identification of a required adjustment path to ensure lengthy austerity did not put us under for good. In terms of the fiscal implications of the debt correction rule, it is important to remember that the debt-to-GDP ratio is the key element. In other words, on the basis of reasonable assumptions in the medium term, we can expect economic growth to do a lot of the heavy lifting. This is very complex and detailed and based on all sorts of economic theories, but I will give a simple example which might shed a little light on it. Between the 1990s and 2007 Ireland's debt ratio fell from well over 50% of GDP to about 25% - clearly, a dramatic fall - while the nominal level of debt increased. Thus, the nominal amount grew, but the debt-to-GDP ratio fell because of growth in the economy. This illustrates that it is not simply a question of cutting and cutting, rather by achieving growth over an extended period we automatically reduce the debt-to-GDP ratio.
Nobody inside or outside this House can predict entirely how much growth there will be and how long it will take. It is impossible to do so. We can have forecasts, certainly, and lots of number crunching, but it is absolutely impossible to determine exactly how long it will take and how much growth there will actually be in that period. Anybody who suggests he or she can give a definitive figure is wrong. I have heard wild figures being thrown around which I absolutely reject of €5 billion a year in austerity meaures and cuts from 2015 to eternity. That is patent nonsense because there are no circumstances in which the country would have a zero growth rate. It is not realistic. Even last year, while we were in the middle of this deep and difficult economic crisis, the country achieved a 1% growth rate and certainly the forecasts for the years ahead will be more optimistic. The Department of Finance has its own growth projections, while the ESRI and others have competing ones. I suspect the reality will be somewhere in between.
At this time it is impossible to anticipate the growth rate because it depends on so many external factors, including global trade and how serious the European Union is about enhancing the Single Market. I have said repeatedly that there are huge opportunities to achieve growth if political leaders in Europe take the initiative now. Many opportunities have been missed in the last 15 years. There have been wonderful grand plans to increase growth, liberalise trade, eliminate barriers and make it easier for SMEs to access credit, become mobile and penetrate markets all over Europe. We did not have the impetus to do this in the last 15 to 20 years; we were all far too complacent. Now we have that impetus and I am confident we will see serious action being taken at a European as well as a domestic level. Senators are aware of the Government's proposals for job creation, outlined this week by the Taoiseach and the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton, which have been well received. That is an element of the solution, although I will not pretend it is the full solution.
Some really interesting articles have been published by economists in Ireland in the last few weeks on the debt-to-GDP ratio - I am sorry I do not have them with, but I can happily pass them on to Senators - which take into account a range of elements that have to be considered in calculating the debt burden such as write-downs of mortgage or personal debt that are written into banks' own projections and which certain commentators have not taken into account. Credit card companies, for example, have an in-built mechanism for a debt write-down which is not taken into account in calculating private debt. All these elements make things very complex but must be taken into account in the process of reducing the debt-to-GDP ratio over a long period. These are not simply obligations imposed by the intergovernmental treaty; they are obligations that the Government has set out for itself. We want to reduce the debt burden. Unsustainable debt levels are not desirable and it is in our interests to reduce the debt burden. This is, of itself, an essential element in achieving growth and setting out a path forward for the State.
Senator Katherine Zappone also asked about added value. She particularly wanted to know whether, if we signed up to the treaty, we would be allowed to access the European Stability Mechanism funds should we require them, and whether, if we did not sign up to it, we would be precluded from accessing them. The simple answer is yes. The treaty clearly links its ratification with access to ESM funding. It is not our intention to draw down funding under it; our funding is in place through the EFSF and we are confident that we will meet all our targets, as we have been doing, and that we will emerge from the programme on target. However, the simple answer is that there is a direct link with the ESM.
We must consider the logic behind it. We obviously see this challenge from one perspective, while the creditor countries - the remaining triple A credit rated countries in the eurozone - see it from a very different point of view. They want some assurances, as they turn a blind eye to the intervention of the ECB in the last two months and agree to enhance the capacity of the ESM, that they are not putting money into a black hole. That is the sort of language we have heard from a number of finance Ministers of triple A credit rated countries and it is a reasonable perspective. They must go back to their parliaments, as we do, and explain to taxpayers why they are investing money in these funds, in which there is always a risk involved.
Therefore, they are seeking some type of assurance that if countries intend, or are likely, to draw down funding from the ESM, they will make every effort to reform their economies, restructure their government spending, reform in so far as is possible and make significant strides in reducing their deficit and debt to GDP ratio. That is, objectively, a reasonable assumption.
Senator Gilroy asked a number of questions about achieving a balanced budget within the 3% threshold and how we would agree to the sanctions. He also asked questions relating to compliance and how we could believe it is fair to codify these terms in law. Even if it was not required, he wondered if it was desirable. Finally, he asked if the fiscal compact was not simply a recipe for continued austerity. These questions are connected to some of the questions that have already been addressed. The first thing to note is that the elements of the fiscal compact are already European law and we have already signed up to them. The idea that this is new and that we are putting into law something that was not previously part of the European legal framework is incorrect. The compact is consolidating it in a treaty and changing one or two of the mechanisms to make it more enforceable and binding. The implications of that are more significant for bigger member states than for small member states. As we have seen over the last ten years, when small member states breached the terms of the Stability and Growth Pact and had deficits greater than 3% or their debt to GDP ratio grew out of control, proceedings were brought against them. There was no requirement to achieve a qualified majority of the European Council to do that. On the other hand, when large member states breached the terms of the Stability and Growth Pact a blind eye was turned because the other countries did not want to club together to vote in favour of imposing sanctions on them. That burden has now been reversed. It is necessary to achieve a qualified majority of member states to oppose the automatic introduction of sanctions. That is the interesting element in this. It means it is far more likely that the big countries will have to play by the rules, as the small countries have had to do previously. We should see that as a positive. When one considers how interconnected we all are in the eurozone and how dependent we are on the performance of other member states, it is in our interest to ensure that all other states play by the rules, particularly the bigger member states. That is probably the most important development contained in the intergovernmental treaty.
We will be required to reduce our debt to GDP ratio annually by one twentieth of the difference between the actual rate and the threshold rate of 60%. Some commentators have suggested that we would have to reduce by one twentieth of the overall rate in each year that we are in an excessive deficit procedure. That is not the case. As one reduces the difference between the 60% and the total debt, it is one twentieth of that. As one reduces it, the proportion one must reduce it by each year is reduced. That is an important distinction. It means it is a much slower process, not the type of big bang accelerated process which has been suggested by many people. During the transition period that applies to Ireland, which lasts for three years following the correction of the excessive deficit procedure, the requirement under the debt correction rule is deemed to be fulfilled if we are making sufficient progress. That is essentially an allowance for countries emerging from a programme to have a great deal of flexibility and not to rush into this one twentieth per annum rule.
It is also crucial to stress that reducing the debt ratio is a function of running not just a prudent fiscal policy but also of economic growth. I made that point previously but it is worth reiterating. In Ireland we expect growth to do much of the heavy lifting and that is a realistic objective. We have managed to stabilise our public finances and, most importantly, managed to stabilise our banking sector. I do not wish to reopen the differences that exist in this House and in the Dáil about how we did it. We are where we are, to use that awful phrase. However, the bottom line is that we have created a significant amount of confidence in the Government's capacity to deliver, in our banking system generally and across our public finances. The key element of that stability is that we have generated a great deal of investor confidence, which was absent for the last number of years. It has been restored. Investment in the last 18 months has been improving steadily and our exports have grown at a quicker rate than was the case for the previous ten or 15 years.
There is a great deal of good news. This places Ireland in a strong and opportune position to take advantage of the growth opportunities that exist. While growth in the European Union has clearly slowed down dramatically, there is still a big market if one has good products and services and if one is smart about how one exports them and about targeting markets. Coupled with that, if the European Union does what it says it will do to eliminate barriers within the Single Market and to make it easier for small and medium enterprises, SMEs, to access other markets, I believe Ireland will be far better placed than most countries.
I can give an example. I spent the last three days in Madrid and Lisbon meeting with members of the governments in those countries, members of academia and people from other walks of life. Portugal's exports account for approximately 30% of its GDP, which is below the European average of 40%. Ireland's exports account for 100% of our GDP. We are in a different league in the context of the flexibility of our economy and our capacity to export products and services, and to generate growth and potentially employment through that process.
I give credit to the last Government for a number of the policies it pursued. Clearly, we have our differences but many of the policies that were pursued in regard to exports and placing Ireland in a competitive position to take advantage of our natural qualities have been successful. We have continued that. One can see the work that is done by Enterprise Ireland and the IDA. They are very focused. They have a small team but it is hugely professional. The same applies to our embassy network and the work it does. We have huge untapped potential in markets such as France and Germany. It is interesting to meet Irish business people who are living and working in other European countries and to listen to them talk about the frustration they experience with market access. There is huge potential if we can just eliminate many of the barriers and difficulties that exist. I am very confident about our potential to do that.
I do not buy into the negativity we hear much of the time about our economy being crippled, that we have no potential for growth and so forth. It is simply not true. If we believe we cannot develop and grow, we will not. However, if we believe we have potential, if we are ambitious and if we follow through on it, we can grow. It is that simple. We must decide which way we want to go. The Government and I are determined that we will go in the right direction.
I wish to make a final point in response to the series of questions on the notion that the treaty will lead to years of austerity. This comes back to the fact that we have already committed to correcting our excessive deficit. We are already in that procedure and we are making big strides. It is and has been difficult, and it will continue to be difficult up to 2015. There is no easy way out of this. We often hear people saying this is the wrong road and that we should be on some other path. We rarely hear anyone spell out exactly what that path is.
Prioritising making our economy more nimble, getting our public finances back on track, which it is very difficult to argue against, and trying to reduce our debt to GDP ratio while receiving billions of euro of funding to keep the State running as we do so, is the only solution. I am not aware of alternative options and I have not heard any Member, of this House or the Dáil, making any concrete proposals as to how better we could do it. We have heard people advocating unilateral default of our debts. That is fine, but they do not explain where the funding would come from to run our schools and hospitals and to pay for pensions, carers and social welfare benefits. I have heard no answers to that question.
We need to face the reality of where we are and plan our way forward. Part of that is about stabilising the eurozone. This treaty is an essential element of that stabilisation. We need to have a discussion based more on fact and less on fantastical views of how we can solve this crisis. There are no easy answers. It would be more honest of many Members of both Houses of the Oireachtas to acknowledged that.
Similar questions were put by Senator Barrett. There is considerable overlap between the questions and while I may not have addressed individual Senators' questions I think I have covered most of what was raised. Senator Reilly asked about the link between the treaty and the European Stability Mechanism. I think I have answered that.
I appreciate the Members who have attended today. I also appreciate that Members are busy and that several committees are meeting at this time also.
Senator Reilly asked about the treaty's inflexibility. I have tried to address some of her concerns regarding the three year transition period and how the one twentieth requirement is calculated. There was some misunderstanding about this. One can have flexibility but one must also have rules. We saw flexibility taken to an extreme in the past, in a way that did not serve this State. Flexibility is all well and good but we must have parameters and rules by which we set standards, and we must meet those standards. It is in our interest that we meet them, for some of the reasons I have pointed out. It is also in our interest that other member states meet them. In the interconnected world we live in that is now more important than ever.
I answered Senator Colm Burke's question on my previous visit to the House and I will not do so again. Senator Darragh O'Brien raised the issue of whether the Government sought a write-down of the debt. I answered that question on a previous occasion, perhaps not in this House. We are looking for debt sustainability and our focus is on the promissory notes. The Government is working hard with the troika to reach an agreement on a reduced interest rate on repayments and potentially - and I do not want to be prescriptive because this is still part of a negotiating process - on the extension of the repayment period.
It is hugely important.
With regard to whether we sought a debt write-down, the Minister for Finance had informal but high level contacts with the ECB, with Mr. Jean-Claude Trichet and with other member states and finance ministers. It was made abundantly clear that there was no question of a write-down being agreed in a mutual sense at this time. There has been some criticism of my party, and it has been claimed that we made commitments before the general election to default unilaterally on the debt. We did not. It would be irresponsible ever to suggest that a country in a bailout programme should default on its debt. We committed to try to write down debt through a multilateral process. It did not work. It may work in the future. Who knows? At this time we are not looking for any such debt write-down.
We are committed to making our debt burden as manageable and sustainable as possible. In the past 11 months, we have already achieved many concessions, most notably at the July summit when the interest rate on our loans was reduced and the maturity date extended.
The Minister of State has repeated in my presence a lie that Fianna Fáil disengaged from European Council meetings, when the evidence from the University of Gothenburg - I have a copy of it here - shows that our attendance record put us in fifth place out of 27 member states. Why does she repeat this? She said Fianna Fáil disengaged from Europe when the evidence shows our attendance record puts us fifth out of 27. I will show her the report. That is what I am annoyed about.
I said the Minister of State repeated an untruth. If I said the word "lie" I withdraw that unreservedly. I have no wish to impugn the integrity of the Minister of State. She made a political point and I am attempting to reply to a political point. I think the Minister of State can see that as being legitimate.