Recent developments in the eurozone
Ceann Comhairle,
I welcome this opportunity to update the house on recent developments in the eurozone.
This week, I participated at the Eurogroup and ECOFIN ministerial meetings in Luxembourg. Just over two weeks ago I was in Washington for the annual meetings of the IMF and the World Bank, where developments in the eurozone were high on everyone’s agenda. The Taoiseach, the Tanaiste, other Ministerial colleagues, officials and our diplomats have also maintained an intense programme of contacts and meetings to ensure Ireland’s voice is heard as things evolve.
I am happy to report that at these recent meetings in Washington and Luxembourg, Ireland came in for much praise for the progress we are making as we return to sustainable growth and economic stability. Of course, it goes without saying that this is no basis on which to become complacent in what we are doing. It also goes without saying that the extent of our recovery and growth does depend on what happens beyond our shores.
Ceann Comhairle, I will speak about these meetings and how I see matters evolving, but I think it would also be useful to inform the House on the very important steps we and our European colleagues have already taken in recent months. The focus is perhaps too often on the "immediate fix" to the latest fluctuation in the markets or the situation of one or more member states; what is necessary just as much is putting in place the right framework for economic sustainability in the longer term. In that we are making genuine good progress.
The EU economy
In terms of the wider euro area and EU economy, it is clear that the outlook has deteriorated over the summer months. A key factor weighing on activity is the dramatic change in market sentiment towards the euro area. Tensions in euro area sovereign debt markets have intensified with spill-over effects to some non-programme countries. At the same time, markets have become increasingly concerned about the exposure of some European banks to sovereign debt. The weakening economic outlook is exacerbating the situation, and there is a lot of uncertainty and nervousness.
Greece
Turning to Greece, the situation remains fluid and my Eurogroup colleagues and I discussed the latest developments on Monday night. In recent weeks, it is clear that the Greek authorities have announced additional measures to address the situation. While significant measures are planned on both the revenue and expenditure sides, the Troika is currently assessing as to whether these are sufficient to close the fiscal gap, and we are awaiting the Troika assessment.
Policy responses so far
While there are significant difficulties as I have just set out, it is important to stress that it is not all doom-and-gloom. It is often overlooked, but it is fair to say that the policy response at EU level since the crisis began three years ago has been impressive. For instance:
a new and improved economic governance structure is being put in place; a European Semester involving ex ante guidance on national economic and fiscal policies has been introduced; crisis resolution mechanisms – the EFSF and EFSM – have been established; and, significant progress has been made in terms of financial sector repair at EU level.
Financial sector
On that last point, the past months have been difficult for the Eurozone and its financial sector. Initiatives in relation to the EFSF following the Eurozone meeting on 21st July are to be welcomed.
I am pleased to say that, since early July, Irish banks have had success in securing term wholesale funding from international banks with some €4.5 billion funded to-date in a very difficult environment and this shows the progress that the banking sector has made.
Irish banks’ exposure to some of the peripheral sovereigns is very limited and manageable within the context of their capital, which was confirmed through the EBA stress tests as being well in excess of requirements.
21 July: significant progress
Deputies are aware that Heads of State and Government in July committed to improve the terms at which financial support is available, to increase the scope of the EFSF / ESM, and to consider proposals on how to improve working methods and crisis management in the euro area.
As the Taoiseach said to the House when reporting on the 21 July meeting last month, these are significant and important enhancements to the EFSF. There is now increased flexibility, something that this government had been actively seeking.
Member states are now engaged in the process of legislative change needed to enable the new arrangements agreed in July to enter into force. For our part, the necessary legislation was passed during September and now has been signed into law by the President.
The decisions made means that the EFSF will lend to Ireland at a significantly reduced rate. This will apply not only to monies yet to be drawn down, but also to future interest payments on existing loans. This is a saving of several billion euro over the term of the loans; in this regard, we welcome the decision of the European Commission to propose that loans under the EFSM will come with zero margin and I hope a decision on this can be approved as soon as possible.
The meeting in July recognised Ireland’s resolve to press ahead with implementation of our programme, and expressed its strong commitment to our success. I have repeatedly said that "Europe needs a win" and I believe that message has resonated with my EU colleagues.
Tax
With regard to corporation tax, there was no new language agreed at the July meeting. We agreed to engage in what I expect to be a very complex debate on the Commission’s CCCTB corporate tax base proposal, and more generally in the structured discussions on tax policy issues provided for within the framework of the euro plus pact. There was nothing new in this and I would repeat that the Government’s position on the substance of the matter has not changed in any respect.
Also in the tax area has been a proposal published by the European Commission for a Financial Transactions Tax. The draft Directive will now be subject to detailed discussions at EU level and, as always, we will participate constructively in those discussions.
There is no consensus as yet among European Member States on this issue, either about whether an FTT should be introduced, or what precise form it should take. It is important that any proposal does not have the effect of encouraging relocation of activity or damaging the EU’s competitiveness in financial services. It is for this reason that there is an emerging view that the EU and other international groupings, such as the IMF and G20, should move in tandem to avoid the danger of financial sector business gravitating to jurisdictions where taxes are not levied on financial transactions.
Eurobonds
Ceann Comhairle, there has also been much discussion of the concept of Eurobonds and I have spoken about them on both sides of this House in the past. President Barroso has indicated that he will make proposals in the coming weeks for what he calls "Stability Bonds"; I’m sure Deputies will agree that it is prudent to withhold judgment until we see the details of the actual proposals.
EU Economic Governance
On wider economic management issues, I mentioned already that among the welcome policy responses, has been the putting in place of a new and improved economic governance structure. The government’s view is that every appropriate step should be taken to avoid recurrence of the economic shocks that hit us in the last few years. Indeed, we believe that we have Ireland’s experience of these recent years to bring to the table as that new governance structure is discussed in the coming weeks.
A series of significant measures are already in place. I have already mentioned the European Semester, which is already proving its worth in terms of ensuring a coordinated, flexible and effective system of economic planning at Member State and EU level.
A series of legislative reforms, known as the "six pack", has been agreed.
The six-pack has four broad goals:
· It toughens the rules of the Stability and Growth Pact (SGP) which was designed to limit budget deficits and government debts, by introducing a much greater degree of surveillance at an earlier stage and making it easier to initiate the excessive deficit procedure. The rules will also give a greater importance to debt (and not only deficit) reduction and sustainable growth,
· It introduces new controls on macro-economic imbalances across the EU, such as housing bubbles and growing divergences in competitiveness between Member States,
· It sets standards to ensure the correct and independent compilation of statistics as this data is crucial to sound budgetary policy-making and monitoring of budgets, and
· It strengthens the transparency of the decision-making processes and the accountability of decision-makers.
In am pleased to be able to note that on Tuesday of this week (October 4th) the ECOFIN Council formally adopted the six-pack measures. This means that work can begin immediately on implementing the new legislation and that Member States can begin to work towards the 31 December 2013 deadline for having the provisions of the Directive transposed into national legislation.
Ireland already has some of the Directive’s provisions in place, and a significant number of those outstanding will be transposed through the upcoming Fiscal Responsibility Bill which will of course be debated by the Oireachtas.
These are real and substantial changes in EU economic governance and are perhaps not appreciated enough yet in terms of their long-term value. The work does not end there, however – the Heads of State and Government tasked the President of the European Council, in close consultation with the President of the Commission and the President of the Eurogroup, to make concrete proposals by October on how to improve working methods and enhance crisis management in the euro area.
This work is now being advanced, including through bilateral consultations at official level; officials from my Department, the Department of the Taoiseach and the Department of Foreign Affairs & Trade met with President Van Rompuy’s team on the subject last week.
In all we do on governance and all such issues – and we have taken a lot of tough decisions at EU level and at home in our capitals – we should keep our focus on growth and on job creation. That will guide this government as we approach the next steps in the governance debate.
Conclusion
I might conclude, Ceann Comhairle, with some of the points I made to ministerial colleagues and to members of the global financial community when I was in Washington for the IMF and World Bank meetings last month. I told them that the global economy is in a major crisis and that the Euro is being buffeted by this crisis. I see the euro as the centerpiece of European integration, which has been good for Ireland and for our partners.
Throughout the current crisis, many of the strengths and advantages of the euro have been overlooked. It should be remembered that since its introduction, the euro has increased trade by 50% within the eurozone, controlled inflation and allowed for the deepening of a successful internal market across the EU.
I believe this financial crisis will be solved but that it will take time. The credit bubble that caused the crisis must be reduced, which means everyone must in effect deleverage their balance sheets. This deleveraging must be done in as speedy a manner as is possible without putting at risk the all important return to economic growth, which will create the jobs that our citizens seek.
Developments in the eurozone and the wider world are a major concern to us but we will continue to take decisions on the economic and financial matters that are within our control here at home. Ireland is in the process of reestablishing financial and fiscal credibility. Against this background, we will play our full part in ensuring that the eurozone’s current crisis is brought to a resolution.
Thank you, Ceann Comhairle.