Committee Reports::Report - Economic and Monetary Union::16 December, 1998::Appendix

Appendix 2

Minites of Evidence



Dé Céadaoin, 11 Feabhra, 1998

Wednesday, 11th February, 1998

The Joint Committee met at 2.00 p.m.


Deputy Seán Barrett,

Senator Don Lydon,

Deputy Ulick Burke,

Senator Paddy McGowan,

Deputy Pat Carey,

Senator Brendan Ryan.

Deputy Michael Collins,


Deputy Tony Gregory,


Deputy Seán Haughey,


Deputy Phil Hogan,


Deputy Séamus Kirk,


Deputy John McGuinness,


Deputy Gay Mitchell,


Deputy Jack Wall.


Deputy Bernard J. Durkan in the Chair.

Mr. Joe McCartin, MEP also attended.

Chairman: We have a number of speakers today on EMU. Mr. Pat McArdle is the head of EMU planning at Ulster Bank and project leader of the IEA EMU group. He will present an overview of business issues affected by EMU. We will have other speakers on that issue later. On economic issues and living with EMU, we will hear Dr. Dónal de Buitléir, general manager of the office of the group chief executive of AIB and member of the IEA EMU group. The introduction will be made by Mr. Terry Stewart, director general of the IEA. All of the speakers are well known to Members from previous incarnations.

Mr. Stewart: My introduction will be short because we want to get to the meat of the argument quickly. On behalf of the institute I thank you, Chairman, for inviting us to meet the Committee. We have been following the issue for some time. The beginnings of economic and monetary union coincided with the foundation of our institute almost ten years ago and we were formally established during the preparation of the Maastricht treaty. We have followed its progress with interest but we do not take a stance - we try to isolate the issues so people can make up their own minds.

Some years ago we formed an EMU group, to which the Chairman referred. It is chaired by the former Commissioner, Mr. Ray MacSharry and the first project leaders were Dr. Dónal de Buitléir and Mr. Pat McArdle, both of whom are here today. Through our publications, lectures and seminars we have tried to bring to the attention of decision and opinion makers the full implications of EMU. Two years ago we published a book on the relationship between the United Kingdom and Ireland within the Union. We devoted a considerable amount of space within that book to our relations with the UK and EMU and we outlined a number of scenarios. Some Members may not have the book - there was an election since we last circulated it - and we will be delighted to send them copies. We also held a number of seminars and published the results. We do not have a copy for everyone but we will be delighted to forward them to Members who give their names to the secretariat. Those are examples of what we have done and when we conclude I will give an indication of how our programme will go in the next few months.

Mr. McArdle: I will give a brief overview and speak on business issues, as I will loosely call them. Much of this will be known to Members. In Ireland we tend to see EMU in terms of its economic effects and ignore - to too great an extent, in my opinion - that EMU is a political matter. The economic effects are important but they are secondary to the ultimate goal of the political visionaries in the centre of Europe who are driving the project.

As regards the on/off nature of the project, opinion has changed greatly over the last year, especially in the markets. There are no longer major debates about whether this will happen - surveys now typically show that 90 per cent of people believe it will go ahead on schedule. Leaving aside a significant number of German economists who were interviewed in a newspaper recently, the general view is that it will go ahead and I am taking that as read.

No longer do eminent central bankers on the continent leave Ireland off the list of countries to participate in EMU; that too has changed. It is commonly accepted not only that Ireland will be included but that the first wave will be large and will start on time with ten or 11 member states. It will cover a vast bulk of Europe, giving an economic area which will rival the US dollar.

The UK Chancellor for the Exchequer, Mr. Gordon Brown, made a statement at the end of November which clarified their position. There is a sea change in sentiment in the UK which has become evident since the election of the new Government, particularly in recent months. They are actively preparing to trade as a foreign currency with the euro as sterling will not be included from the start of EMU. There are four countries not included. The UK and Denmark have opted out and will not be included from the start of it; Sweden where political opinion has dictated a non-entry and Greece which will not qualify now but may do so in the future.

Business in the UK is beginning to drive things. It is interesting to see the change in the stance taken by the CBI. The banks are very involved and want to prepare and ensure London remains the European financial centre par excellence. I think they will be successful in doing that whether they enter or not. A bigger question for the UK is will they join and fully grasp the single currency. They said they will prepare to have a referendum early in the life of the next parliament, which if it ran to full-term would be 2002, but more likely 2001. There is a small possibility that they might have a referendum earlier than that. I am involved in some working groups in London and I sense an active preparation and a lot of pressure from Government to be ready. That will be important to us, particularly Irish businesses.

In conclusion, Germany has laboured with a very negative populist opinion on single currency matters which was driven by certain key politicians. But there has been some change in sentiment in recent opinion polls with more people accepting the inevitably of it. There is still a considerable amount of dissension evident among the 150 economists who managed to agree and sign a letter the other day suggesting the EMU should be postponed for various reasons which reflected their stance. In a surprising development their ill founded argument was torn apart by The Financial Times. In Germany there is no doubt that a number of people would prefer if the EMU did not go ahead. The Bundesbank will lose the most from the project and must ask themselves will it benefit them. There is view now that the Bundesbank will emphasise the need to meet the criteria and try to qualify on a proper and sustainable basis but they will stop short of doing anything which would wreck the project.

As regards preparations, first I will look at the Government and then at the private sector. The preparations by Government over the past year have been very impressive. I would list action taken on Budget and fiscal policies for starters. The number of countries who now look like qualifying and coming near the 3 per cent Budget criteria is vastly greater than one might have supposed even a year ago. For example, France where a new government came in and had a major change in policy after it was elected. Another example is Germany where they have had tough policies for a number of years. The best example is Italy where its government was defeated and a new one enacted the original policies. Spain and Portugal will bring in deficits which are well below 3 per cent and those of Germany and France. There has been a remarkable effort and fiscal policy has changed over the past number of years in a way many of us might not have imagined.

Second, the Germans proposed the stability and growth pact. The Maastricht Treaty was a little bit deficient in that it did not provide for fiscal rectitude after membership. There was a risk some countries would break ranks and gain some unfair advantages. Remarkably the pact was agreed in a short period of time. It may not be watertight. There are certain loopholes and we do not know precisely how it will work and what the definition of exceptional is. The fact that it was put there, agreed and on the stocks is significant. Third, there is the ERM TWO, the successor to the EMS, which is meant to govern relationships between countries which are left out now and the euro post January 1999. ERM TWO is modelled on the old EMS and has a very wide band of 15 per cent but the UK do not wish to join it. It is perhaps of limited relevance to Irish companies but nonetheless they did agree it.

Fourth, 1 January 2002 is the date for the introduction of notes and coins. I mention this to illustrate the way issues are being dealt with one by one. In the legal area an immense amount of work has been done, mostly under the Irish Presidency.

During our Presidency two regulations were put through in a matter of a few months. I do not recall that happening before in the 30 years I have covered EC affairs. These regulations have removed the vast bulk of the legal uncertainty which was there a year ago. I am talking about continuity of contract and technical issues of that nature. They have dealt with other more minor issues. The checklists from the point of view of Governments has been impressive and there are only one or two areas left which I will touch on in a moment.

As regards business their preparations are close to zero. The Ulster Bank does a lot of talks around the country and I have travelled through other countries and my impression is that, apart from the major companies which get all the publicity, there is very limited preparation being made by small to medium sized companies. We need to ask ourselves why. I put it down to the uncertainties and complexity of the project and the fact that it has tended to be debated in the media. Perhaps we have been exposed to negative reviews by the British press. It is only in the past month or two that many people are coming to terms with the idea that the EMU is going ahead. This raises some issues. In January the Ulster Bank and the Small Firms Association conducted a survey and found that 5 per cent of respondents regarded themselves as well informed and another 30 per cent as fairly well informed. The people who took part in this survey were sufficiently well motivated to come out and attend the lecture and it does not give the full picture. It is a biased sample in the favourable sense.

A lot of work still needs to be done and I will focus my contribution today by focusing on what might be done in that area. At the moment organisations such as banks and accountants are going around the country having seminars on this topic. Surveys show that industry looks to those two types of organisations first. Some of us would prefer if industry looked to Government instead. The Government has a programme currently focused on the business sector organised by Forfás. My experience is that there may be a need to look at a more local environment to get people involved and to get them to take a greater interest. There may even be a need to look at local towns in the way Ennis was focused on in another area.

Some areas need to be clarified such as the legislative area. The more certainty we have the better. People have the view that there is still a lot of loose ends on this project. Many countries have produced taxation proposals at this stage and they are going through parliament. Ours is proposed to come in the middle of the year and will be later than the majority. From the point of view of business and industry the sooner the better and it will tie up technical issues like rounding issues, non partia values etc., issues that need to be dealt with. The Revenue Commissioners were among the first in Europe to declare they would accept tax payments and returns in Euros. In the meantime, they have been joined by nearly all the other countries. There is a need for a detailed standard of practice from them because there are certain details required. I understand they intend to issue it early in 1998 and the sooner they do so the better. The sooner they do so the better.

It is a problem area in this proposal because it will be a complex situation with two currencies existing side by side for three years. It raises issues which one does not typically encounter. The rates themselves are to six significant figures and no computer packages are designed to cope with that or with the triangulation and other methods of conversion which are now prescribed by regulation. That will involve the rewriting of software packages. As of now, it is fair to say hardly any software companies have produced the new packages, although they are promising them for the first half of this year. There is an urgent need for them to emerge so that businesses can know they can buy a package off the shelf if necessary.

There is also a need for some industry norms and standards. It would be very helpful if, for example, they all changed over at the same time in a certain industry. It would reduce confusion and facilitate others, including the banks, so that they could plan for this in an orderly fashion. Industry must decide when, in the three year period from 1999 to 2001, it will switch its invoicing and, more importantly, its core basic accounting to the euro. They will have to do it at some stage in that period because by the end of 2001 they will have to be in euros. The problem is deciding when to do that. There are many factors which would influence that decision but which I do not have time to go into today.

The other outstanding issues are dual pricing and bank charges. They will both be discussed at a special round table in Brussels on 26 February, following which we expect Commission recommendations. There has been a debate on dual pricing. The mood seems to be switching towards maximum flexibility on the basis it is impossible to legislate for, given the variety of pricing methods and systems. That would suit business. Consumers, on the other hand, might not be so pleased and might seek mandatory dual pricing for a one year period before the final changeover at the end of 2001. That issue is yet to be resolved.

The issue of bank charges is also on the agenda. The emphasis is on avoiding any additional charges associated with the euro; in other words, the charges should be the equivalent of an Irish pound transaction. That is becoming accepted across Europe and the Irish banks signalled that approach in the changeover plan, the second version of which was published by the Government in early January.

The euro will probably mean as dramatic a change for Irish businesses as membership of the EEC was in 1973. Their backyard will be all of Europe and their competitors will come from God knows where. They will have to be aware of and alert to what is going on in other countries because price transparency will bring greater competition. They have a long way to go yet.

Chairman: Everyone will agree that was an excellent presentation which provided the perspective which members of the Committee have been seeking. Deputy Gay Mitchell will be using the submission as a backdrop for the report on those aspects which he will present to the Dáil.

I now call on Dónal de Buitléir who is the general manager of the office of the group chief executive of AIB. His theme will be economic issues and living with EMU.

Dr. de Buitléir: I am very pleased to have the opportunity to discuss this important issue with the Committee. Any views I might express are personal views as we do not have an official bank view on these issues. I wish to make five points about what living with EMU will mean, which are set out in greater length in the document promised by Terry Stewart.

The first point is that EMU will mean a major change in the regime to which we have been used. We will lose an independent exchange rate policy and any flexibility we had in relation to interest rates. That will put much more of the burden than was the case in the past on the budget or fiscal policy. If we are to leave room in the budget to try to cope with fluctuations in the economic cycle we should be running a budget surplus in the current booming economy. That is particularly the case when one takes account of the uncertainty over EU funds post 2000. The worst case would be that we would have to make major cutbacks when finances are not as buoyant as they are now.

Second, the stability and growth pact imposes significant constraints on Government borrowing. This may increase the pressure on under performing assets in the public sector and may increase the pressure to privatise some of these assets. Under the stability pact the Government is obliged to produce a stability programme. One of our suggestions in the paper is that stability programme should be considered and debated by a Committee such as this one and a report made before it is issued to Brussels.

Third, I wish to stress that the partnership approach, which has been so successful here over the past ten years, seems very important in the maintenance of consensus and competitiveness.

The fourth point is that because EMU reduces the number of adjustments one can make in the economy it is very important to try to increase the income flexibility of the economy to cope with shocks. Private sector companies should be extending profit sharing schemes more widely than they are and should be moving towards or extending bonus payment systems. Fortunately, this fits in with best human resource practice. We should also consider extending this in some way to the public sector. However, how to do that is a more difficult issue and I am not sure we have time today to discuss it.

Fifth, we must increase investment. We are going to have to compete with the leading economies of Europe and telecommunications and transport are two key areas in that regard. Given the future reduction in EU funding and the constraints on Government borrowing, it seems we are going to have much more public/private partnership in the financing of infrastructure investment.

I will now deal briefly with the short term economic issues. The main issue is the EMU entry rate for the Punt. This morning the punt is 2.51 against the Deutsche Mark. Our central rate is 2.41 which implies a 4 per cent devaluation.

The arguments in favour of a devaluation are that it would give us some increase in competitiveness and it would give us some protection if sterling enters EMU at a substantially lower rate than it is now. There is an argument that one last devaluation before a country irrevocably fixes its exchange rates is not as costly as it would be otherwise because there will not be a hit on the interest rates and there will be less reaction in the economy because people will believe the EMI will enforce a low inflation regime.

An argument against devaluation is that it would reduce the buying power of Irish pound savings, which is sometimes overlooked. It would increase the national debt somewhat. It would give a short term boost to inflation and a cut in living standards, unless the cycle of compensation and more inflation is started again.

However, the great imponderable is sterling. My view is that sterling is probably currently overvalued and is likely to decline in value at some stage, although UK macro policy is consistent in the long run with a stable exchange rate for EMU. When I looked at this a few days ago sterling was 2.98 against the Deutsche Mark - it is 2.94 this morning but I did the sums based on a rate of 2.98. If sterling went in at a 20 per cent lower rate it would be 2.38 in comparison with our rate of 2.50.

I calculated the sums based on £2.98. If Sterling went in at 20 per cent lower it would be £2.38 compared to our figure of £2.50. That is £1.05 for the Irish punt against Sterling. If Sterling came down by 15 per cent we would be at £0.99 vis-a-vis Sterling. Account must be taken of the fact that interest rates and the exchange rates will not be as high as they were in 1992 and 1993. The decision to go EMU at an entry rate is irrevocable. My judgement is that one is better to enter at a lower rate rather than a higher rate because the costs of being low are somewhat less than the cost of being high. In my opinion the rate of £2.41 is quite low.

Chairman: Mr. de Butléir’s submission will be viewed in the same context by our rapporteurs when producing their report. We will deal with questions now.

Deputy G. Mitchell: May I join with the Chairman in welcoming the deputation. We owe the Institute of European Affairs a great debt of gratitude for the way they have involved people both on a cross party and non political basis on the serious and dry issue of not only EMU but also European affairs generally. It is one of the great successes of an organisation in Irish society.

Firstly, what is the current thinking on ERM Two. My understanding is that there will be a voluntary participation in ERM Two but it seems absurd that a State should continue to avail of the Single Market and yet have a competitive devaluation available to it to use against other Member States. In the deputation’s judgement will all of the non participating States in EMU join ERM Two.

Secondly, in relation to the ERSI Report, it is to Ireland’s our advantage to join from the beginning. In relation to EMU membership from the beginning and taking into account the general budget deficit and GNP ratio criteria it seems to me that if Belgium is to qualify then Italy must qualify also. Not only has Italy marginally a lower debt GNP ratio but they also had a similar make up of debt to the Belgians. The argument has been that a lot of the Belgian debt is domestic and therefore it did not put the same pressure on the economy. The Italian debt is quite similar but progress has been made on the general budget deficit. The deficit might not have an annualised consequences but once they have joined EMU they will be required to continue to meet the criteria or face penalties. Would the group agree that it is likely that from the beginning there will be 11 members, including Italy in EMU?

In conclusion may I say I share the concerns of the group about company awareness of EMU. Forbairt have been doing their best and circulating information on this issue. We would be doing a service if with the help IBEC, the Irish Congress of Trade Unions and Forbairt could draw up steps to alert people to the challenges and the need to prepare for EMU. Maybe it is time we, as parliamentarians alert people to the importance of our membership to the EMU.

Chairman: With your permission I will invite questions from Mr. Joe McCartan, MEP, Deputy Sean Barrett and Deputy Seamus Kirk in that order.

Mr. J. McCartan (MEP): It is a privilege to be here and hear the presentations of the speakers. The people of Europe will benefit from having a single currency from a political and practical point of view. Account should be taken of the fact that a single currency will do the same thing for business that a common system of weights and measures will do. It makes everything much more convenient and it eliminates a lot of uncertainties. At the end of the day, our participation in the Single Market would eventually restrict our ability to carry out our own manoeuvrings.

In 1979 after 153 years we broke the link with Sterling without public debate and political division. People generally felt that we had given ourselves a new set of options and more freedom. I do not think we found a lot more freedom but we were equal. In the old relationship we were not equal. People in general do not seem to be aware that we do not have a common currency with the British at the present time. No matter what happens in the future I do not think it can be any more volatile than it has been in the last couple of years.

In the experts’ opinion will the British economy within the single European market set the price against the value of the pound Sterling? In the past it was feared that the British would devalue and become more competitive than us. Now it is feared that the British will become very strong and cause inflation. I cannot see how a strong Sterling is going to give inflation to all of the European Union. An Irish business person, trader or manufacturer will be able to purchase goods elsewhere in the European Union which they previously bought in Britain and therefore will not be affected by the destabilisation of its currency. From a political point of view the CBI were always around but they were silenced for a while by the bitterness of the debate that occurred about the single currency at the time of the last election. This morning Swedish bankers are warning that the Swedish currency will suffer because Swedish people will start to use the Euro in any case.

As Sweden is a small economy, this will pose a greater danger than the British will experience. Nevertheless, I think the British will come on board in the short-term and will not be a risk to our economic welfare. We must now concentrate our efforts to helping people in the area of conversion and gearing ourselves towards dealing in euros. I never heard of anyone going to the United States and coming back because they could not manage the currency.

Deputy S. Barrett: I wish to join in thanking Mr. McArdle, Mr. Stewart and Dr. de Buitléir for their very worthwhile contributions. I fully support the concept of educating small businesses in the transition from the punt to the euro. There is a huge lack of knowledge on the part of ordinary individuals in this area. What people want to know is whether the pound of carrots in the shops will be the same price when dealing in euros as it was when dealing in punts. We should start educating people at that level as and from 1 January 1999. That will start a debate which will force people to sit up and take notice. If we ignore basic questions, people will be fearful because there is a basic feeling among the public that they were ripped off after the change-over to decimalisation. The debate as to whether we join EMU is all over as far as I am concerned and begs the question can we afford not to join. I believe it is not feasible for a small country like ours to compete in the European marketplace by using our own currency.

I was interested to hear Dr. de Buitléir’s views for and against our joining EMU and the point at which we will go in. Has there been an analysis of our debt spread at the moment and whether we should be looking at changing from one currency to another in terms of that debt. Our debt situation is a big issue in relation to devaluation and it will affect us more depending on our borrowings. For argument sake, if sterling were to join EMU on 1 January 1999, what in Dr. de Buitléir’s opinion would be the level at which they would join?

Deputy Kirk: I, too, welcome the delegation here today. The debate so far has been very worthwhile, and if it results in spreading information about the issue it will have been a good day’s work.

Mr. McArdle made reference to the fact that there is a degree of antipathy in the Bundesbank towards the euro arrangement and I would like some background thoughts on that. I represent a Border constituency, therefore, I am interested in the relationship between sterling and the euro because places such as Dundalk and Newry have enjoyed or lamented the exchange rates, depending on the rates at any given time. I also know that the volume of trade between here and the UK and the exchange rate at any given time determines the level of profitability and viability in many instances. I would like to know what will be the exchange rate arrangement between sterling and the euro and whether the arrangement will allow for a variation of that during the interim period. I assume we will be proceeding on the basis that Britain will enter the new single currency arrangement in the short-term rather than the long-term or this an assumption that is not soundly based?

Deputy McGuinness: The story regarding our involvement in Europe to date has been a positive one and I think that because of that there is not much interest in moving forward in terms of the euro and industry involving themselves in public debate because it is accepted that it is another positive step within the European dimension and how we are progressing within Europe. As a result much of the debate now is, in fact, irrelevant because the decision is already made. We must now focus the attention of institutions like the chambers of commerce, farmers’ associations and so on in understanding what the euro is about and when and how it will happen. Mr. McArdle mentioned bank charges. There is nothing like bank charges to focus the attention of people and how it will affect their particular sector. That is an area that must be addressed. A round table discussion on the matter was mentioned but I hope there will be a positive round table debate as to how ordinary people will interact with the new situation.

A serious effort must also be made to get the message across to the ordinary man in the street because they are the people who will be confronted with the issue. At the time of the change-over to decimalisation there was a feeling among the public that they were ripped-off. I would not like to see that happen when the change-over to the euro comes about. The ordinary guy in the street should not feel there is a major change in terms of the value of the pound. Bank charges are an issue which must also be addressed.

Deputy U. Burke: I thank the delegation for their presentation. I have reservations that the opinions of the public at large regarding entry to EMU might be responded to in a negative way in a referendum because of lack of information and education generally. Outside of the banking institutions and the business sector, the public at large are fearful that entry to EMU will result in a series of price rises. This situation will be used by people who want to have an excuse to increase prices. I would be concerned that as this debate unravels and intensifies people will use the most immediate situation to respond in a negative way when they get an opportunity to vote in the referendum.

While there may be the possibility of price increases for many goods and services at local level, are we likely to see a corresponding rise in exports apart altogether from the devaluation element which we might encounter? If there is no corresponding price rise in goods and services which we export to Europe, it will be of little value for us to be competing in the European market as equal partners. If we are to go by the exorbitant price of foreign exchange charged by banks, to which the Deputy referred, and if it is to be paralleled down the line, there will be a very serious reaction towards entry to EMU by the public at large.

Deputy P. Carey: I found the submission extremely worthwhile. We must acknowledge that the public is sceptical. When one considers the torruous progress towards metric measurement over the years - we must face the fact that many people still talk about pounds and ounces, yards and feet, etc. - I would not be that hopeful about our capacity to educate the public in the short-term about the value of the Euro.

For the vast majority of the people it has been an argument based on people who have been for or against monetary union from an economic point of view. Any time one reads the newspaper, some economists think it is a great idea and others think it is a dreadful idea. For the person on the street, it is about as interesting as watching paint drying. A public education programme which is targeted at young people, who are likely to grasp it quickest, is the one which is most likely to be productive. There is a certain age over which it is difficult to cope with any sort of change. I was at the chalk face when we were trying to cope with decimalisation in schools and it was not an easy task for those of us who were imparting it. Those who were learning it had no difficulty whatsoever in picking it up.

As other members stated, people’s consciousness will be raised when it comes to finding out whether the fortnight in the Canaries will be even more expense in euros than in Irish pounds, but in the short-term a public education programme targeted at younger people and at the sceptical public is probably what is required most.

Senator B. Ryan: I am grateful to the speakers for their submission. It is a pity this level of debate did not take place before the Maastrict Treaty referendum when we could have had an intelligent debate on these issues rather than be presented with this situation, to which Deputy Carey referred, of having half the economists of the country saying one thing and the other half saying the opposite at a time when the decision is irrevocable. It is either a commentary on the way we do business or, more appropriately, on economics. That we did not have the debate when we should have had it is definitely a commentary on something.

What emerges from what we have heard here is that there is a negative side was well as a positive one. Mr. Joe McCartan, M.E.P., does not agree with us. He thinks it is all positive. However, there is a negative side to this, as the speakers outlined, and we must accept that there are risks - that is fair enough.

I do not want to rehash issues which were sorted out by the people a number of years ago, but I want to ask a couple of questions. Close to 60 per cent of Ireland’s gross national product is represented by exports - maybe it is 50 per cent. Therefore, the banks, through which many of the associated currency transactions go, make a great deal of money from foreign exchange business, almost all of which they will loose. How do the banks propose to make up for that loss? Will they simply absorb the loss as a decline in profits or will they spread it around on everything else by increasing other charges, because this involves a big loss for the banks?

I know about the stability pact. What if the Danes, for instance, decide to play a few clever tricks and competitively devalue the Danish currency against the Euro because it suits their agriculture industry? Is there anything which the Euro countries could do about that because Irish agriculture could be out competed by countries like Denmark which remain outside the Euro? Is there a way of ensuring that Britain does not engage in a process of competitive devaluation?

There is a significant degree of whistling past the graveyard here. Every time the question of British entry to EMU is raised people always say the British will probably enter. It is important to remember that the alternative government in Britain is close to painting itself into a corner on this issue and saying that they will never join. They are saying they will join in ten years now and if the argument gets a little more heated, they will be say it will never happen. It is a little unrealistic to hope that the big problem will go away when, in fact, it is the big problem and it might get worse. If Britain were to stay outside and indulge in a process of competitive devaluation, what would happen then?

Does anybody have any idea how we will tell ordinary people about this? Decimalisation was a damp squib by comparison with this. This is a new currency, involving coinage and notes. Ninety-five per cent of the population would not recognise a 1,000 Euro note if it landed in their lap. They would probably think it was monopoly money. We are going to suddenly - in three years - present an entire nation with a new currency which they have never seen before. I appreciate all the problems of business, but they are well talked about. I have seen nothing to suggest how we will help ordinary people when they discover, as they will only discover on 1 January 2002, that there are new notes and coins, there will be two listed prices and in six months there will only be one listed price, and they discover they are on a permanent continental holiday and as confused as most Irish people are when they try to figure out the price of something on a continental holiday. That is a huge practical education process and I do not know that anybody has done anything about it.

I know a stability pact has been agreed. What is the methodology of enforcing the stability pact if some member of the group of countries which joins EMU decides to misbehave, is called to task, has penalties enforced on it and refuses to pay the penalties? One can understand that if a country would break the conditions of the stability pact, it would be in dire financial straits. What is the available enforcement mechanism which would let outsiders tell a country that it must make its position worse by paying fines to Europe? I know the Germans can bully us but if Germany misbehaves - they had to misbehave in the 1980s because of German unity - what enforcement mechanism is available?

Chairman: Before I call on the panel to reply, I should mention that we will be calling in other expert groups in the context of this and the other issues. Groups, such as IBEC, ICTU and consumer interests, will be called upon to indicate their perspective on the particular issue.

Mr. Stewart: I see a number of themes emerging. The question of competitive devaluation has arisen in a number of cases as has the question of the maintenance of stability. Senator Ryan asked how does one enforce stability. There was a question allied to that which related to the debt situation of Italy and Belgium. There was a question about how people would react to the Amsterdam Treaty. I must put in a plug here; I hope you all received copies of the book in the post in the past few days. Then there was the question of the changeover in prices, whether the British intend to join, how we will operate within it and the various scenarios involved.

I will make two points before asking my colleagues to contribute. The issues I referred to are the main themes which emerged from this discussion but I am sure there are others. I hope someone will correct me if I forgot to mention any but I was trying to list them as quickly as possible.

I remember the introduction of the decimal system well. I will not state that there will not be a change in pricing, etc., but the difference between now and 1972 is that the economy is more open and competitive. Prices can be changed more easily, consumers are better educated and there are more watchdogs in existence. This will help during the changeover. What will be the situation in respect of a bag of sweets costing 99p? Will it cost 99 cents, which is less than 99p? Will some of the sweets be removed to cater for the change in price? Will the packaging be retained? There are many problems of this nature which must be taken into consideration. There will be scope, as Adam Smith stated in 1776, for businessmen to get together. There are even more possibilities than that in respect of people’s reaction.

It is difficult to say when Britain will join. One major political party in that country stated that it will postpone joining for at least ten years, which would bring us up to 2008. We are going to publish a document on the British in June or July. There are a number of scenarios involving the British. The best one is that they will join by 2002. As Pat McArdle stated, some people have not ruled that out. There is a small chance but I do not believe it will happen. The next scenario is that they will join between 2002 and 2004. If they do, things would still be fairly fluid and their joining would not have a tremendous impact. There is a 50-50 chance that this will happen. The third scenario is that they will join after 2004, which poses two questions. When after 2004 will they join? Will they ever join? These are the sort of parameters involved. The British Labour Party is committed to joining but there can be changes and slips between cups and lips. Perhaps my colleagues will come in at that point.

Mr. McArdle: Many of the questions outlined by Terry were covered earlier by Donal so I will not deal with them. I propose to go through the questions in the order in which they were asked and provide answers to the relevant ones. If I neglect to answer any, I am sure Members will task them again.

Deputy Gay Mitchell inquired about exchange, ERM II, volatility and who will join. The UK is the only country seriously resisting joining. It had a bad experience in the period 1990/2 and it is not likely to do so again. However, as we saw elsewhere, opinion in the UK about membership is changing so perhaps opinion on this will change. At present, it has been ruled out entirely.

The requirement to qualify under the Maastricht Treaty is that a currency shall respect the normal fluctuation margins in the EMS, without major volatility and without initiating a devaluation for a period of two years prior to the examination. We could spend some time debating the meaning of this. The UK holds that it can be observed without joining the system but other member states do not agree. If the UK wants to be a member of the “euro club”, group X, which is going to be a sub-unit of ECOFIN, the price it may have to pay is to join the mechanism. I will not give a definitive answer because I do not know. On the other hand, I suspect that if the UK comes knocking on the door in 2000 or 2002 seeking membership it will be welcomed as it was in 1990 when the remainder of the member states pleaded with the UK to join the EMS. Without sterling, the “euro zone” will be incomplete.

I except that all other member states will join. In particular, Denmark will have a narrow fluctuation margin against the euro. It has already more or less signalled that. Someone asked about Danish devaluation in a competitive devaluation. I was tempted to say that most countries have learned their lesson in that regard and ruled it out. That would certainly apply to countries such as Denmark. One does not tend to see so many competitive devaluations now. However, it is not long since some southern European countries engaged in this practice. One could say that Ireland’s entry at 2.41 deutschmarks is somewhat akin to a competitive devaluation. It is still a risk but there will be much pressure on aspirant members to behave and stabilise their currencies when they join.

Deputy Mitchell also asked whether we still share the conclusions of the ESRI report. I believe we do. In economic terms, it is hard to draw a line in the sand. The ESRI came to the conclusion that, on the whole, joining EMU would be beneficial in a modest way. There is no other report with which to compare it, apart from one carried out in Sweden which came to similar conclusions and the Swedes opted out of joining as a result. If I was to give a personal view on the ESRI report, I would say that some of its assumptions were conservative. I would single out those relating to benefits from lower transactions costs with banks, etc., in respect of which the ESRI estimates a boost to growth of only 0.1 per cent. Other reports have given higher estimates. Its assumption on interest was also on the conservative side because it assumed interests in Ireland would be only 1 per cent lower than otherwise. Many of us believe it might be more than that.

I will leave the question of sterling and the inflationary effect to Donal who will also deal with the majority of Deputy Barrett’s questions about decimalisation, debt spreads and sterling levels.

Deputy Kirk asked two specific questions about the Bundesbank. The Bundesbank sees itself as the guardian of currency matters in Europe. That is not entirely surprising given the history of Germany. The older generation of Germans who remember the war and its effect on their currency hold deeply entrenched views and are keen on strict membership criteria. They also have the most to lose because they effectively set interest rates for Europe. However, from 1 January 1999 that responsibility will pass to a new European central bank located in Frankfurt. This institution will involve the participation of the governors of the individual central banks on the governing council.

Any German who invested in the ecu lost money because it depreciated consistently against the deutschmark since its introduction in 1979. Given the strength of the deutschmark, they have reason to be sceptical about currencies. That is very much how they view this matter. Apart from the 150 economists to which I referred, constitutional court cases are being taken in Germany. A number of eminent people, including an ex-director of the Bundesbank, have taken cases before the constitutional court and are claiming that their property rights are being damaged. They are doing this in anticipation because the decision will not be taken until May. The two Houses of the German Parliament, the Bundestag and the Bundesrat, are debating whether they have the right to direct the Chancellor how to vote. They will engage in detailed deliberations during this year and they will want to ensure that the euro will be as good as the objective.

I am not saying that the Bundesbank has the potential to cause trouble but it will consider this issue keenly. If it does not like what it sees, it will say so. Against that, the scope for the Bundesbank to formulate negative conclusions has diminished considerably as the performance of member states has improved. I will leave it at that if I may.

Another speaker raised the relationship between sterling and the euro. Donal will answer that question. Deputy McGuinness and Senator Ryan inquired about bank charges.

Banks make a lot of money from foreign exchange activities. The ESRI report goes to some lengths to try to estimate how much and concluded that there would be a loss of income to the banks of the order of £100 million. They will lose money because with fewer currencies there will be fewer charges - that is the purpose of the exercise. There will be fewer currencies to trade. Certain products which they had will disappear. This is a feature common to all banks, not just Irish banks. They will not be allowed to recuperate the loss by raising charges. The authorities and consumers in every country are keen to ensure that does not happen. In Ireland the DCA has already commented publicly on the issue.

This matter is to be debated at European level at the end of February, following which we expect recommendations from the Commission. In Ireland the debate has largely gone ahead of the Commission and the banks have made their positions known in the recent national changeover plan, which not only deals with the issue of bank services in the euro context but also the bank charges. It is stated clearly that bank charges for euro transactions will be no higher than those for equivalent punt transactions. I hope that will reassure Senator Brendan Ryan and Deputy McGuinness.

Senator B. Ryan: That does not answer the question.

Mr. McArdle: Perhaps the Senator would ask the question again and I will have a go at it.

The other question was how the banks will make up the loss of income. I will not answer that question partly because it is a competitive issue between banks. Obviously, banks will endeavour to make up the loss in whatever way they can. The laws of economics are such that when one dampens activity in one area it tends to increase in another. If one examines the statistics on currencies, the currencies of the likely “in” candidates are quite stable relative to each other but the other major currencies are more volatile.

The ESRI report also drew attention to the fact that the single currency would boost economic activity in Ireland and higher activity is good for banks. Therefore, they would hope to recover some of the lost money in that way.

The question of how to tell the man in the street was raised. I do not know. People will have to learn a new language. People are confused about what will happen to prices, for example. There will be an automatic nominal effect. If IR£1 is equal to euro 1.25 the price of every good will appear higher but of course it will not be higher in reality. Put simply, if an individual earns £1,000 they would spend £1,000; come 1 January 1999, if the rate of the punt against the euro were 1.25 that person would receive euro1,250 and would spend euro1,250. Hence they would be no better or worse off. That idea is difficult to get across to people and many people fear the impact. In the UK and France studies are being conducted which tend to show that spending will decrease because consumers will be uncertain. They may think that prices have gone up without realising that their incomes have also risen. The natural reaction may be to curtail activity.

There are other issues associated with it. Decimalisation was mentioned a couple of times. We are always asked whether there will be a price explosion as happened with decimalisation. It is impossible to convince anyone in Ireland otherwise - people believe that decimalisation led to massive price rises. The economic studies of the period, for what they are worth, do not show any significant link between actual decimalisation and inflation at the time. It is difficult to be precise because it was time of rapid inflation anyway - price rises were in the high teens at the time and there was on oil crisis. I will not attempt to argue from history.

The situation today is quite different. Three things should make a difference. First, the degree of competition is vastly greater than in the early 1970s and that will be the primary safeguard for the consumer. Second, dual pricing will probably apply and it will mean that the price in punts will be accompanied by the price in euros. The consumer will be able to compare the price and complain if it has gone up. That did not happen during decimalisation. Third, the authorities will seek to monitor prices. This is another item which will be discussed at the round table in February. The office of the Director of Consumer Affairs may have a role in this. Obviously, it will be difficult to monitor prices everywhere in the economy. That would be a fairly Herculean task.

Deputy Barrett: An important element would be the dual pricing display. If that is applied quickly, before the introduction of the currency, it would relieve a lot of suspicion. It would get across to the public a positive attitude. Any such positive steps would be well worthwhile. I do not suggest it is Mr. McArdle’s responsibility but his contribution is important.

Deputy Collins: Mr. McArdle said he could not answer the question about how to inform the public. How has it been done in other countries?

Mr. McArdle: In response to Deputy Barrett’s point on dual pricing or dual display to be more accurate because it will apply to more than prices, the banks will dual display bank balances from 1 January next. It is a small contribution. Public utilities and government in all its manifestations have an important role, especially local government which is frequently more in touch with the public, although that is not as true here as in other countries. Central Government will dual display as is clear from the national changeover plan. In France the public utilities have announced that they will dual display from the beginning of 1999. There have not been similar announcements from other countries. Everybody gets bills from the utilities and it would be helpful as part of the education process if there was an element of dual display to allow people to get used to the relationship which will, after all, be fixed on 1 January 1999 for ever.

Many stores have indicated that they will dual display voluntarily - in many cases they must. Small shopkeepers often rely on the price on the good for information at the checkout. It will be as necessary for small shopkeepers as for the consumer. I think we will see widespread dual pricing.

The Commission has various programmes and held another communications round table meeting. It is trying to do its best. They will focus on schools, for example. There are a couple of years left in which to do this because it does not have to be done by January next. For many the relevant date is the beginning of 2002.

There is a couple of years to do this. For most people the relevant date is January 2002. There is time to do that. The banks, under the umbrella of the Irish Bankers’ Federation, have a communications programme which will target schools. Everyone will doing their bit but there is no easy answer to the question.

Dr. de Buitléir: Deputy Mitchell and Senator Ryan raised the issue of competitive devaluation. Devaluation is not a free ride. If devaluation were a road to economic success, Britain would be much richer than Germany. It is not a soft option.

The ESRI report still stands. Two areas show the benefits we are already seeing. Irish two year interest rates are two per cent below the British rates. If we were not entering EMU I doubt that would be the case. That we are part of the core group makes us more attractive for foreign investment. Part of the substantial flow of foreign investment is due to our being in the core group.

Deputy Mitchell raised the issue of Italy versus Belgium. Looking at the numbers I think there will be 11 members. Next year the Italian and Belgian debt ratios are line ball although the Belgian ratio is falling faster. It is a political question, although I think Italy will be a member.

Mr. McCartan, MEP, asked about the UK. EMU will make the UK price takers rather than price givers. We are not indifferent to the value of sterling.

Deputy Barrett raised the issue of decimalisation. I was struck by Dr. Garret FitzGerald’s piece in The Irish Times some months ago which finally nailed that one for the myth that it is. It is a hoary old myth which everyone believes but there is not a shred of evidence to support it.

Deputy G. Mitchell: Are you talking about the article?

Dr. de Buitléir: No, I am talking about the myth. I thought the article was good. I have not analysed the debt spread but that is easy to do.

On the question of what sterling value would be if it went in next January, there is not a ghost of a chance of sterling going in then. When it does go in, early in the next century, it will be somewhat lower than it is now. Everyone believes sterling is overvalued. They were seriously burned when they went in at DM3.10 some years ago and the British system does not want to repeat that experience. I do not think the UK will enter EMU until after the next election.

Deputy Ulick Burke was worried about inflation. We are going into a low inflation regime. The idea there will be an explosion in inflation as a result of EMU is not a concern. I stress the degree of competition in Ireland. It is significantly greater in every business than it was before. That is the greatest protection against inflation.

Senator Ryan raised the stability pact. On page 67 of the Institute of European Affairs document there is a timetable for the implementation of sanctions under the excessive deficit procedure.

Senator Ryan: What happens if someone refuses to pay?

Dr. de Buitléir: If they refuse to pay they are breaking the rules of the club. I do not think anyone will ever get to the stage where they will have to pay. The political embarrassment for a government before it reached that situation is so substantial that I cannot see that in the realm of practical politics.

We underestimate the capacity of the ordinary person to understand these issues. Irish people are among the most internationally well travelled in the world. I have never found any of us have any great difficulty in coping with pesetas and lira when we are abroad. The steps which are being taken and the time we have to get the information across mean this is not a significant problem. It requires attention but people are capable of grasping this issue.

Chairman: I thank our contributors for a very enlightened presentation, succinctly given. Also points raised by members were relevant and well articulated. I thank Mr. Stewart, Mr. McArdle and Dr. de Buitléir for being so anxious to assist the Committee and to outline their views to us.

Chairman: The meeting is concluded.

The Joint Committee adjourned at 3.45 p.m.



Dé Céadaoin, 3 Meitheamh, 1998

Wednesday, 3rd June, 1998

The Joint Committee met at 2.00 p.m.


Deputy Seán Barrett,

Senator Don Lydon,

Deputy Ulick Burke,

Senator Maurice Manning,

Deputy Pat Carey,

Senator Brendan Ryan.

Deputy Michael Collins,


Deputy Seán Haughey,


Deputy John McGuinness,


Deputy Jack Wall.


Deputy Gay Mitchell in the Chair.

Senator John Connor also attended.

Presentation on Economic and Monetary Union

Acting Chairman: I welcome Mr. Maurice O’Connell, Governor of the Central Bank of Ireland who will address the Joint Committee on EMU. A copy of his comments have been circulated. We will follow his address with a question and answer session. Mr. O’Connell is accompanied by Mr. John Kelly and you are both welcome. I apologise for the absence of the Chairman who is on committee business.

Mr. O’Connell: Following the decisions at the beginning of May, the way is now clear for the third and final stage of economic and monetary union. The single currency zone will come into being on I January and will extend to 11 countries, embracing the second largest economy in the world and a population close to 300 million people.

For Ireland and all other participating member states, sovereignty on monetary affairs will be pooled. Perhaps the most immediate and visible aspect of this is the establishment earlier this week of the European Central Bank. The first meeting of the governing council is planned for next week. While the new bank is now in existence, it will not become operational until January. For the next seven months the individual member states will retain responsibility for the exchange rate and interest rates. In practice, the decision of 2 May on bilateral central rates means that market rates can be expected to remain very close to the pre-announced levels. These levels have been chosen because they are in line with economic realities and there is no good reason to anticipate any substantial fluctuations.

Irish interest rates, though low by historic standards, are still well above those of the other countries that will participate in EMU. Our one month wholesale rate is 3 percentage points above the deutschmark rate. Irrespective of movements elsewhere, we may expect that our rates will be reduced by the end of the year. The forward interest rates for December have already virtually converged. I cannot give a precise figure not do I wish to put a timepath on the reduction.

There have been some market indications that European rates might rise in the meantime, but there can be no assurance of this. The Central Bank has indicated consistently that, while recognising that wholesale rates must converge, its preference is to delay reductions as long as possible because of the exceptionally buoyant economic conditions.

The European System of Central Banks will consist of the European Central Bank and all the national central banks of the EU member states. The Central Bank of Ireland will be a constituent part of this system. From 1 January there will be a single monetary policy across the euro area. In practice, decisions on monetary policy, including interest rates, will be made by the governing council of the European Central Bank consisting of 17 members. The Governor of the Central Bank of Ireland is, ex officio, a member of this council. Voting on issues of monetary policy will be on a one person - one vote basis. As recognised by the Maastricht Treaty, the priority at all times will be price stability. The bank must conduct a European policy and it cannot attempt to address every regional or local problem.

As regards operational matters, there will be considerable emphasis on decentralisation. While decisions will be made on a centralised basis, the implementation of day-to-day activities will be delegated to the national level. This means in practice that we will continue here to manage reserves; intervene in the markets; provide liquidity for the banking system and to collect statistical material and market intelligence. The one big difference, however, is that, like all other national central banks, we will act on instructions or guidelines from the European Central Bank.

The Maastricht Treaty provides that the different central banks participating in EMU will pool and share their monetary income. Agreement has yet to be finalised on a definition of monetary income for this purpose and on the transitional arrangements that may apply in phasing in this arrangement. Each individual central bank must also contribute to the capital of the European Central Bank. The amounts and the composition have yet to be determined. Our contribution in gold and foreign currencies may be of the order of 400 million to 450 million euros, roughly £300 million to £340 million equivalent. We will of course have a corresponding claim on the ECB.

The perception that there will be a large surplus of free reserves when we join EMU is misleading and I would like to explain the position. At the end of last year the Central Bank had total assets of £6.5 billion. There were corresponding liabilities of £5 billion, relating to currency and deposits, leaving net assets or internal reserves of £1.5 billion. We will continue to need reserves bearing in mind the range of Central Bank responsibilities. All the other central banks are in a similar position and our internal reserves as a proportion of total assets are about average by European standards. It would be inadvisable to make any judgment on the appropriate level until EMU is established and we have experience of the new system.

There are some further points of importance in relation to the European Central Bank which I would like to bring to the attention of the committee. The precise relationship between the bank and the Council of Ministers has yet to be clarified. Ministers will ultimately be responsible for exchange rate policy for the euro. There is also mention of an informal Council of Ministers representative of the countries adopting the euro. The relationship between the bank and the European Parliament is also under discussion. There are provisions in the Maastricht Treaty requiring the bank to submit reports to Parliament and also requiring that the President and other members of the executive board appear before Parliament. Proposals, including the publication of minutes of meetings of the governing council, have been put forward by Parliament and these issues should provide the basis for discussion with the bank in due course. Whatever arrangements may apply, it is essential that the ECB, with the full support of the national central banks, communicates its policies clearly to the markets and the public generally.

From January onwards all Central Bank of Ireland business will be conducted in euro. All accounts held with us, whether by the Government credit institutions or international institutions, will be in euro. The banks generally will make any banking service required available in euro. They will process lodgements and payments in Irish pounds or euro as required. Conversion of incoming and outgoing payments from Irish pounds to euro and vice versa will be free of charge.

From 1 January 1999 the euro must be credible and the markets must be comfortable with the newcomer. Investors must have the confidence to hold assets denominated in euro. This is vital and we should bear in mind that the euro will have no track record. In addition, it must be clearly demonstrated that it is underwritten by a solid and stable economy. This is why there has been so much emphasis on convergence and on the Stability and Growth Pact. From the beginning the euro will become the second most important international currency, behind the US dollar and ahead of the yen. The real issue is the extent to which it can compete with the dollar as a world currency over time.

The dollar is by far the dominant currency. About two thirds of world foreign currency reserves are denominated in dollars, over half of world trade is transacted in dollars and dollar banknotes circulate widely outside the United States. The value of the euro vis-à-vis the dollar should be determined primarily by the monetary policy implemented by the European Central Bank. This relationship will also be influenced by developments in the markets, including the use of the euro as a home for private investment funds and its popularity as a reserve currency. It will also be influenced by whatever policies are pursued by the Federal Reserve Board in Washington. The success of the new currency will also depend crucially on political factors and on sustaining the consensus built up over the years. Confidence in a currency is established with difficulty; it could be destroyed all too easily.

The advent of the euro should speed up the development of a single capital market in Europe that will be liquid and efficient. The focus will no longer be on currency gains but rather on the best returns. We may see large scale shifts in portfolios and in borrowing patterns across Europe. There is no reason to conclude that this should be detrimental to our interests provided we sustain a competitive financial system.

While euro banknotes and coin will not circulated for another three and a half years, the preparations for production and stockpiling are already well under way in the Central Bank. The figures are so large that they are difficult to comprehend. We must provide for our own initial needs 200 million euro notes and 900 million coins. A large proportion of these coins will be of lesser value than our present pennies and two pences. During the period of transition we must also continue to supply Irish notes and coins to meet demand. From January we will provide to the general public an inward exchange service free of charge for banknotes of other member states participating in EMU.

From our perspective it would be preferable if Britain were joining EMU at this time. The relationship with sterling continues to be very important and the security of a fixed rate against sterling would be welcome. Sterling has been particularly strong for some time against the deutschmark. In the past it has been subject to large fluctuations. There is some concern that this might be repeated or that the British authorities might engage in competitive devaluation at some later stage. I would take a more optimistic view. While sterling has been unusually strong, there are indications that it may have peaked. At this point in time some weakening of sterling is beneficial both to the Irish and the British economies. I point to the requirement in the Maastricht Treaty that all member states should treat exchange rate policy as a matter of common interest. This applies as much to Britain as to anybody else. The Bank of England will participate in the General Council of the European System of Central Banks and will be subject to the obligations that this imposes. I also point to the major change in monetary policy arrangements in Britain whereby, in the past year, responsibility for interest rates has been assigned to the Bank of England. The bank is working to an inflation target and this should reduce the likelihood of large scale fluctuations of sterling vis-à-vis the euro. It is disappointing that the dialogue in this country about EMU has focused almost exclusively on sterling to the detriment of so many other considerations.

As we move into EMU, economic conditions here are exceptionally buoyant. The outlook is good and, while the present rate of growth will not be sustained, we have the capacity for the longer term to grow beyond the European average. Success brings its own problems and EMU will impose constraints which will limit our flexibility in future. I have already illustrated this in respect of interest rates. We must be very alert to the possibilities of overheating in the economy. We are joining a union which will impose strong disciplines on us in terms of inflation, budget and fiscal policies and general management of the economy. We must be competitive in a very competitive environment. If we go wrong, there is no bail out mechanism and we bear the consequences ourselves. These are the downsides and we need to be aware of them. There are considerable upsides, not least the completion of the single market and the stability and the opportunities that this should provide. I hope EMU can be combined with a new emphasis on employment in Europe. I have focused on the financial and economic aspects of EMU and the practical arrangements at Central Bank level. I recognise at the same time that EMU goes much further than economics and that it is a huge political and profoundly democratic experience.

Acting Chairman: We shall start by asking questions. If members wish to ask questions, they should indicate so and a list will be made.

Does the Governor think the recent and possible future increases in inflation can be curbed given that the traditional tool of raising interest rates is no longer available and that, as a result of our membership of EMU, interest rates will be set to fall by as much as 2 per cent? How can that problem be dealt with?

Mr. O’Connell: We are entering a new system based on achieving and maintaining low inflation. This in itself will be of benefit to us. Our projection for inflation this year is 2.75 per cent. That could be described as disappointing in that it is at the higher end of the scale rather than the lower. We hope this is a once off rather than a permanent situation. We are moving to a situation where the emphasis will be on price stability as the ultimate objective. We should look forward to that as providing stability and the prospect of low inflation. If we fail in that, we will be in trouble.

Acting Chairman: Given the tight fiscal constraints of the Stability and Growth Pact and the need to curb inflationary pressures in the economy, would the Governor like to see the unexpectedly high Government revenues being earmarked for debt reduction rather than for increased spending or increased tax cuts? Regarding future pay agreements, an argument has been made for an element of productivity and profit and loss sharing to deal with the competitiveness problem. What is the view of the Central Bank of that proposal?

Mr. O’Connell: On budget policy. I refer to the communique issued when the Irish pound was revalued on 14 March. In that, there was a stated requirement relating to budget policy that there be no increase in expenditure, that any increase in taxation would be offset against debt and that the 1999 budget would target low inflation. The Central Bank endorses that and the Minister for Finance has already indicated his agreement with the approach. It provides a good basis for progress in terms of budget and fiscal policy.

On the pay question, the productivity element is part of the agreement so there is no problem with that.

Acting Chairman: For future pay agreements there might be a greater element of profit and loss sharing so that there would be some contribution to competitiveness.

Mr. O’Connell: It depends on how one defines profit sharing. We have been trying to do this for years. We tried to do it in the tax system ten or twelve years ago but we have not had great success to date. There is much talk internationally about developing new approaches to profit sharing. So far I have seen nothing that would solve our fundamental difficulties. On principle, I would be in favour of developing something in that area.

Acting Chairman: Employees might accept pay restraint in return for a share in profits. They would, of course, also share in losses.

Mr. O’Connell: How does one define profit? It is easy to define it in a commercial company but not so easy in most walks of life.

Acting Chairman: The Revenue Commissioners have no difficulty defining it.

Mr. O’Connell: It is made very simple for them. It is a simple tax relief.

Acting Chairman: You may have seen a recent Ernst & Young survey which suggests that up to 40,000 jobs could be at risk if sterling were to fall dramatically. Given that the Institute of International Economics believes that sterling needs to fall by as much as 25 per cent, what steps does the Central Bank believe could be taken to minimise the risk to jobs in exposed sectors such as textiles, furniture and prepared foods. Initiatives such as the Government backed market development fund of 1992-93 will no longer be possible.

Mr. O’Connell: In my opening remarks I said that this may well be overstated. It is based on the assumption that sterling will fall through the floor to approximately £2.20 against the deutschmark. I do not see that happening. The management of monetary policy in Britain has changed. The Bank of England has more powers than it had before and this will be beneficial in terms of achieving a less turbulent sterling than we have been used to. Sterling must also be kept in line with the euro and cannot wander too far from it.

Senator Manning: The Governor, in the course of his comments, said, “if we go wrong there is no bail-out mechanism and we bear the consequences ourselves”. Since most academic economists seem to think we will go wrong - although I agree they do not have a great track record in these matters - could the Governor elaborate on the sort of things that could go wrong and what the consequences would be?

Mr. O’Connell: In the normal course of events I would be very confident that we will do things right because of the disciplines imposed on us and the checks and balances that will be coming on a regular basis and from a variety of sources - Brussels, Frankfurt and so on. There will be no shortage of early warnings for us and for all European countries. It is possible that a Government might ignore early warnings. I do not think that will happen in practice. However, if we choose, at some stage, to ignore an early warning we will get into trouble. In that case we will have to get ourselves out of trouble. There are no funds or any arrangements for assistance in that event. I am not suggesting this would happen.

Senator Manning: It is not easy to explain to people in everyday language what can go wrong and why these disciplines are necessary. I would like you to do that.

Mr. O’Connell: If these disciplines are not in place the currency - the euro - will suffer. If the currency suffers the whole economy of Europe will be in difficulty. That is why so much emphasis is placed on the stability and growth pact as a basic requirement of making the system work efficiently.

Senator Manning: Is it possible for a small country to coast along within the euro currency area?

Mr. O’Connell: It is difficult to define the word “coast”. We are going into the system in a very good economic condition and there is no reason why we should not survive. We do not need to coast. I would say we will prosper rather than coast.

Senator Connor: The Governor made a brief reference to interest rates and said that the preference of the Central Bank is to delay the reduction of interest rates for as long as possible because of our exceptionally buoyant economy. Many people like myself who are borrowers would like to see an early fall in interest rates. Economists tell us that interest rates should have fallen, although the policy of the Central Bank is to retain them at their current level. People will say that high interest rates favour the banks. Does the Governor think that the Central Bank is being a little too cautious in delaying the drop in interest rates?

A couple of years ago the Governor spoke to the Finance and General Affairs Committee of which I was then a Member. He said then that he saw certain problems of capacity within the Irish economy which would give rise to problems such as inflation. He was right so far as house prices are concerned. Could the Governor make a general comment on the current state of the Irish economy and on possible capacity problems which might lead to inflation and slow down our current rate of growth?

Mr. O’Connell: The Committee will appreciate that I try to be very careful in what I say about interest rates. I hope my words earlier were very well chosen and I find it hard to add to them. I have been saying for several months that our preference is to delay reduction of interest rates for as long as possible. I am not sure that I share the view that the banks are profiting from high interest rates. Reading some of today’s papers one would get the impression that banks are uneasy about the situation.

Senator Connor: They would say that, wouldn’t they?

Mr. O’Connell: They would, yes.

Senator Connor: Will the Governor make a general comment on the capacity of the economy?

Mr. O’Connell: The building industry is an obvious one where there are problems of capacity. We saw warning signs recently. There is a shortage of people for jobs in many areas. One might say I was wrong in my predictions two years ago. We are still here and doing very well.

Senator Connor: Much of what the Governor said two years ago, particularly with regard to the building industry, was perfectly right.

Mr. O’Connell: We are still doing very well but the warning signs are stronger than they were then.

Senator Connor: So the warning signs are stronger now than two years ago?

Mr. O’Connell: Two years ago credit was growing at the rate of approximately 12 per cent per annum. Now it is almost double that. Had I been told then that the figure would double and that the economy would still be going well I would have been surprised, to put it mildly. I am not suggesting that we can go on forever.

Senator Connor: Can I take it that the Governor is unhappy with the level of credit at the moment?

Mr. O’Connell: We are. The credit figure is very high and at some point it has to come down.

Senator Connor: Hence the Governor’s liking for high interest rates.

Mr. O’Connell: I will not be drawn on interest rates.

Deputy Haughey: I thank the Governor for his very optimistic comments on EMU although I note his warnings about overheating in the economy. I also welcome his comments on transparency, having regard to the European Central Bank. Most people would welcome what he has to say about the European Central Bank’s relationship with the European Parliament and the Council of Ministers. My question relates to the Governor in his capacity as overall monitor of the banking system. I note that the conversion of incoming and outgoing payments from Irish pounds to the euro and vice versa will be free of charge and that the banks will make any banking service required available in the euro currency.

The public needs to be reassured on this having regard to the recent experiences with NIB. Is Mr. O’Connell assured that the banks will not introduce charges with regard to the conversion? It seems like a lot of work for them and they are not used to providing services free of charge. Are they obliged by law to provide the services free of charge?

There is a general view that the public was ripped off at the time of decimalisation and conversion prices in shops were increased. When the euro is common currency, so to speak, can we be assured the public will not be ripped off when prices are displayed exclusively in euros?

Mr. O’Connell: The banks are not obliged by law to do this free of charge. However, there is a standard of good practice produced by the Commission and banks have assented to it already. I would see that as sufficient.

With regard to pricing, there is a long way to go yet. The issue does not arise until 2002. There were problems at the time of decimalisation. It is hard to make a definitive statement on it at this point. So many resources will be devoted to this matter here and across the EU because a similar problem may face other countries. A lot of attention will be given to this. The changeover group in the Department of Finance will be addressing this. It is early days. However, I take the Deputy’s point that it is necessary to address it.

Deputy Haughey: The public is cynical about this.

Mr. O’Connell: The other side of it is that we will have smaller value coins than at present which may have a downward effect. There will be a bigger range of coins.

Deputy Barrett: One of the most important statements the governor made was with regard to the commitment we have given on no increase in public expenditure. The public may be unaware of the commitments given as a result of entry into the euro. Does the governor agree that there are profound implications for public pay, for example, and the agreements that will have to be reached in the future? I cannot see how we can have a society that will have constraints with regard to the delivery of services competing for demands for increases in public sector pay, if we are to meet certain expenditure targets and, as the governor says, there is no room for manoeuvre.

This will have a profound effect on politics. It will be difficult to explain to people why the economy is booming but that they cannot have a better health service or that limited funding is available for education. Does the governor feel that the bodies involved in agreeing partnership agreements are fully au fait and agree to the commitments that accompany entry into Europe.

Mr. O’Connell: There will be great disciplines. There is another side to it, however. On the budget and debt ratio criteria we have come out well ahead of others. If we have problems, it seems others will have greater problems. We are by no means in a unique or more difficult situation than anyone else. We are going into this in good monetary and budgetary shape. One could argue that we are starting with an advantage. That said, I have no hesitation in saying that there are disciplines in the Treaty and the stability pact - disciplines we and others may not have experienced before now. There are implications for public expenditure in the future which I cannot spell out but it is important that people are aware of them.

Deputy Barrett: Yes. The choices will be restricted.

Mr. O’Connell: Yes.

Deputy Barrett: If one wants higher public sector pay there will be less money available for services or vice versa.

Mr. O’Connell: Yes.

Deputy Barrett: With regard to private pensions difficulties might arise with continuing low interest rates which in turn drive down annuity rates and make it more expensive to purchase pensions to which people are committed. If an employer must pay two thirds of final salary it will cost considerably more. Will that have a profound impact on the state of pension funds?

Mr. O’Connell: I do not think the advent of the euro will affect that. The policy of low interest rates will have an effect and pension funds are already pursuing a variety of investments, seeking new ways of generating higher income. If bond yields are low there will be less going into these funds. That is the logic of it.

Deputy Barrett: It will also cost more to purchase the pension.

Mr. O’Connell: If that is extended over the long term there will be higher premiums.

Deputy Barrett: The advantage of having the governor before the committee is that issues such as this which are of concern to the public get an airing. I am not seeking to put the governor on the spot.

Mr. O’Connell: That is the logic if we are going to have much lower interest rates, although I am not sure we will. In the long term I do not know whether that will be the case. If one examines the behaviour of the deutschmark over the last ten or 20 years interest rates have regularly fluctuated. They are historically low or near that at present. We cannot assume we will have lower interest rates forever.

Deputy Barrett: The European Central Bank will control monetary policy. If we behave ourselves in terms of economic management but another country does not, do we have to suffer because they are not conforming to the rules in the same way?

Mr. O’Connell: Theoretically, yes. In practice I am not sure it will work that way. If a country or countries are stepping out of line there are so many checks and balances to bring them back into line

Deputy Barrett: By penalties?

Mr. O’Connell: It is hard to see it getting to the stage where a penalty would be imposed. There are so many checks along the way and penalties are a last resort. One hopes they will not be a reality. We must not forget that enormous progress has been made in this context. There has been great convergence already. We have come a long way in the last four to five years. Why should we not keep going in that direction?

Deputy U. Burke: Does the governor feel that confidence in the banking institutions has been severely damaged by the malpractices disclosed recently? Is he satisfied with the role of the Central Bank in the matter? Does he feel there is a need for additional powers to monitor the activities of the lending institutions more closely? There is disquiet among the public, the business community in particular, about the recent revelations. Have they had a damaging effect on our EU position?

Mr. O’Connell: There have been allegations of malpractice. These allegations have been investigated and I suggest we wait for the results before we pass a judgment on any institution or group of institutions. Regarding damage and so on, let us have the facts before we pass judgment.

Acting Chairman: We are debating EMU so I do not want this to broaden into a discussion on the banks.

Mr. O’Connell: In terms of damage, any malpractice damages an organisation. Regarding changing the rules, the Minister of Finance has set up a working group to look into this matter and I await their report.

Senator Ryan: It would probably be incorrect to refer to Mr. O’Connell as Governor because as far as the EMU is concerned he is the Central Bank - this is what the Central Bank Act says. As far as I know he is under no obligation to discuss ECB policy with the board of the Central Bank or with anyone else. To whom is Mr. O’Connell accountable?

Mr. O’Connell: The board is now a decision-making board but it will become an advisory board. I see myself as being accountable to the board in the first instance even though it will only have an advisory role. I am also accountable to the Oireachtas.

Senator Ryan: But the Act specifically precludes Mr. O’Connell ANITA

Mr. O’Connell: The Senator is quite right in his interpretation of the Act.

Senator Ryan: It is an awesome position.

Mr. O’Connell: Yes, but under the law I am answerable to the Oireachtas also. I believe I will come before the Oireachtas more frequently than in the past.

Senator Ryan: In terms of the way in which Mr. O’Connell carried out his job in relation to the European system of central banks and what he decides to do in terms of a vote of the 17 member group, he is precluded from discussing this matter in advance in many instances and he may, if he wishes, inform the board afterwards what he thinks. However, he is not under any obligation to discuss the matter. This seems close to looking into one’s heart to find out what is good for Europe.

Mr. O’Connell: The Senator is quite right. The legal position is clear cut - I cannot take instructions from any source. The Governing Council, of which I will be a member, must formulate monetary policy for Europe as a whole, not for any individual region or country and it must have respect to the Treaty. It would be natural for me to look at events from an Irish perspective and convey the Irish viewpoint, but legally I cannot take instructions from any source.

Senator Ryan: Mr. O’Connell’s view of the Irish perspective will be the view of the Governor of the Irish Central Bank which would not necessarily conform to the views of most of the political leadership on some issues. For instance, Mr. O’Connell could have a stronger priority for price stability than many politicians.

Mr. O’Connell: Yes, but it is not as simple as that. The Minister for Finance of the day will be on the Ecotin Council which will have a role also.

Senator Ryan: It will have a role but not a defined authority.

Mr. O’Connell: Not in a day-to-day sense. He will be interested in the orientations of monetary policy, which are the words used in the Act.

Senator Ryan: I am not clear on the definition of price stability which the ECB will operate.

Mr. O’Connell: No, because this is not defined in the Act.

Senator Ryan: I spent a frustrating two hours in the Seanad trying to get the various representatives of the Department of Finance to give me a definition.

Mr. O’Connell: This is because it does not exist. There is a broad understanding that it will be somewhere between zero and 2 per cent.

Senator Ryan: But it will not be defined by any political group.

Mr. O’Connell: Perhaps the European Central Bank will define it in individual situations.

Senator Ryan: I have no problem with an independent Central Bank provided it operates within the guidelines. I was intrigued to hear Mr. O’Connell describe EMU as “a profoundly democratic experience”. It appears to me to be profoundly undemocratic.

Mr. O’Connell: There are a lot of checks and balances. There is the European Parliament and other institutions.

Senator Ryan: What can they do?

Mr. O’Connell: At the end of the day the European Central Bank is independent in terms of implementing exchange rate and monetary policy. In the normal course of events there would be no involvement or interference from any other source. It has a reporting role to the European Parliament and Ecofin and individual members who report to their national parliaments. I would only see ministerial involvement in a crisis situation or in the case of worldwide change in monetary arrangements that would require an international treaty for instance. In the normal course I would not see ministers involved. This is no greater than the independence we have had up to now in relation to the Central Bank and Government.

Senator Ryan: But you are governed by legislation which the Oireachtas could change at any time.

Mr. O’Connell: There is European legislation which presumably the political authorities in Europe can change at any time in the future if they so wish.

Senator Ryan: This is precisely my point that there is no political authority in Europe.

Mr. O’Connell: The Council of Ministers is the ultimate political authority.

Senator Ryan: I will give an example of something that concerns me. When Germany was reunited the Bundesbank was forced to blink. It could not do what it wanted because of political realities. There is no such structure to require the ECB to deal with fundamental changes in reality.

Mr. O’Connell: It would not be as straightforward as that but there is a Council of Ministers who are the ultimate authority. They could come together and initiate the process to change the law.

Senator Ryan: Does Mr. O’Connell believe the banks, the EMU and their extraordinarily altruistic statement that they will not charge us for the changeover to the euro?

Mr. O’Connell: They will do this once. You can change your account at any time after 1 January next but if you continue to change more than once they will charge. I believe this is reasonable.

Senator Ryan: It is, but the banks make approximately £120 million per year from foreign exchange transactions and most of this will be lost to them.

Mr. O’Connell: No, because sterling and the dollar will remain a foreign currency and they account for two-thirds of the banks’ transactions.

Senator Ryan: Will they lose £40 million? Does Mr. O’Connell believe the banks will not find other means of making up for this loss or will they put it down to patriotic duty?

Mr. O’Connell: It is a fact of life that they will lose foreign exchange business.

Senator Ryan: Does Mr. O’Connell not think the banks will slip 1 per cent or 0.5 per cent on to charges here and there in order to recoup their losses?

Mr. O’Connell: The banks operate a standard of good practice and they are bound by this.

Deputy Collins: Mr. O’Connell stated that from our perspective it would be preferable if Great Britain joined the EMU and that sterling is unusually strong. Has Mr. O’Connell discussed with the Governor of the Bank of England why Britain is not joining EMU at this time?

Mr. O’Connell: It is not for him to decide. We have discussed the matter on several occasions.

Deputy Collins: I accept it is not for him to decide. Has this ever been discussed with him or was an opinion sought from him?

Mr. O’Connell: He implements the policy set down by the Government. He has no choice in the matter and it is not his concern. This applies to all of us. Our job is to get ready and not to second guess.

Deputy Collins: Why is it disappointing that dialogue about EMU in Ireland has almost exclusively focused on sterling to the detriment of so many other factors.

Mr. O’Connell: The points raised by Senator Ryan have never been discussed. For the past two or three years all the debate and investigations have been about sterling.

Senator B. Ryan: I have tried to raise these issues for five years.

Mr. O’Connell: There are many other issues, some of which have not yet surfaced, including those raised by Senator Ryan. We have put all our energy into the issue of sterling.

Deputy Collins: Is it because we seem to be tied to sterling?

Mr. O’Connell: It is because it has been so important up to now. It would be an obvious advantage if Britain was joining as one uncertainty would be eliminated. I would not tend to exaggerate the uncertainty as some people have.

Senator Lydon: In his speech Mr. O’Connell said a large proportion of the coins issued will be of lesser value than our penny. He also said in answer to a question that some of the coins will be smaller? Was he referring to their value or their size?

Mr. O’Connell: I was referring to their value. There will be eight coins ranging from one euro cent to two euros. One euro cent will be worth approximately four fifths of a penny. Germany still uses the pfennig which is worth less than a halfpenny. We will get used to smaller value coins.

Senator Lydon: It seems the bank is not accountable to very many people. I realise Mr. O’Connell is one of the good guys, but God help us if we ever get a bad guy.

Senator B. Ryan: I forgot to say that.

Senator Lydon: I firmly believe some banks stole customers’ money, although I do not expect Mr. O’Connell to agree with me in public. I hope these banks will be made pay.

Mr. O’Connell: We should wait to see if the allegations stand up.

Senator Lydon: Thousands will say they stand up, but we will wait for the report.

Acting Chairman: I will be compiling a report for the committee on this issue and wish to ask a few questions. Mr. O’Connell’s statement spoke of his preference to delay reductions in wholesale and interest rates as long as possible due to the exceptionally buoyant economic conditions. What restraint mechanism is available to the bank and over what period of time can it use it in this context?

Mr. O’Connell: In the normal course of events we control wholesale interest rates.

Acting Chairman: For how long will this be possible? Will it be possible to do so until the end of the year?

Mr. O’Connell: Who knows? The markets could jump ahead of us.

Acting Chairman: The statement also raises the voting system in the European system of central banks. Will voting be by qualified majority?

Mr. O’Connell: No, not in monetary matters.

Acting Chairman: So there will have to be unanimity in monetary matters.

Mr. O’Connell: No, there will be one person one vote.

Acting Chairman: How many votes will be necessary to carry a decision? Will it be a simple majority?

Mr. O’Connell: A simple majority.

Acting Chairman: The statement says the precise relationships between the bank and the Council of Ministers have yet to be clarified and that Ministers will ultimately be responsible for exchange rate policy for the euro. Earlier it was stated that the ESCB will be responsible for interest rates in practice. What is the qualification in practice and what exactly is the relationship between the European Central Bank and the Council of Ministers in relation to responsibility for exchange rate policy?

Mr. O’Connell: It is not yet clear, but will probably be similar to the situation pertaining here. The Council of Ministers will be responsible for exchange rate policy, something which is specified in the treaty. The treaty says it will responsible for the general orientations. This means the Council will confine itself to broad directions and will not intervene in the normal course of events in the work of the European Central Bank. I do not think it will be engaged in revaluations or devaluations as the euro will be a world class reserve currency and therefore different from what we have been used to.

Acting Chairman: Are you referring to the value of the currency as against the value of the dollar or yen.

Mr. O’Connell: A value against the dollar will not be pitched. Initial concentration will be on achieving price stability which will determine the relationship with the dollar and other currencies.

Acting Chairman: A devaluation or revaluation at some future date will be a matter for the Council of Ministers rather than the Central Bank.

Mr. O’Connell: Yes, but one cannot see this happening in the case of the euro. I do not think it makes sense to talk about devaluations or revaluations in this context. The dollar is the dominant currency and the euro will be the second largest currency in the world, ahead of the yen.

Acting Chairman: Ultimately the decision will be made by the Council of Ministers.

Mr. O’Connell: The question of an international understanding, as happened in the past, will be a matter for Ministers. However, this will be a rare event. Interest rate policy will remain strictly the prerogative of the bank.

Acting Chairman: Is that both in fact and in law?

Mr. O’Connell: Yes.

Acting Chairman: Regarding EU states remaining outside the euro, what will be the position regarding an ERM II and the requirement of members states to shadow the euro? The Governor mentioned that the Bank of England will participate in the general council of the European system of central banks and will be subject to the obligations this imposes. Does this mean there will be leeway for euro members to impose some restrictions in terms of competitive devaluation on states outside the currency?

Mr. O’Connell: It will not be possible to impose restrictions. Four countries will be outside the currency. It seems in future that two of them will participate in ERM and that Britain will remain outside ERM II.

Acting Chairman: What will be the second state?

Mr. O’Connell: I am not sure about Sweden. Denmark and Greece will probably participate. I said Britain will be subject to disciplines as three are provisions in the treaty, including article 109M which states that the currency of an EU member state is a matter of common interest. Nobody has yet interpreted this provision, but I am sure we would be interested in an interpretation if there was a problem with sterling.

Acting Chairman: Does the Governor agree it is untenable for a member state of the EU to have access to the Single Market and competitive devaluation as an instrument of trade? Is this situation unacceptable?

Mr. O’Connell: Such states are also losing out. There are privileges and advantages as well as disadvantages in the context of EMU. Presumably we are joining EMU for the advantages.

Acting Chairman: I am talking about states which remain outside EMU.

Mr. O’Connell: If they stay outside they will lose the advantages. They will not be involved in decisions about a currency which will have a huge influence in Europe. This is the downside for such states. The Acting Chairman is saying the upside is that they could engage in competitive devaluation. That is the downside for them. You are saying the upside is that they would engage in competitive devaluations, but I rather doubt it.

Acting Chairman: Can I ask you about the asset price issue, especially increases in house prices? Do you think that the Bacon report will have the desired effect? Is the Central Bank concerned that there will be a knock-on effect in the foreseeable future in the private rented accommodation sector? What are the implications of low interest rates in that area?

Mr. O’Connell: The Bacon report is a step in the right direction. How much influence it will have remains to be seen. It certainly addressed the main issues and decisions have been taken on foot of that which we would entirely support. We regard them as moving in the right direction. It is impossible to say what the overall effect will be, quite impossible.

Acting Chairman: Do you think the private rented sector is in for a crisis?

Mr. O’Connell: That is the latest story - that there will be a shortage of rented accommodation. I do not know. We will have to wait and see.

Acting Chairman: Or that it will be available at prices beyond people’s reach?

Mr. O’Connell: The old law of supply and demand will come into effect there as well as everywhere else. We will have to wait and see.

Acting Chairman: You have no forecast?

Mr. O’Connell: We have no forecast at all. In fact, our concern begins and ends with the banks and the lending institutions.

Acting Chairman: Do you think the consequences of losing our capacity to devalue as an instrument are being overstated? If you have to devalue, does it not mean that your economy is, in any event, lacking in long-term competitiveness? Is it an overstated argument?

Mr. O’Connell: Most of the decisions we have taken in the last ten years on the monetary side have been forced on us by outside events. You could say that much of the independence we have had over the last ten years has been quite symbolic. Most of the time, outside influences rather than domestic ones determined the decisions we made in relation to revaluation and devaluation. In that sense you could argue - and people have argued - that we are not losing a huge amount of independence. On the contrary, you could argue that we will now at least have a voice where decisions are made.

Acting Chairman: So we will not have to follow the Bundesbank automatically?

Mr. O’Connell: The Bundesbank will become only one of a number of central banks. You could look at it that way.

Acting Chairman: Have you done any assessment of the preparedness of Irish business for the euro.

Mr. O’Connell: Not business - we begin and end with the banks and the financial institutions. The question of business generally belongs elsewhere.

Acting Chairman: And the banks?

Mr. O’Connell: We are in very close contact with the banks all the time. We are satisfied that they are well prepared.

Deputy Haughey: I want to ask about these automatic cash dispensing machines. Are theyANITA

Mr. O’Connell: That is down the road. They do not have to be ready until 2002.

Deputy Haughey: Yes, but it will be a big operation for them, although it is small in the overall context of what we are discussing.

Mr. O’Connell: It is a huge operation but it is a European operation and the same problem applies in every country. The same coins will have to fit into machines in each of the 11 countries involved.

Deputy Collins: What advice would you give the entrepreneur who is probably in the throes of borrowing money? Would you advise him to accept the fixed rate now or wait for six months?

Mr. O’Connell: My own family are asking me that and I do not give them an answer. I would be destroying my reputation if I did. I would probably give them the wrong advice.

Senator B. Ryan: On the question of devaluation as an instrument of policy in this country, I agree with you - who would dare to disagree with the Governor of the Central Bank - that devaluations are forced on us by external events. However, is that not precisely the problem? If an external event, which bears excessively on us, occurs now we cannot devalue even if it is the obvious thing to do. Economists go on at a great rate about asynchronous shocks, but is that not precisely what we are losing - the capacity to respond to something which is not of our own making?

Mr. O’Connell: Absolutely. We are giving up two instruments: the exchange rate and interest rates. What are getting? Presumably we are getting a good deal in return.

Senator B. Ryan: We will agree to disagree on that.

Mr. O’Connell: We are guaranteed stability in a low inflation environment and that is a lot to be getting on with.

Senator B. Ryan: But we have done very well in terms of stability and a low inflation environment without it. That is a compliment to yourself.

Mr. O’Connell: At times, yes.

Senator B. Ryan: In recent years, we have.

Mr. O’Connell: In recent years, yes.

Senator Connor: What would happen if one major economy within the EU - Italy, for instance, with a sort of historical in-built instability - suddenly got badly out of kilter with the rest of the EU? A small economy behaving badly might not throw things too badly out of kilter, but if a big economy started to behave badly it might. What happens then in the context of full European monetary union? We have no guarantee that it will not happen because, while the Maastricht disciplines are there, they might not always be observed.

Mr. O’Connell: I would not like to pass judgment or to set any other country up as an example, but theoretically any big country could behave badly, as the Senator said, and what would happen? We would be in a state of crisis. Nobody knows. All the rules and regulations are designed to make sure that does not happen.

Senator Connor: So, we live in hope?

Mr. O’Connell: You would never do anything in this life if you did not go ahead with it on the basis that you were going to succeed.

Senator Connor: We are all devil’s advocates here, you know.

Acting Chairman: The question of economies at different stages of the business cycle has been given as a reason why we should not have economic and monetary union at this time. What is your view of that?

Mr. O’Connell: There is never a right time. You could go on and on forever. There will always be some problem. The fact is that a huge amount of convergence has been achieved. This is evident, particularly in the case of inflation. It is quite remarkable what has been achieved in the past few years. However, if you were waiting until everybody was absolutely synchronised, things would never happen.

Acting Chairman: Will there be synchronisation over a period?

Mr. O’Connell: Yes, that would be the general expectation. It should go that way.

Acting Chairman: Italy and Belgium both have very large debt/GNP ratios. Presumably they will be required to decrease towards the 60 per cent rate?

Mr. O’Connell: Yes, they were accepted on that understanding. That was made clear, I think, at the Council meeting.

Acting Chairman: You mentioned earlier that you had done an assessment of the implications for the banking system. Have you done one for the broader IFSC?

Mr. O’Connell: Do you mean in terms of preparation?

Acting Chairman: In terms of how it would affect its success or otherwise.

Mr. O’Connell: I do not think one can say that this will impact on the IFSC in that sense at all. It would be a separate issue.

Acting Chairman: In relation to challenges of price transparency across the European Union, obviously when one was invoicing in Irish pounds. French francs or guilders, the price of a product purchased by a client in Germany from Ireland, Holland or France was not immediately obvious. It will be more obvious now.

Mr. O’Connell: Absolutely, yes.

Acting Chairman: So, this will have implications for business here?

Mr. O’Connell: It will but it will probably be slow in the sense that the actual currency will not arrive for another three and a half years. It will probably become more obvious in business circles in the first instance.

Acting Chairman: That is the point I am making, in terms of business.

Mr. O’Connell: In terms of business it will, yes, because you will probably find a lot of companies doing business in the euro from January 1999 or very soon afterwards. There will be a build up on that very quickly.

Acting Chairman: Even in Britain, British Steel is actually invoicing in euros.

Mr. O’Connell: Yes. They are quoting in euros.

Acting Chairman: So that will bring about greater price transparency?

Mr. O’Connell: Absolutely, yes. You cannot complain about that.

Acting Chairman: No, but people will need to be aware of that.

Mr. O’Connell: Yes.

Deputy Haughey: Everybody says that EMU and the single currency is a political ideal brought about purely by the political will of the member states for greater European integration having regard to World War II and so forth. It makes political sense but do you think EMU on its own would make economic sense, if one did not have the political considerations? Is it purely viable on economic grounds without the political aspect?

Mr. O’Connell: It has to be. It would be crazy to go in if we did not believe that. A huge volume of transaction costs is being eliminated and a world class currency is being established which - hopefully, in time - will compete with the dollar. That has to be beneficial.

Senator B. Ryan: I can appreciate that it would be both a viable and good idea from the point of view of the European single market. Are you quite certain that it is definitely good for a small country on the periphery of Europe with very little influence at the centre?

Mr. O’Connell: I was going to ask if that was a rhetorical question. The Senator is asking if EMU will be good for us. On balance, yes.

Senator B. Ryan: That is a better answer than most Irish politicians will give because, on balance, they are overwhelmingly in favour. You at least accept there is a downside, which is the first timeANITA

Mr. O’Connell: Please do not get me wrong. There are downsides, and matters will have to be handled very carefully, including disciplines. However, in general, it should prove to be good for us.

Senator B. Ryan: However, it is possible that the ECB will have to take decisions in the interest of the EU which could be fundamentally at variance with our interests.

Mr. O’Connell: Any region is vulnerable to that.

Senator B. Ryan: However, it is possible for this region.

Mr. O’Connell: It is theoretically possible, but if, as we expect, the convergence process will continue that issue will begin to diminish.

Acting Chairman: As things stood the Bundesbank could have acted in any event and we would have had to adjust accordingly.

Mr. O’Connell: We were in that situation before.

Senator B. Ryan: That is not true.

Mr. O’Connell: It is true.

Acting Chairman: It is true. If the Bundesbank or the Bank of England took a decisions we would have had to follow. At least in this situation we can make an input to decisions. They will not be taken on a national basis but in consultation with all participating member states. It must be compared with the system it is replacing, when Ireland could not act independently with regard to the value of its currency.

Senator B. Ryan: Managing the economy of a small peripheral country requires as many instruments of policy to be available to a Government as possible because of the vulnerability of a small open economy. I am not trying to get the Governor of the Central Bank to disagree with us joining EMU, but we must recognise the downside. We could be at the receiving end of policy decisions which are of no benefit to us.

Acting Chairman: The ESRI examined this and put the case for and against. On balance it favoured the case for. Policy makers went along with that.

Senator B. Ryan: If one believes that an economic forecaster can forecast five years hence to within an accuracy range of 1.25 per cent when we still do not know last year’s economic growth rate one is believing in fiction.

Acting Chairman: All business and political decisions are based on risk and the best calculation. This is the best calculation possible. Otherwise we sit on our hands, allow others make decisions which our currency must follow without any say.

Senator B. Ryan: We do what the Governor has suggested and hold a proper debate, which we have never had.

Mr. O’Connell: I must disagree with the Senator. He is understating the upside. We have the promise, and every prospect, of a low inflation environment and stability. That is much to be thankful for.

Senator B. Ryan: I appreciate the advantages.

Mr. O’Connell: Managing a small currency in today’s world is not easy.

Senator B. Ryan: You did it very well.

Mr. O’Connell: Thank you.

Acting Chairman: Governor, thank you for your time. You have been very helpful. We have set the date for the next meeting.

The Committee adjourned at 3.15 p.m.



Déardaoin, 25 Meitheamh, 1998

Thursday, 25th June, 1998

The Joint Committee met at 2.10 p.m.


Deputy Matt Brennan*,

Senator Helen Keogh.

Deputy Ulick Burke,

Senator Don Lydon,

Deputy Pat Carey,

Senator Paddy McGowan.

Deputy Michael Collins,


Deputy Seán Haughey,


Deputy Phil Hogan,


Deputy Séamus Kirk,


Deputy John McGuinness,


Deputy Gay Mitchell.


Deputy Bernard J. Durkan in the Chair.

Chairman: Item 4 relates to EMU, and we are glad to have representatives of the Irish Bankers’ Federation: Mr. Jim Bardon, Director General of the Irish Bankers’ Federation, Mr. Pat Ryan, Chairman of the IBF-IMSA EMU Steering Committee group and group treasurer of AIB and Mr. Michael Watson, Vice-Chairman of IBF-IMSA EMU Steering Committee who is head of EMU Planning and Development at Bank of Ireland, Mr. Frank Sexton, Deputy Director General of the IBF and Mr. Felix O’Regan, manager of Irish Banks’ Information Service. At further meetings we expect to have the Director of Consumer Affairs next Wednesday to discuss EMU and currency transition. We want to be satisfied that the consumer is protected and that we do not have a repetition of what happened with decimalisation, when everyone decided to round prices upward instead of downwards, which is how we should operate this time.

I welcome the delegation. The committee is concentrating on EMU, enlargement and related matters and we must produce reports for the Houses of the Oireachtas based on the information gleaned at these meetings. We wish to identify the main areas of contention.

Deputy G. Mitchell: Do we have to declare our overdrafts?

Chairman: Members could declare overdrafts during the meeting. I am sure that would be acceptable.

Mr. Bardon: I thank the committee for this opportunity to clarify any EMU-related issues that may concern it. The Irish Bankers’ Federation is a representative body for Irish banks. We have 50 members, including approximately 20 institutions from the IFSC. We are here to discuss the industry’s preparations for EMU. Preparations are continuing at industry and individual bank levels. Over two years ago the IBF set up an EMU steering group to oversee these preparations.

The Irish Mortgage and Savings Association, the IMSA, which is the representative body for building societies, accepted our invitation to join the steering group. Much of what we have to say here relates to both banks and building societies. However, I stress we represent banks only.

The members of the delegation, in the order in which they will speak, include Frank Sexton, Deputy Director General of the IBF. He has specific responsibility for the EMU project. Michael Watson, Vice-Chairman of the steering group, is head of EMU policy and development within Bank of Ireland. Pat Ryan is the Chairman of the IBF steering group. He is Group Treasurer with AIB. Felix O’Regan is Manager of the Irish Banks Information Service, which is part of the Irish Bankers’ Federation. Each will address a specific aspect of our preparations for EMU.

There are 7 messages we wish to convey today. First, the banking industry took the view that because of the pivotal role we play in the economy it was important we provide leadership in preparing for the introduction of the euro. We have put a banking framework and structures in place that will support the efforts of Irish business to exploit the opportunities the euro will bring from 1 January 1999. As and from that date any banking service required in euro will be available in Ireland.

The industry will fully comply with the European Commission’s Recommendation concerning bank charges for conversion to the euro, including those elements of the standards of good practice and transparency provisions that are not legally required. We are co-operating fully with the authorities at Irish and European level to ensure that the transition and changeover will be as smooth as possible and that the banking industry will play its part in introducing the euro notes and coins and withdrawing Irish pound notes and coins at the end of the transition period.

Banks are making substantial investments in EMU at individual and industry level to ensure that our customers and the public are not only well informed but also well prepared for EMU. Finally, we have instituted research into what measures could be taken to maximise Ireland’s role in the financial services activities under the euro. I will now hand over to Frank Sexton who will talk about the development of an infrastructure for the industry with regard to the euro.

Mr. Sexton: As a starting point it was realised that the changeover to the euro will affect every aspect of banks own business and the services they provide. Many of the changes involved require a long lead time. Also the banks are essential to the changeover process because of their role in the economy and their central function in enabling financial flows between individuals, businesses, the authorities and the financial markets. This fact has been acknowledged by the EU Commission and necessitated an early start to preparations so that our industry would be ready in good time. A commitment to invest in the necessary changes was, therefore, required even before certainty of EMU and Ireland’s membership was established.

In 1996 the banking industry adopted a clear commitment and afforded the highest priority to ensuring that effective and timely preparations were made. A structure to plan for the changeover in which the building societies also agreed to participate was put in place. This structure is headed by a steering committee under which 20 expert groups advise on particular aspects of business. These include financial and capital markets, including the bond, money and equity markets, payments and clearing systems, payment cards, ATM systems, legal issues, taxation, accounting and communications.

The work of the steering committee and the expert groups has been intensive, involving detailed analysis, research and wide consultation within and outside the industry. The objective has been to evaluate the impact of the changeover on the various aspects of banking business and the markets and to agree solutions on an industry basis where this is required to support banking systems and services. Individual banks have their own single currency units, many with full-time dedicated resources.

The preparations for the euro at industry level support and complement these units. The banking industry priorities were to pinpoint those issues with long lead times and those that impact from the beginning on 1 January 1999. These include interbank agreements and standards for payments and clearing systems so that Irish pound and euro transactions can be processed.

Settlement of bond and equity trading in euro through the banking system will also be facilitated from the beginning of January. The Irish Bankers’ Federation has participated fully in the planning work conducted by the EU Commission, the European Monetary Institute and the European Banking Federation, to which we are affiliated. We have examined and made proposals on euro related Commission regulations and on Irish legislation. A detailed study on all legal issues involved was published by the industry at the beginning of 1997.

We were also anxious to ensure that timely and concurrent preparations are undertaken nationally and by other sectors. To that end we proposed a national structure and initiated dialogue with the Department of Finance, the Irish Stock Exchange, the National Treasury Management Agency, IBEC, the insurance industry, retailers and the public utilities. This work is continuing. We are also actively participating in the work of the Euro Changeover Board of Ireland and in the board’s subgroups on information and on preparations for E-day, I January 2002, as well as in the EMU Business Awareness Campaign organised by Forfás.

The internal once-off costs to banks in Ireland of adopting to the euro is estimated at £100 million. In addition, there will be ongoing losses of revenue in areas such as foreign exchange business. The ESRI has estimated these ongoing losses at £75 million per year while the UK is outside the single currency, rising to £143 million per year with the UK in. Banks will not pass on these additional costs. However, they are committed to passing on savings to customers where they arise in specific areas and also to providing euro services at the same price as similar Irish pound services.

As a result of the banks early start they will be ready to operate in the euro environment from 1 January 1999. By announcing their detailed plans at an early stage they have provided leadership and encouragement to others. Furthermore, they are using the expertise gained in their own euro planning and development to help their customers, especially businesses. That concludes my overview of the industry’s structure and planning.

Mr. Bardon: Michael Watson will talk about the impact of the euro on the wholesale and retail markets.

Mr. Watson: Next January the euro will become a real currency available for use in all forms other than notes and coins. For a transition period of three years thereafter, the Irish pound will circulate side by side with it. From 1 January next we expect there will be a growing number of commercial and investment payments, both domestic and cross-Border, denominated in euro.

However, for the man or woman in the street, and to a lesser extent for many of our small domestic businesses the impact of the euro’s arrival will not be significantly felt until January 2002. It is then that euro notes and coins will be introduced, that wages and salaries will be paid in euro and that pricing in the shops will be expressed in the new single currency.

The initial impact of the euro will be felt most strongly in the wholesale financial markets. The Central Bank, in common with the central banks in all other participating countries, will operate entirely in euro from 1 January and as a result, we expect the euro will quickly become the dominant currency in Dublin’s money markets and will be widely used in Dublin’s capital markets.

The pace at which the euro will develop in retail financial markets is, however, much less certain. We know there will be some usage, even if only to fund transactions in the money and capital markets or to receive funds resulting from such transactions. However, in addition to such transactions we know a growing number of businesses perceive advantage in converting some or all of their operations to euro earlier than they have to and to meet this potential demand the banks are preparing to deliver a full range of retail account and retail payment services in euro from next January.

The transition period form 1 January 1999 to 31 December 2001 represents, therefore, a unique challenge, both for the Irish banks individually and for the Irish banking industry, namely to add a euro capability to our domestic and cross border payment services. Up to now, our domestic payment services have been provided in a single currency, the Irish pound, and over the years banks have co-operated in the development and maintenance of the cheque, credit and electronic clearing infrastructures necessary to underpin our national domestic payment systems while competing on the features and terms of the account services offered on an individual customer basis. From next January domestic payments will be effected in euros as well as Irish pounds. The banking industry has already agreed on revised cheque, credit and electronic clearing infrastructures to enable this to happen. As before, the banks will adopt their own distinctive approaches to the provision of euro account services - euro current, deposit and loan accounts - and the associated payment instruments, such as cheque books.

Banks will also facilitate their customers in making and receiving cross border payments in euros from January next. Such transactions can have, of course, counter parties located in countries inside or outside the euro area. The banking systems which support cross border payments have always had the capability to handle multiple currencies and the euro will be an additional one. They may well be increased demand for convergence between currencies participating in EMU. In addition, there will be a number of dedicated new electronic channels through which euro cross border payments can be processed and banks will plug into them to make them available to customers who wish to settle such payments in euros. Our customers will, therefore, be able to effect such payments through speedy and cost effective channels, including the new ones or the slower old fashioned paper based systems, such as cheques. Euro cross border payments which are channelled through these paper based systems will, however, continue to be slower and less cost effective than the electronic alternatives. This is because of the manual nature of the process and the incompatible coding standards between countries and this inefficiency will continue into the euro era.

Preparing for next January has been a major challenge for banks. As soon as this has been completed we will be faced with the even more daunting task of preparing the banking systems and payments services for the final changeover to euro in 2002. At that point, banks must convert to euro, free of charge, all accounts remaining in Irish pounds or other participating currencies; phase out the special industry arrangements which were introduced to handle domestic currencies during the transition period; play their full part in introducing euro notes and coins and withdrawing Irish pound notes and coins and support a national awareness programme to prepare the public for the currency changeover.

We are confident that customers of Irish banks will be offered euro account and payment services from next January which are at least as available, efficient and competitive as those on offer elsewhere in Europe and, equally, we are committed to participating fully in the national co-operative effort which will be needed to plan and manage the 2002 currency changeover as smoothly and efficiently as possible.

Mr. Ryan: First, I will discuss costs and charges relating to the euro. Banks and building societies have already given very explicit commitments in the national changeover plan. They have given a commitment on pricing and in addition to pledging that any banking service required in euro will be available from 1 January 1999 they have given the following key assurances. First, charges for euro transactions and services will be the same as those that apply for Irish pound transactions and services. Second, conversion of accounts from Irish pounds to the euro at the time the individual customer chooses will be free of charge. Third, customers will be able to convert the currency of any participating member state into the currency of any other participating member state, for example, from French francs into lira, at the fixed conversion rate. Commission will, of course, be required in those cases to cover the costs involved in the exchange of the money, for example, the costs of insurance and carrying an inventory. Any such commission is subject to clearance by each institution with the Director of Consumer Affairs, which ensures it maximises the competitive environment. That will still represent a significant saving to customers in comparison to current exchange costs.

I have circulated the recommendations adopted by the European Commission on its approach to charges and transparency. It agreed them last April and they cover many pledges already made by us in the national changeover plan. I have provided a description beside each recommendation about what we are doing. We are meeting all the recommendations and will fully comply with them, not just those that are legally required, but also those recommended as good practice. We must talk to the Director of Consumer Affairs about any charges that will arise. The IBF has talked in principle with him on a proposed framework to ensure fair and transparent pricing in the euro environment. In the near future each institution is expected to talk with the director about their proposals in that regard.

Between 1999 and 2002 we must handle the question of bank notes from other countries and the costs associated with repatriating them. We are doing everything we can to ensure it is done as efficiently as possible, but the costs which people may not realise are involved include staff, carrying a big inventory, security, insurance and transport. Attendant costs are associated, but there will still be a net lower cost. People do not appreciate in many cases the costs involved in that area. We will be the main network for people using those notes and we will try to make it as streamlined as possible.

Mr. Watson referred to cross border payments which will be an area in which people will have difficulty appreciating that paying between here and Germany still takes longer and is more clumsy if one uses a cheque than paying in Ireland because we have a clearing system with its own codes. There are still certain associated costs. Electronic transfers will be more efficient than sending paper just as in the US which has been a single currency area for a long time. Despite that if one writes a cheque in New York to pay in the New York, it will be quick, but if one uses one to pay in California it takes much longer for the money to be cleared. Those hurdles exist in paper based systems. The arrival of the euro is a great opportunity for people to use electronic systems more and speed the process up. Those are inescapable facts involved in money transmission.

Our submission outlines how we will facilitate our customers in terms of exchanging Irish pound notes at the end of the three year period. We will also work with other entities, such as the post office and retailers, to facilitate the transition as much as possible.

The second topic deals with the initiatives we are taking to maximise jobs in the financial services industry in the euro environment. Having done our work to be operationally ready, which is the first job we must do, and being confident that we have got that on track, we have initiated research into what we can do to maximise jobs in the new environment. We have seen initiatives in different countries in Europe to retain a bigger share of different parts of the business that will go in the euro context. We are examining the areas in which we will have a comparative advantage and those where we can create a comparative advantage to maximise jobs in Ireland. We have initiated research in that regard. We hope the committee endorses that approach and we hope to have a report on it in due course.

Mr. Bardon: Mr. O’Regan will speak about the awareness campaigns which the Irish Bankers Federation is undertaking.

Mr. O’Regan: We recognise that we have a major role to play in generating information and awareness about the euro. It is probably the single greatest development that consumers and businesses have had to face since decimalisation.

Commencing in 1997 and running through until 2002, we have developed a campaign which will unfold in various stages. This campaign at an industry level will complement the wide range of initiatives the individual institutions are undertaking vis-à-vis their customer base. The campaign also recognises that the primary responsibility for the provision of information and education rests with the national authorities. Our objectives are to inform about the changeover timetable, to highlight the need to make preparations, which is particularly important for the business sector, and to develop information materials which are generic, user-friendly and consistent across all banks and building societies.

We have developed a priority list for the staff of banks and building societies because we recognise that staff who deal with customers on a regular basis need to be briefed for their own purposes and to enable them to advise and provide information to customers. We are talking about approximately 20,000 people between banks and building societies. We started that process during the autumn of last year with the support of the EU Commission. We also developed a wide range of materials which were sent to the front line staff and we plan to introduce further initiatives aimed at that audience during this year.

The second major audience for us in the banking sector is the retail trade. It is our assessment that if it does not work in the retail trade, the changeover process will be cumbersome for everyone. That is why we are seeking to address basic principles of information which will provide basic data to retailers but will also motivate them to go to their individual financial institutions for additional information if they so require. We also aim to develop those materials in close consultation with the retail representative bodies to ensure they are as focused and targeted as they need to be.

The third area of priority we have identified is the school sector. We have already established major education programmes in the schools and they have been well received. The money go round programme was introduced in primary schools and the paymaster programme in post-primary schools. We believe we can build successfully on these both by extension and by building block on block. In doing so, we hope our initiatives will assist the State in including the education and school systems in the information drive on the euro, as recommended by the Commission as recently as last April. We would like to develop information initiatives in this field not on our own - we will do so if we have to as we have done before - but on a joint basis with the Department of Education and Science, the Department of Finance and the EU Commission. By doing so, the best of our expertise can be brought together for the benefit of an important audience, the school sector. Students will probably be the first fully fledged generation to use the new currency.

Members may wonder why customers and the general public are so far down our list of priorities. Our assessment is that if we undertake intensive information activities in this area vis-à-vis customers and the general public too early, it could pass over people’s heads. If we undertake it too late, it could have little or no benefit. We must strike the right balance. I have already noted some of the views expressed on previous occasions by members of this committee which reflect the confusion and scepticism among the public, particularly when they refer back to the days of transferring to decimalisation. We can get the information fundamentals on the euro and EMU to customers and the wider general public through the customer network. In addition, individual banks and building societies have extensive information campaigns in place. Most of their focus is on the business sector because that is the greater priority.

The feedback in terms of the work we have done vis-à-vis the staff of financial institutions and the 20,000 posters we sent to primary and post-primary schools late last autumn has been positive. Lansdowne Market Research did research to give us guidance on how well we have done, where there is scope for improvement and where we can develop on that basis. The overall impact of EMU related communication by individual institutions and ourselves at industry level is also reflected in research carried out by Price Waterhouse, Forfás and The Chambers of Commerce of Ireland, which shows that banks are the primary source of information, particularly for the business sector. We take considerable heart from that because it shows that what banks individually and at industry level have been doing to date has been effective. We propose to continue and build on that basis.

We have a concerted communication plan in place. We are not naive or simplistic enough to believe that this will be easy or straightforward. However, we are concerned to make our contribution. We want to do so in a co-ordinated way with other institutions so that there is no undue duplication, overlapping or confusion. We are in no doubt that it is in the interests of the financial services sector, our customers and the public that they should have a clear understanding of the changeover process, the new single currency and the implications for them. I assure the committee the banking industry will do all that is necessary to that end.

The pack of information which will be circulated contains some of the sample materials we have already provided, summary points of our presentation and details of each of the papers presented.

Chairman: I compliment the delegation for its interesting presentation. A number of rapporteurs are involved in producing reports, including Deputy Gay Mitchell. He is producing a report on EMU so your intervention is timely.

Deputy G. Mitchell: I welcome the delegation. My questions are in no particular order and they relate to a number of different issues. However, they will assist me in compiling my report.

I note a reference to the conversion without charge of incoming payments. What will happen when there is a euro note and an Irish note? Will there be transaction costs for exchanging those notes? Before and after that occurs will there be any conversion charges for paper or electronic conversions?

Could the delegation give some indication of their customers’ awareness of EMU. The federation’s constituent banks handle 98 per cent of business customers. What is the state of preparedness of the federation’s business clients for EMU? What is the federation’s response to the view that because Ireland is not in sync with the business cycle in Europe we are wrong to enter EMU? Has the federation carried out any studies on this matter?

Does the federation agree with the ESRI’s views on the euro’s effect on the economy? Is the federation more concerned or more optimistic or has the ESRI got it right? The federation has stated that there will be a loss of £100 million in profits in the first year. Presumably that is a gross loss and the net loss after tax will be less. What will be the implications of EMU for employment and competitiveness within the banking system?

Does the effect of the year 2000 on computers have any relevance for EMU? There is a dual complication. What is the federation’s view of asymmetric shocks? With a budget ceiling of 1.27 per cent of GNP in the EU, the Union will not be able to come to Ireland’s assistance in the way that the US Federal Government can assist Texas if there is an oil shock. What is the federation’s views of the size of the EU budget? Is it relevant and is the federation concerned?

Could the delegation comment on the Asian situation and how it might effect EMU? Will the accounts of the banks be in euros, punts or both? What are the federation’s concerns about the opportunities for speculation as we approach 1 January 1999? I did not hear what was said about the IFSC. As we are the only English speaking state in the euro zone, does this auger well for the IFSC? Will ATMs be able to issue euros and punts or will they convert to euros at a particular point? What are the plans?

Deputy Kirk: I thank the delegation for its succinct presentation. Will banks be encouraging current account holders to operate as they are or to move as quickly as possible to euro accounts? What are the transitional arrangements? Will bank statements be in euros or euros and punts? People north of the Border with sterling accounts may wish to have accounts in banks in the South. How will they be treated? I think Mr. Watson indicated that different banks would have an individual approach to EMU. What degree of co-ordination is there between the banks?

Senator Lydon: The delegation stated that it will cost £75 million per annum in ongoing costs if the UK is outside the euro and £143 million if it is inside. I would have thought it would be the other way round. How long will this continue and why is it this way round?

Should the banks have to bear the £100 million internal costs? A political decision was made and should the banks have to bear the costs? Does the federation expect to get some relief?

Senator Keogh: I thank the delegation for its clear exposition of what will happen. I was amazed to hear that the internal costs to banks would not be passed on. I am relieved and perhaps a little sceptical so could I have a little clarification of how the banks are going to look after us on this issue?

How will employment be effected. There is much talk of the electronic systems which will be used. Will this impact on employment in the banks? I was pleased to hear of the awareness programme for schools. Is it intended to continue this programme on an ongoing basis until 2002 or when will it end?

I am interested in the costs to small business. I do not know how the federation may be able to adress this issue but there is concern among small businesses about the cost implications of the euro. Could the federation comment on this matter?

Deputy U. Burke: I was fascinated to hear the delegation say that the financial institutions are doing their own promoting and educating and are leaving it to national authorities to educate the public at large. It is difficult to understand why this should be necessary. A huge educational programme is needed to make the changeover effective.

As the previous speaker said, when Mr. Sexton made his statement initially he said the costs for the internal changeover would be something in the region of £100 million. I do not think many people believe that will not be passed on in some way or another. Is that what it will cost the banking and other financial institutions or is it just the whole changeover? I have had contacts with three international companies in my own constituency who have gone about it themselves because they are progressive marketing companies who rely on their overseas markets. Each of them has appointed an internal person to handle everything related to the changeover. It is inevitable that will involve a huge cost. It would be foolish to put out the idea that the changeover will not cost anything. It will affect customers in particular. As customers of banks, individuals will have to pay for it. It will not do the banking or lending institutions any great credit, particularly in the current climate, to say that there will be no hidden or transparent charges. I do not know, but if it goes as heretofore they will be hidden, although I do not mean that as a snide remark.

It is welcome that the banking institutions are getting into schools, starting at the bottom and working upwards brick by brick. However, there will be a huge inbuilt cost within the education process. The changeover of textbooks will be one more heyday for publishing firms. Until very recently, I was involved in education and we have just come through a process involving curriculum changes. Now that will all be on the scrap heap and we will have to have a completely new set of books, particularly in areas like maths, commerce and business studies. That will transfer itself into the whole education process which is a serious situation because there will be massive costs.

If one is to have a prolonged three-year changeover from 1 January 1999 to 31 December 2002, we will have massive confusion. I am disappointed to hear that the banking institutions will do their promotion at the same time as allowing the national authorities to do theirs. I cannot see why there cannot be co-ordination in an overall plan to make the changeover easier. The business sector has already identified itself as going its way and the banking institutions have told us today that they are looking after business as their priority. God help the ordinary individual who has to deal with it - they will be literally screwed again, unfortunately.

Chairman: The delegation has a fairly wide platform to deal with. I would echo the points made by other speakers. The conversion to the euro will be the biggest single factor affecting the public’s reaction to and perception of Europe since decimalisation. At the time of decimalisation the public became cynical because everything seemed to cost more and every opportunity was used to round everything in a direction which militated against the consumer. The difference now is that consumer protection law is more developed and, generally, the consumer is more aware of his or her rights.

Unlike my colleague, I believe this is a golden opportunity for financial services, the commercial sector and the entire business sector, in so far as consumer relations are concerned, to prove once and for all that we can do something efficiently, cost effectively and well in a way that will benefit the consumer and those providing services at the same time.

Mr. Bardon: I have listed all the questions and I propose to group them. The first point that has been mentioned by everyone arises from the figure of £100 million and the costs involved. The EMU project is a political decision by EU heads of state to create economic and momentary union. Decisions have been taken, including the time frame from 1 January 1999 to 2002 and we are living with the practical implications of that. It will cost us £100 million as an industry to effect the changeover; that includes staff costs, computer changes and education programmes for our own staff. Every other sector has its own costs associated with EMU. We will be carrying ours and they must carry theirs. In that context, we said we would carry our own costs in relation to the euro.

Deputy Mitchell mentioned the year 2000 and it does impact to the extent that both issues come close together. Computer-based systems that have to be adjusted for the euro must also be adjusted for the year 2000. We are looking at the same resources to deal with both of them. They are not, however, directly related, per se. The year 2000 is being treated as a separate project within the banks themselves. We have a separate awareness campaign in relation to the year 2000.

The next issue raised concerned conversion charges. Perhaps some of the bankers could deal with that matter.

Mr. Ryan: I want to deal with the issue of priority in business because that is a misunderstanding of sequence. The ordinary member of the public does not need to be confused by the complexities. They want to know about it in broad terms at this stage, until the notes and coins arrive and they start being paid their wages and salaries in euros in 2002.

Priority is probably the wrong word, but our intention is to help business people who can use euro bank accounts from 1 January 1999. We are deliberately timing the points at which we advise the different groups we need to address. I wanted to clear that up before we get into any details.

As regards charges, once the euro notes become available on 1 January 2002, we will be involved in a massive national effort to withdraw Irish notes and coins. We will not be offering people the choice to take whichever notes they like on a day to day basis. We will take in the Irish notes as quickly as possible so we will not be running in parallel, interchanging in and out. Stores may wish to tender Irish notes to pay for their goods and thus use up their Irish pounds, but they will tend to get euro notes and coins in change. The withdrawal effort will operate very quickly so it will not continue on an ongoing basis.

Deputy G. Mitchell: Will it still be possible for somebody to pay in euros and ask for punts in change, for whatever reason?

Mr. Ryan: If they really needed to, but we will be discouraging it. Quite frankly, it would only add to the complexity of the changeover. We will be trying to take Irish notes and coins out of the system and thus reduce the complexity involved. That may help to clear up some of the confusion about that.

Deputy G. Mitchell: Will there be any charge for that?

Mr. Ryan: There will be no charge for our customers. We have given a commitment that we will exchange a minimum of £500 for each customer. People will make other arrangements with the post office. We will be working with retailers as to how we handle the changeover.

Mr. Watson: The changeover is a huge logistical exercise. It is on a scale which we as bankers, and I am sure the other sectors involved as well, will not have undertaken before.

The planning and management of that exercise will, of necessity, be a major co-operative exercise. Banks will be totally dependent on the Central Bank which will manufacture and supply coins. The retail trade will also play a part in making arrangements with banks to take Irish currency out of circulation at the time of the changeover.

Deputy G. Mitchell: If my bank account is in Irish pounds and I wish to pay a bill in euros, will a charge be levied for that?

Mr. Watson: There will be a charge similar to that currently levied for bill payment services but there will not be any conversion charge during the transition period. After the transition period, we will expect all such instruments to be written in euros rather than in punts. I emphasise that the issue of notes and coins changeover will be a major national exercise. The banks have a major role to play in that and we intend to play it in full. However, a range of other institutions will have to play their part in ensuring the changeover occurs efficiently and smoothly.

Deputy Burke: It was stated earlier that the decision to provide a timescale of three years was a political one. Would the banking institutions have preferred a shorter period?

Mr. Bardon: The banking industry across Europe was in favour of everything changing over on the one date. That could not be done because of a physical problem in producing the notes and coins and putting them into circulation at the time of the changeover.

Mr. Watson: The difficulties related more to coins than notes. A further reason related to the preparations which public administrations would have to put in place.

Mr. Ryan: Quite a few macroeconomic questions were asked. The changeover will inevitably result in a significant redeployment of people within banks. There will not be a net reduction in staff levels at the time of the changeover although that may happen at some future date. The current need for staff will absorb people freed up from the areas referred to.

Mr. Watson: The issue of ATMs was referred to. Deputy Mitchell asked whether these would dispense both euros and punts. It would be our objective, in the interests of all parties involved, to ensure the changeover occurs as quickly and efficiently as possible. For that reason, we aim at achieving a situation where ATMs would dispense euros only at the earliest possible date.

Deputy G. Mitchell: Has any objective date been outlined for that?

Mr. Watson: The objective date is 1 January 2002 although we have not yet clarified whether that would be achievable in regard to all ATMs. It is unlikely that machines would dispense both currencies as that would be very difficult from a technical and software point of view, apart from airport ATMs where such facilities already exist.

In regard to bank statements, each bank will present its statements in its own way. A common feature in all statements will be that the closing balance would be shown in both currencies. On an Irish pound account, a transaction which originates in euro would show the euro originating value as well as the Irish pound debit or credit value of the transaction. The opposite will be the case on a euro account. Where a transaction originates in Irish pounds, the originating value will be shown as well as the euro debit or credit value.

In regard to current accounts and the issue of whether banks would be able to handle euro accounts as well as Irish pound accounts, we would expect the majority of our customers in the personal and small business sector to continue to operate their accounts in Irish pounds until the end of the transition period when they will have to changeover. During that period, we will be in a position to enable customers to make euro payments out of their Irish pound accounts or to make euro lodgements to those accounts. A number of larger businesses in the corporate sector will perceive it to be desirable to change their operations into euro at an early stage in the transition period and we will be able to convert their accounts into euro ones.

Deputy Kirk picked up on a comment I made about each bank adopting its own approach. I was trying to make the point that the operation of a payment mechanism would depend on inter-bank co-operation at the clearing system level. In the past, we have always competed in terms of the way in which that was presented to our individual customer bases and that will continue into the euro era.

Mr. Bardon: Mr. O’Regan will answer questions relating to our information campaigns.

Mr. O’Regan: Deputy Mitchell asked about our views on existing awareness levels.

Deputy G. Mitchell: Among your clients in particular.

Mr. O’Regan: I sit on the Forfás consultative committee as part of the business awareness campaign. Two surveys commissioned by Forfás show there is an increasing awareness of the need for business to get its act together in time for the introduction of the euro currency. Research shows that some parts of the country are responding better than others in that regard.

Timing is very important. Everyone in the business of generating information at either Government or private sector level recognises the mountainous task which lies ahead. It behoves us all to sit back and identify what the best approach and timing would be. I suspect awareness levels among the general public are very low at the moment but the national awareness campaign has only got underway recently. Each household should have received an information leaflet on the matter at this stage and, as the various campaigns kick in, awareness levels will obviously increase.

Senator Keogh spoke about schools education. Our work in this regard began in earnest four or five years ago. While I do not want to indulge in crystal ball gazing, it is our intention at this point in time to continue our work in this area. The Irish Bankers’ Federation recognise the need to provide factual information in an attractive challenging way in classrooms so that pupils can increasingly come to terms with what otherwise could be the complex issues of money, finance, savings and related issues. I hasten to add that all of the materials which the federation provides for schools are generic; they are totally unbranded. In addition, there is no charge on all of the material which is provided to schools. The primary school and post-primary programmes which the federation has provided to date cost in excess of £500,000. The federation is involved there on an ongoing basis.

The euro is one additional dimension to that, albeit probably the single most important added dimension. Euro or no euro, those campaigns would continue. The arrival of the euro simply means that these education campaigns will become more intensive. The federation certainly envisage being involved there for a number of years yet.

As to Deputy Burke’s point about the banks saying one thing and the Government doing another, again I stress that from where the federation stands the priority for public information education rests with the national authorities. I do not think the national authorities have any difficulty with that concept. The Irish Bankers’ Federation is anxious at all times to explore where there is common ground because there is no point in there being unnecessary duplication or overlap. As things stand, the Irish Bankers’ Federation is represented; I sit on the information sub-group of the euro Changeover Board of Ireland so the federation will have an input to the campaign. There is some overall co-ordination and there will continue to be co-ordination but, from the point of view of the federation and its customer base, certain of the messages and information it wants to get across will be necessarily more focused than would be the case in the wider general public area. The Irish Bankers’ Federation is very keen, particularly in the education sector, to explore common ground and interest. It makes economic sense and educative sense in terms of getting the message across effectively.

Deputy Mitchell mentioned the year 2000 and implications for EMU. That, in itself, has given rise to another information campaign which we have launched vis-à-vis the business community. We paid for the transmission of a documentary by RTE in the middle of May. Subsequently, that lead to the production of a video. Elements of that, combined with other information, have gone out into the business community. About 500,000 information brochures, which are intended for the business sector, have been produced. Like the euro, the year 2000 issue has major information communication implications for the banking sector and the Irish Bankers’ Federation is certainly pursuing that as effectively as it can.

Mr. Sexton: The Chairman stated that this is an opportunity for the banking industry to show what can be done and to achieve a smooth and efficient changeover. That is certainly the objective of the federation. I hope the joint committee will agree that the work which has been done and the early announcements which the Irish Bankers’ Federation made demonstrate our ability to do that.

On the questions raised about the ongoing loss of revenue to the banking industry, this arises principally in the loss of foreign exchange business which will arise because of the disappearance of the difference between the Irish pound and other currencies or, indeed, between the participating currencies. The figure of £75 million arises where the UK is not involved in the euro and it increases to £143 million if the UK is involved. That reflects the amount of financial business which flows between the UK and Ireland. If sterling remains an outside currency, the revenue can remain as between the trading in sterling and the Irish pound. Once sterling is involved, that revenue disappears also.

There is no need for scepticism about the figure for once-off costs and whether that can be passed on to customers. There is no question but that it will not be passed on. When we say it here, it can be taken as a commitment to that end. There is also a suggestion that this will be passed on somehow or other, hidden or otherwise, in charges. Again, the assurances which are in the documentation have been reached voluntarily before the European Commission issued its recommendation should be taken as a commitment of the industry. If anything, charges or costs to the users of financial services will be lower. That is due to the commitment that where there are savings they will be passed on but also due to the undoubted increase in competition to the Irish market which will arise from the bigger single currency market. That is undoubted and it presents a huge challenge to the Irish financial sector.

Mr. Bardon: There were a number of other questions. There were some economic questions from Deputy Mitchell, but we did not bring along an economist today. Certainly we accepted the ESRI report when it was published.

Deputy G. Mitchell: Do you agree with the ESRI report?

Mr. Bardon: Yes.

Mr. Ryan: Speculation will only arise if there is a serious doubt about something and there is a chink in the armour of people’s belief in the way the thing is being brought about. The Irish Bankers’ Federation has no reason to believe that such an undermining thing is happening in the markets. The federation has been impressed at the various phases the way the announcement of the convergence was managed, the way surprises have been avoided and the way the mechanism is in place for striking the rates by announcing the bilateral rates between currencies in May. The fact that it will all converge on 1 January 1999 has been a powerful way of smoothing the transition to that rate.

Deputy G. Mitchell: Is there any relationship between the possibility of currency speculation and bond yields in different member states?

Mr. Ryan: No, not at present within the 11 member states which are committed. If there was worry about a country’s credit, it would affect that. However, to answer the Deputy’s question, there is none at this stage.

The Deputy asked a question about the situation in Asia. In a sense, that is still partly unfolding. Its main impact is simply what it will do for world growth and to what degree that might affect the level of demand for exports from Europe. At present, the effects would not appear to carry over into the currency sphere in Europe. I am not making a forecast on the extent of that. It will obviously impact on the level of business but at this stage we do not see it undermining that convergence towards 1 January 1999, the docking of the individual currencies with the euro.

Deputy G. Mitchell: Given the American intervention recently more to support China than Japan, does Mr. Ryan see three currency areas developing with a European currency, the dollar and an Asian currency?

Mr. Ryan: Yes. We see there being three currency blocks.

Deputy Kirk: Will the deputation outline from the banking perspective the benefits to the Irish economy of membership of EMU? Will they comment on the fear that if inflationary trends were to be triggered in the economy, the traditional methods of control will no longer be available?

Mr. Ryan: The Irish Bankers’ Federation see the benefits of EMU as obviously reducing transaction costs in the first instance, that is, there will be less fees to be paid to banks for changing money. That is why, for example, Mr. Sexton’s figures on the impact on the revenue of banks arise. That will reduce costs. The second aspect is the price transparency that will follow from the euro. There will be a momentum to depress prices. In the retail trade here the competitive effect meant that, following the sterling exchange rate appreciation against the punt, it was not possible for people to contemplate the ferocity of price competition. It will be much greater in the euro area, for people generally and for banks.

If Irish business looks to the euro area as its market it will see it as a positive thing. Opportunity will not arise unless people avail of it. The ease with which people will see pricing, etc., and the fact that Irish industry has shown itself to be adaptable to compete in international markets will present opportunities for business.

On the question of inflation, if we get out of line with prices in the new structure the penalty will be that business becomes uncompetitive. This will be more ferocious in terms of the effects of a company’s ability to even remain solvent in the ultimate extreme. There will be no devaluation option to take a soft way out.

The management of people’s psychology, especially through this period where the economy is reasonably buoyant, is very important. People should not talk themselves into pay or price rises that are unsustainable. They do not realise the ferocity of the greater competition. There is always price confusion when there is a new unit of value. However, ferocity of competition will be the best disciplinarian on that.

In its April commentary, the ESRI suggested that because we are small open economy when there is a big jump in spending here in all the tradable areas it immediately goes out in exports rather than driving inflation locally, as would happen in the classical closed economy model. While it drives inflation in the untradable goods, for example, fixed assets, if our spending gets out of line it shows itself in the trade balance, in imports. In view of this, some of the assumptions of the inflation effect will not carry through unless people are silly enough to accept high pay rises and then find they are unable to pass on that cost. We cannot work as a cost plus economy.

While others were debating the options of entering a single currency, we had to work on preparing. We have done the preparatory work and we believe the Irish banking system is ready. We are very pleased with what has been done. It is now about getting everybody else aware of the position.

Mr. Bardon: The published accounts of banks are for the banks themselves to decide. After the 1 January they can report in either euros or punts. We consider there to be definite advantages in being the only English speaking country in the Euro zone. It cannot be quantified, but the matter is being researched. We do not see the fact that the UK is staying out as being a plus for the UK as a financial market.

Deputy G. Mitchell: As a former Minister of State with responsibility for the IFSC could you give a general overview on how it will develop following entry to the single currency?

Mr. Ryan: We are looking not only at the IFSC but financial services generally. The less glamorous wholesale market activities may gravitate in some cases. The most eloquent example was the recent announcement by Credito Italiano. The fact that Ireland will be part of the same currency zone was a decisive factor in its decision to locate at the IFSC. In our dialogue in North America, where banks are competing for the same customers, we get a reaction when we mention the English language factor in the euro area. It is definitely a positive but it is difficult to quantify.

On the question of sterling accounts in Northern Ireland, given the absence of exchange controls in the UK, people are free to open euro bank accounts. We will be delighted to get the business and can provide it on either side of the Border.

Mr. Watson: The conversion to EMU will cost every business. The size of the cost depends on many factors, some of which are specific to the business, including the sector it is in, its size, the nature of the operation it undertakes and a variety of other factors, including the location of its customer investment base and the currencies in which its business is transacted. Ultimately, there is no rule of thumb which can be applied. Figures were bandied about by the Commission at an early stage which referred to the possible cost of £75,000 for what it defined as an SME, which would be much larger than ours. There is a significant cost for every business, but what it is will very much depend on the business itself and the nature of its operation.

Companies in Deputy Burke’s constituency have already appointed an EMU expert to look at all of the aspects of EMU and how it will affect them. It is difficult and dangerous to generalise on this matter. It will be particular to the business itself and its market and competitive circumstances.

Deputy G Mitchell: Outstanding questions include the business cycle in the EU and the asymmetric shock and the 1.27 per cent ceiling.

Mr. Ryan: The degree of flexibility in handling asymmetric shocks is an issue. It is a fact of life and it underlines the need for greater flexibility in the economy. This was a theme at the recent IBEC conference. The need for companies to look at different models with regard to pay structures, etc., will create an upside and a downside. Trade-offs will be necessary. It is emerging that the Irish economy is probably more prepared psychologically for flexibility than some of the other economies joining EMU. However, it is an issue that must be addressed. For example, the taxation system may be able to help people to anticipate and deal with developments.

It is a fact of life that we have less flexibility.

Deputy G Mitchell: What is Mr. Ryan’s view on the 1.27 per cent ceiling in the European budget?

Mr. Ryan: That is a difficult question. Different regions in the United States can get out of line, for example in Texas a number of years ago. The US has more flexibility in moving funds around, although some studies in Europe suggest it is not quite as drastic as it looks on the surface. I do not want to stick my neck out on that figure.

Deputy G. Mitchell: My last question dealt with the business cycle.

Mr. Ryan: That is partly dealt with in last April’s ESRI report. We are out of sync because we are a small open economy and the inflation does not come through. It puts a greater burden on us to ensure that pay rises do not get out of control.

Deputy G. Mitchell: Is there any indication of the synchronisation of economies? Will they always be out of sync? Has any research been done?

Mr. Ryan: I do not have the information to answer that immediately. However, there will always be divergence - as is the case in different parts of the United States which is a single currency area. Companies and businesses find some way to cope with it. We are focused on preparation and we cannot give a full economic commentary.

Chairman: I thank the delegation for attending the committee. The information they gave will be used in the preparation of Deputy Mitchell’s report, which he has almost written in the course of today’s meeting. This issue is economically important and now is the time to deal with it. There is not much sense in dealing with it in 2006 or whatever. I commend the delegation for giving us their opinion.

Mr. Bardon: On behalf of the delegation I thank the Chairman and Members of the committee for giving us the opportunity to answer questions and do some thinking ourselves. If the committee requires information, we will be happy to provide it. As regards the business cycle, we are ahead of the game and are above the European average in the growth rate. It could have been the other way around.

The Joint Committee adjourned at 3.55 p.m.



Dé Céadaoin, 1Iuil, 1998

Wednesday, 1st July, 1998

The Joint Committee met at 2.00 p.m.


Deputy Seán barrett,

Senator Willie Farrell*,

Deputy Ulick Burke,

Senator Helen Keogh,

Deputy Pat Carey,

Senator Brendan Ryan.

Deputy Michael Collins,


Deputy Tony Gregory,


Deputy Seán Haughey,


Deputy Seámus Kirk,


Deputy John McGuinness,


Deputy Gay Mitchell.


Deputy Bernard J. Durkan in the Chair.

Senators John Connor and Rory Kiely also attended.

Chairman: We are delighted to have with us, Mr. William Fagan, Director of Consumer Affairs, and Ms Rady Redmond who is accompanying him. You are both very welcome. The reason for inviting you is because quite an amount of discussion has taken place in relation to what transpired when decimalisation was introduced in the 1970s. Fears have been expressed to the effect that there might be a repetition of that with the changeover to the euro and that the consumer could fall victim to a rounding up of prices. The experience of decimalisation was that there was a great deal more rounding up than down. Consumer protection law has developed considerably in the meantime. The Director of Consumer Affairs has developed his office considerably also and we expect to see a dramatic change in the manner in which consumers are treated in so far as the transition of our own currency to the euro is concerned. We have a particular interest in that area.

The format is that a short presentation is made by your good selves. We will have a short question and answer session and if needs be we will go for a second round of questions and answers.

Mr. Fagan: Thank you, Chairman, for this opportunity. As a selected public official I always feel privileged to appear before elected representatives because what I do is very much connected to the people. It is where public administration meets the people. It is very important, therefore, that you, on behalf of the people who have elected you, should ask the right questions and get the right answers.

First, may I draw your attention to my annual report for 1997, a copy of which was sent to all members of the Committee. In the introduction to that report I did some advance contemplation on some of the issues which are relevant to consumers. I also have with me a longer presentation which I have made to a number of bodies about more esoteric legal issues relating to this matter. I would like to deal with the general issues first. I will try not to be too long because I appreciate that Senators and Deputies have other matters to attend to.

With my statutory independence I will allow myself to admit to being a committed European, for want of a better word, and, therefore, I am very much in favour of further European integration and the introduction of a European currency. I fully appreciate that for many citizens or consumers - the two words are really interchangeable - there will be many concerns and worries because it is a step into the unknown. Yet, when I go to Europe, many people say that we did something similar back in 1971. It is interesting that you referred to this in your opening remarks, Chairman.

Decimalisation, in 1971, came 31 years before the introduction of the euro which will occur in 2002. In those 31 years the country has moved ahead the equivalent of 100 years. Many of the factors which were there in 1971 and many of the concerns you may have stemming from what occurred with the introduction of decimalisation, may not be as applicable in the year 2002 because of certain advances which I want to touch on as I go through my address. Nevertheless, you are right to be concerned.

If something new is occurring, those who represent citizens and consumers should always be vigilant to ensure there is an adequate level of protection for consumers. I have divided my comments deliberately and I will probably leave out a whole lot. If I do so I would ask Senators and Deputies to fire away with questions. It is not because I am not aware of such issues but in my annual report I was concentrating on those areas where I felt that I, as a public official, could make the greatest impact in relation to protecting consumers.

It is also interesting that in April 1998 the European Commission published three recommendations. If Deputies do not have copies I can supply them to the Committee. The three areas which are the subject of Commission recommendations are banking charges for conversion to the euro, the dual display of prices - which is basically to what extent retailers will be asked to display prices both in euros and in national currencies - and, finally, dialogue monitoring and information. By pure coincidence these three recommendations appeared in April, yet I had drafted my annual report last February or March and had subdivided them in exactly the same way as the Commission, although I did not know these three recommendations would appear in April.

In relation to bank charges, the Committee has already had a session with the Irish Bankers’ Federation. Basically, a lot of main stream stuff is being done free of charge, such as the once off conversion of accounts and the conversion of incoming payments. As regards the areas where I will have most impact on this matter, my powers will mainly be seen between the years 1999 and 2002. That is the interim period when we will still have national currencies within Europe, but we will also have the availability of the euro.

I hope I will not become too technical about these points but you should all be aware - probably because of the recent NIB affair - that I have powers under Section 149 of the Consumer Credit Act, 1995, to regulate bank charges.

A bank cannot introduce a new charge or increase an existing one without first notifying me. If I receive such notification, I can either prevent a new or increased charge being imposed or allow it subject to certain conditions or modifications. In other words, I have basic regulatory powers in regard to any new bank charges though not in relation to existing ones.

The first thing which will happen on 1 January 1999 is what is commonly referred to in the trade as “the spread”. When one goes into a bank to change money, one does not receive the official exchange rate on that date. There is a 2.5 per cent spread which works to the advantage of the financial institution and constitutes 83 per cent of its income. In other words, the £1.50 or £2.50 commission one pays only constitutes 17 per cent of income from foreign exchange services which are a major earner for financial institutions. After 1 January, those spreads will effectively be illegal for Euro area currencies as official cross exchange rates will exist between, for example, DMs and Irish pounds. This means 83 per cent of banks’ income will disappear and they will almost certainly apply for an increase in commission rates. Otherwise, they will lose substantial income from foreign exchange activities. Nobody will provide foreign exchange facilities free of charge as such facilities cost money to maintain. I recently had some personal difficulty in securing currency notes in a common European currency. I had expected the revenue banks made from foreign exchange services would allow them to maintain stocks. I expect to receive applications in regard to charge increases before I September as, under the Consumer Credit Act, I have four months to consider these.

A further point of interest in the interim period relates to the use of euro-denominated instruments to send transactions to other European countries. This would principally be of interest to the business, particularly the SME, community. I recently held discussions on this issue with an association representing SMEs and was rather disturbed to find that some of its members were of the view that it would still be more convenient for them to conduct transactions in foreign currencies such as DMs or French francs after 1 January next even though it would be theoretically possible for them to conduct them through euro instruments. One of the reasons behind this relates to the very high cost of sending transactions between different European states. While we have harmonised the currency, we have not harmonised the banking or clearing systems. I am aware that various projects such as the Target one are underway but it appears it would still be very expensive to carry out such transactions. A small Irish business person may receive a cheque book denominated in euro on 1 January and may write a cheque to a French counterpart but, given the number of charges which will be tacked on in order for that instrument to be cleared through the French banking system, the cheque will have to be written for an amount greater than that outlined on the invoice. Otherwise, the French business person will not receive full value for the cheque. I am concerned there would be some incentive for business, particularly small business, to commence transacting in euro as soon as possible, particularly in the interim period between 1999 and 2000 and I will certainly bear that in mind when I receive applications from banks in regard to charges for drafts and so on. As I have not received any applications as yet, I can only offer my opinions on this matter on which I have only exchanged views with the banks so far.

My intention is to ensure that if an Irish consumer wants to get cash to go to any European country from 1 January 1999, it will be cheaper than it is currently and to ensure the same applies if an Irish business wishes to transact business in euro with another European country. I cannot say more on the matter until such time as I receive applications on the matter under the relevant section of the Consumer Credit Act. This is an area which should be of concern to the committee both in regard to consumers and small business.

The issue of dual pricing appears to be one of great concern to the committee. I expressed views in my annual report for which I was accused by The Sunday Times of being naive. Perhaps I am. However, any views I express are sincerely held and based on my own experience. In 2002, commodities previously priced in punts will be priced in euro. The question is how long is dual pricing required prior to and following 1 January 2002. It would be difficult to choose a worse date than 1 January to change a currency. That view is held in Europe and elsewhere and both consumer groups and others have been unanimous in it. In Ireland, the date falls in the middle of the new year sales and immediately after Christmas. Essentially, it falls within a holiday period when banks would normally be closed., However, we must accept it.

In the recommendation on banking charges to which I referred, the European Commission stated no compulsory legislation was required on the matter. Ireland is an interesting case as we already have legislation under the Consumer Credit Act. The Commission has expressed the same view in regard to dual pricing. Last year, it set up a working group, on which Ireland was represented, to consider the matter. The group issued recommendations this year in regard to standards of good practice. The question Members should address is whether one can trust standards or codes of good practice. I will outline my views on the matter for what they are worth.

Thirty one years after 1971, Ireland, as a nation, will have advanced in enormous strides technologically and educationally. There is only one extant study of which I am aware on what happened in Ireland and the UK in regard to how quickly people familiarised themselves with new currency. That study was carried out by the University of Nottingham over a wide range of people and reveals that people adapted to the decimal currency very quickly. Technology is such nowadays that bar coding, shelf edge labelling and so on can be produced quite easily. I spoke to a large Irish retailer last week who is obliged to price goods in sterling and he said it is technologically possible to produce shelf edge labelling in any denomination.

He had a problem with some crowded shelves where there are more products per inch, but that is a technical problem. Therefore, the leading retailers can do this. I admit that the smaller retailers will have a problem, although even in that sector the technology will move forward over the next three to four years in this regard.

There is other technology available. It would be easy to produce a little card which the retailer would hand to everybody entering a supermarket. Alternatively, there is a photograph in one of these European publications of a small single function calculator, which can be operated by anybody who can operate a telephone, which converts sums in either direction, from Irish pounds to euros and vice versa. The question is who will pay for this. I already mentioned bar-coding and other facilities which are available so there are technological advances too.

Competition, a word we hardly knew how to spell back in 1971, is also a factor in this regard - I am still talking about price display; I will talk about price mark-ups in a moment. Competition has greatly sharpened both consumers’ awareness of prices and also the awareness of a retailer or seller in marking-up or indicating the price of a product.

The European Commission has decided there will not be statutory dual pricing at a European level but that it should be done by way of codes of practice. To give the committee some statistics on statutory dual pricing, there are between 35,000 and 40,000 retail establishments in Ireland at present. Some retail establishments, such as that of the retailer to whom I was talking on Monday, would have 15,000 lines in a single store and anything up to 45,000 lines on their price lists. In other words, we are talking about an immense task. If dual pricing was an absolute statutory requirement, only the consumer would bear the cost. It is important to bear that in mind. At the end of the day, these retailers are not philanthropists; they are people who are in business to make money. If we require them to engage in expensive activities, rules and regulations, they will pass on that cost to their customers. The committee can be in no doubt about that. The question is whether we need to require them to do this or whether this is needed to be done, given the other points I made about technology.

The final point about transparency is that I do not know who would enforce the statutory regulations. If members read the foreword of my annual report in particular and looked at all the additional tasks which have been imposed on me over the years in terms of legislation, which is a never ending sausage tube which extends from here to Brussels, members of the committee will be aware of the difficulties in attaining resources to do this for a temporary period of six months. I reckon I have less than 50 staff to cover 3.5 million consumers, 40,000 retailers, 26 counties, etc. I would need a minimum of 200 people for a six month period to do this. Based on my experience to date, my chances of getting that staff are minimal. If the members want to pass legislation, they should do so. I would be willing and enthusiastic to enforce it. However, if they ask me to undertake compulsory examinations of dual pricing displays, they should ensure that I get the resources to do it.

On the issue of price mark-ups, which seems to be of great concern to the committee. I have been sitting in on discussions with a number of retailers through IBEC. There is a draft IBEC code, which again I can provide to the Clerk to the Committee, which is being rolled out from the food sector to other sectors. One of the reasons I sat in on these discussions was so that I could hear what was being said because the first thing which would get my antenna going would be price increases, price fixing or, indeed, any kind of horizontal or vertical arrangements between suppliers and retailers. There is competition law and there is a Competition Authority, and I have various powers, if there was collusive price fixing, under various other pieces of legislation which did not exist in 1971.

There are a number of problem areas, one of which is psychological pricing, to which we have grown accustomed. It is evident in prices such as £1.99, £4.99 and £5.99. Indeed, there were prices such as 19$ 11d and 7$ 6d in 1971. This will obviously cause a problem. There are a few things the committee should note. First, the eurocent is 0.8p. One of the problems in 1971 was that many items cost less than £1 and, therefore, the price had to be converted from shillings into new pence, as they were then known.

One will see - I am only making general predictions because I do not know what retailers intend to do and I do not collude with them - some businesses going off-line during the latter part of 2001 and coming back with psychological euro prices. In other words, they might either reduce or increase their prices in January.

There are strict rounding regulations which are set down by the European Commission to six decimal places which will then be rounded down to two decimal places. One may find that some people may go off-line for a few days and then conveniently introduce a price increase on 1 February 2002, for instance. There is nothing in law to stop that happening.

One of the features of today’s retail sector as compared to that of 1971 is the range of products which are available. The range is mind boggling. I stated earlier that a supermarket may have as many as 15,000 different items or price points in a single supermarket. In terms of price controls, one has a mighty big job. There is no point in passing legislation to state that one cannot increase the price on 1 January for X number of months because the person to carry out the price control inspection function, that is, probably me or my successor, would need to know evidentially the prices of those products in order to enforce such legislation. The task would be enormous. Doing that would involve many difficulties.

There are a number of things which could be done to stop this activity. There is a draft European code which is being agreed between some of the SMEs and some of the consumer organisations in Europe in relation to price display. There is reference in this to what is called observatories. I suppose one could all them “yell and tell” organisations. Perhaps Ireland’s poorly funded Consumers’ Association might be a candidate for this. It might get some money from the Governments to fulfil this role. The basic function of such organisations is to make information available, to yell and tell, because in this era of the mobile consumer, competition and transparency, it is difficult for people who engage in this practice to get away with it, if members feel that may have happened in 1971.

There is provision in the third of the European recommendations, which is the one on dialogue monitoring, which I can supply to the Clerk to the Committee, for these observatories. In other words, there is actually a paid yell and tell organisation. I believe that trying to do this through statute law is heavy handed, expensive, and probably unenforceable at the end of the day. I am arguing against it and I would like to have an office of 200 people, even if only for six months. It would be marvellous to have such an office. However, I am not an empire builder. I believe in providing the consumer, the taxpayer, with the best possible value.

There are options to consider other than legislation to protect the consumer. Education is very important. As soon as possible after 1 January 1999, people should start receiving the equivalent euro value on their wages slips. For most consumers it will only become relevant three years’ hence, but the sooner they obtain a sense of the euro’s value the better. The leaflet produced by the Euro Changeover Board, which is being sent to every household, is absolutely marvellous. They handled the issue of how much it is worth extremely well, because that is the first question consumers always ask me. The way they have handled it is extremely good, by approximating 1.25 euros to the pound. Anyone in the European Commission who has seen it thinks it is extremely good, but much more needs to be done in the area of education and my office will play its role as well.

I thank members of the Committee for listening to me. That is all I wanted to say in my introductory remarks, although I am sure I have not covered half the topics members may wish to ask questions on.

Chairman: I was very interested to note the various areas where pressure could arise and the knock-on effect would obviously not be in the interests of the consumer. In these circumstances, I am worried about the prior psychological conditioning of the consumer. As consumers, we should do some of the conditioning ourselves. For instance, the costs incurred by large institutions in relation to exchange rates will not and should not be nearly as high after the changeover date, although they might be in the initial stages. I have no doubt that Committee members will be anxious to cover such areas.

Senator B. Ryan: I compliment the Director of Consumer Affairs on the general job he does. He has done a great job. As members will know I do not throw out compliments too easily. I genuinely think he has done a very good job within the limited resources he has. He deserves to be complimented.

I wish to tell a story about what happened to me recently. For obvious reasons I do not want to identify the individual concerned because he is somebody I do some business with. He is a successful businessman in the auto trade and is far better at making money than I ever could be. He was convinced that every pound he has would be worth only 70p from next January. That was an education for me about the level of incomprehension that exists. It took me half an hour to reassure him that the £100,000 he has saved would not be reduced to £70,000 after the changeover to the euro. He know that every euro would be worth 70p and was, therefore, convinced that the changeover would be done on the basis of a one-to-one conversion. This is a sophisticated man who knows how to use money and the banking system, but we have a long way to go. I am very concerned about this issue from the point of view of consumers.

Is the Director of Consumer Affairs happy that he has adequate powers under current legislation to look after consumers’ interests as regards the conversion? Is there any area where he needs to have his powers strengthened and where he believes that consumers’ interest would be served by so doing? He placed much emphasis on the role of competition in ensuring that consumers were not ripped off and misused by the conversion. Does he believe that banks compete? In other words, is there real competition between the banks? If not, many of our concerns are based on that fact.

He mentioned the problems banks will have, but he did not mention the enormous benefit to banks of eliminating risk from Jaunaary 1999. Irish banks will be able to do currency conversions for their customers in the absolute certainty that there will not be an exchange rate loss for them vis-à-vis other European currencies. That is a huge benefit for them. In the past they could argue they had to cover for the potential loss in terms of the spread. Let us not be too sympathetic to them when they come looking for price increases because they have eliminated a huge risk. One of the justifications is that the greater the risk the greater the return, and there was a risk in the past.

I would like the Director to elaborate on the attitude he will adopt when the banks come looking for price increases, and on their capacity to cloak increases by other devices. He mentioned that he had powers over the banks’ new charges but not over existing ones. I am concerned that banks might find ways of extending or changing existing charges by eliminating the privileges they currently extend to customers concerning free banking. For instance, they might decide to eliminate some things like free banking they currently make available in order to cover the loss. Has he thought out the capacity of the banks to make up for that? Does the Director think the banks could well afford to carry many of these charges themselves because they are not exactly the least profitable institutions in the State?

I fully accept the complexities of compulsory dual pricing but to a degree the Director answered my question by his wonderful “yell and tell” phrase. If people are required to provide dual pricing surely consumer organisations are the best people to monitor it. Much as I would like to be responsible for expanding the Director’s staff fourfold, it is better if consumer organisations and consumers generally know what they are entitled to.

I am genuinely concerned that people are not as numerate as many of us here think they are. It will be a big task for many people to assimilate the simple fact that the pound will be worth 75 per cent of a euro. Anyone who has travelled abroad will find that dividing by ten - if one is in Denmark, for instance - is enough to confuse some people. Dividing or multiplying by 0.75, as appropriate, will cause considerable difficulties.

I disagree with the Director of Consumer Affairs in that we need to make as many ways available to people as possible for them to learn that in three years time the price of a pint will be a certain value at present prices. It is not that people will be ripped off - and I agree with the Director that there is sufficient competition in most retail areas - but there will be a level of human confusion, particularly for older people. I genuinely feel for people in their 60s and 70s in the year 2002, who will suddenly discover they do not know what their money is worth. They will be blissfully oblivious to what they are paying out until the changeover occurs to them. I remember the confusion among older people in 1971. Some elderly people persisted with pounds, shillings and pence for ten years after decimalisation. The introduction of the euro will represent a much greater change in people’s lives and the Director should be more vigilant in that area. Consumers will not necessarily be ripped off by pricing but by playacting by people who realise they do not know what money they are dealing with.

Chairman: We will take a raft of questions and then the Director can answer them.

Deputy Kirk: I join with you, Chairman, in welcoming Mr. Fagan to the meeting. The opportunity for an exchange of views will clearly be worthwhile as far as the Committee is concerned. There is a perception that the introduction of decimalisation involved a built-in increase in costs at that time, although I have heard a number of economists say that is not true. For somebody who has been at the coalface of the problem, although he came into the job some time after decimalisation, I am sure the Director of Consumer Affairs would have some retrospective knowledge of what was involved. With the introduction of the new euro, the opportunity for psychological pricing will not be what it was when we had pounds, shillings and pence. What sort of developments do you see in that area?

Do you feel your office should have responsibility for dealing with below cost selling or do you see your role as being exclusively to look after the interests on one side of the consumer fence?

As regards credit for low income households, low income households are a fact of life. While we would all like to see an end to this, and a minimum wage will help, we must deal with reality. Some households do not have the money to buy groceries and in the past they would have gone hungry, if it was not for the corner shop.

The use and abuse of suppliers by multiples raises the question of monopolies. Some multiples have a tendency to play the martyr as far as suppliers are concerned and to threaten to source supplies from other jurisdictions. In the short term this may appear to confer some benefits on the consumer, but in the long term there will less competition.

It will take a period of time before shoppers become familiar with dual pricing. The provision of an easy to read information card on dual pricing will help people come to terms with some of the problems involved.

Deputy G. Mitchell: I welcome Mr. Fagan. As regards the rationale for EMU, it has been stated that the transaction costs for business, tourism and commerce in the EU continuing with the existing basket of currencies is about $16 billion per year. The advent of the euro should save this amount per year. How will that saving be passed onto the consumer? Will some items decrease in cost?

Did Mr. Fagan’s office conduct a study on decimalisation? Dr. Garret Fitzgerald has cogently argued that the inflation which was believed to have come about because of decimalisation did not. I do not share his view. I remember as a boy buying an apple for sixpence, which became 6p very quickly. We should learn lessons from decimalisation.

Price transparency will present a challenge across the EU. I note that some major British companies are asking to be invoiced in euros so they will see what they are being charged by their suppliers in Europe. This presents challenges for business. For example, those doing business in Germany invoice in punts, and in conversion, it is not clear whether one pays more in punts than in francs. Now, this will be done in euros so it will be clear whether one is getting a better deal from France or Ireland. There must be temptation among business people to camouflage price transparency by having universally higher prices. Are Mr. Fagan or any of his European colleagues prepared for this possibility. What discussion has there been at EU level with other directors of consumer affairs or similar officers? What involvement does Mr. Fagan’s office have in the publicity campaign. IBEC and Forfás have given the lead in this area.

There is a communicating Europe task force which I chaired as Minister of State with responsibility for European Affairs. This has now been transferred to the Department of Foreign Affairs. In my time it was in the remit of the Department of the Taoiseach, because in my role as Minister of State, it had a co-ordinating role and it was easy to get something done. The task force is no longer chaired by a Minister and I do not think it has met. If it has, it has not done so frequently. There is a need for a communicating euro task force. That task force could do that, if the format was slightly amended. Does the director see merit in this suggestion? Perhaps the clerk will note it and draw it to my attention when I am compiling my report.

Senator Keogh: I welcome Mr. Fagan and thank him for his interesting contribution. I am interested in the concept of communication between consumer affairs officials throughout Europe, particularly as regards the dual pricing policy. This is essential if people are to understand the value of the euro. Mr. Fagan said the consumer will bear the cost of dual pricing. Are the retail sector prepared to invest in this area so people will understand what it is about? I am interested in the SME’s view on using the currency versus the euro? Is this a widespread view in that sector?

Mr. Fagan: I thank Members for their compliments. It is a privilege to appear before the committee. Senator Ryan asked about adequate powers. I am not seeking any powers. We have discussed the idea of a compulsory national code of practice. What will suit the food sector in terms of shelf edge labelling etc. will not suit the package holiday trade who operate on the basis of an annual price in a brochure which is issued in January. In January 2001, this price will be in punts, in the middle of the year it will be in punts and euros and from January 2002 it will in euros.

Perhaps there could be some sort of minimal framework legislation in that regard which would support and give a slight push to the various industries to get this right.

In regard to the banks competing, the Senator will see great evidence of that in the next few weeks. I am obviously not in a position to disclose that because I am bound by confidentiality - although I have always communicated freely about what i am doing. Perhaps the Deputy has some perspicacity in talking about free banking. I would ensure free banking would continue to exist for the kind of beneficiaries with whom we would all have sympathy, in other words, the elderly and students. Other forms of free banking are often not free banking but are just a form of marketing cross subsidy. Perhaps the Deputy will see greater transparency in time. However, I can safely predict, from the work i am doing with the banks at the moment, that not only will there be a great reduction in the number of bank charges in a very short period but there will be methods of charging which will be more transparent for consumers and will greatly encourage competition. It is very hard to have competition when prices are woolly.

It is very difficult to eliminate risk and the possibility that people might cloak matters. This is where transparency comes into play. If additional powers were required they would be in the area of transparency. The real difficulty is a physical one, which is the difficulty of attempting to cover 26 counties. It is easy to enforce legislation in terms of national advertising. The real difficulty occurs when one has to go to every small shop in Ireland and inspect everything on the shelves. Is that a good use of taxpayers’ money?

I do not want 200 staff - I would be quite happy to have half that number if I could do the job with them. As it is, I cannot do the job with the amount of staff I have because people keep asking me to do more work. There is a lengthy appendix at the end of my report listing the 35 extra pieces of legislation I have received in the past three years. I would be delighted to see local groups involved in this work, as either voluntary or paid assistants.

I accept what the Senator said in regard to dual pricing, although he may not agree fully with what I am saying. I am not taking one extreme viewpoint. I am not against dual pricing - in fact, I am totally in favour of it. I would be delighted if I could persuade every retailer in Ireland to dual price everything and to do it without charging their customers for it. I am also not against having statutory dual pricing. I am just pointing out the technical, legislative and resource difficulties in having it.

Deputy Kirk referred to decimalisation and built in costs. That probably did happen at the time - I suppose it would expect too much of human nature for it not to happen. However, it is much less likely to happen on this occasion than on previous ones. Psychological pricing is a problem. The use of price points has become even more embedded over the past 30 years. It is a question of what type of psychological prices will be sought. The general purpose behind the psychological prices is to make a price seem less than it is - £4.99 seems less than £5. There is a possibility, given competition, that we might see some deflation of prices - will a price that works out at 2 euros and 24 cents be adjusted to 2.25 or 2.29 or 2.19? I cannot answer that at this particular point in time.

The law on below cost selling is still in force. As long as the law is there I will carry out my duty in regard to it. As I record in my report, there has been universal adherence to it over the past three years. I got one complaint about cans of beer last week, which we are still investigating, although I cannot see why the store in question would want to sell beer below cost.

Deputy Kirk: How widespread is it?

Mr. Fagan: Below cost selling is almost non existent at the moment. We receive no complaints about it. Any investigations we carried out in the past few years indicate parallel importing, where people think they are buying from the Irish distributor but are buying from a distributor outside the State at a lower price. There was a case last year involving whiskey which people thought they were buying from the usual source.

Deputy Kirk: A particular problem area was the sale of potatoes. I know there are particular difficulties with perishable fruit and vegetables . . . . .

Mr. Fagan: They are not covered.

Deputy Kirk: ANITAfor understandable reasons. Potatoes are a very high cost crop to grow; profit levels can be non existent one year and very good the next year.

Mr. Fagan: An Bord Glas has made representations to the competition review group in relation to that. If they want us to cover vegetables we will do so. There is an equal lobby to have any ban on below cost selling removed on the basis it is covered by the Competition Act, 1991, which bans abuse of a dominant position. The real difficulty in the Irish grocery trade is determining who, if anyone, has a dominant position. The competition law review group is addressing these questions at the moment. The case has been very fully made by An Bord Glas.

The question of low income households is of particular interest to me. Senator Ryan has shown an interest in this matter over the years. I must regulate the activities of moneylenders. The Taoiseach predicted last night that interest rates will come down 2 per cent this year. I do not know whether they will, but they will not come down for the people who are excluded from the normal financial system. A study has been carried out into this by one of the country’s top experts, who reached the conclusion that money lending is a very expensive way of lending money because it involves the expenditure of shoe leather. It is much more expensive than the direct debit system operated by the banks. In many cases it may be less profitable than the banks’ activities.

We will be starting from this year to ask money lenders, some of whom are sole traders, for financial returns and we will try to assess the extent of real over charging. However, that is not the real solution to this problem because, no matter how the charges are regulated, it is still an expensive system.

As I keep pointing out in my report, we do not have a system of social lending in this country. With the greatest of respect to the credit unions, they do not constitute a system of social lending: they constitute a system of ready credit for those who can work within that system. That is not a criticism of credit unions but an indication of the gap which exists.

There are social lending models in other countries, particularly Holland and France. However, that involves an element of cross subsidisation and the question is who is prepared to pay for that.

People who are disadvantaged will not benefit from any fall in interest rates because of the rates charged by moneylenders. As the Deputy said, these are the people who have to worry on Monday about where they will get the money to feed their children for the rest of the week.

Deputy Kirk: The credit advanced by the corner shop is what I had in mind.

Mr. Fagan: That is not covered by the Consumer Credit Act and is not regulated. It is marvellous that we still have this cultural method of dealing with credit, and I suspect Deputy Kirk has the maintenance and future of the corner shop in mind. This matter could also be related to use and abuse of suppliers. There are advantages for certain consumers in the advent of the modern supermarket. The stop and shop approach with the credit card, where one can get one’s petrol, do some banking, eat and have the childen minded is something many middle class consumers desire. The question is how one maintains that while preserving the traditional system for those who cannot use supermarkets because they do not have cars? One does not get credit from a large supermarket.

I note the Minister for the Environment and Local Government’s moves on planning, though those are subject to review. People with ears also use local shops and treble park, so there is an environmental aspect. One cannot drive through certain towns at certain times on Saturday. I feel there are great advantages in diversity, especially when the market serves more than one stratum of society. It is important to maintain that, though I have an open mind as to whether legislation is the best way of doing so.

Deputy Kirk: Are there statistics available on the number of people who buy their weekly groceries from supermarkets as opposed to the corner shop or smaller supermarket?

Mr. Fagan: The numbers using large supermarkets are very high. The loyalty cards are a great source of information and one supermarket said last week it had 380,000 regular shoppers every week. There is a centre for retail studies in UCD, and Dr. Tony Parker is the expert in the field there. I do not have the information to hand, but I am sure he would have it to hand. That supermarket’s competitors would probably have the same numbers, but there is probably some crossover. However, there are probably 1 million people a week shopping in those. I do not know if that means the rest of the population uses the small stores. Dr. Parker is a great source of information in these matters.

I mentioned the possibility of into cards and single function calculators. That is an excellent idea. I was in a supermarket in the United Kingdom where one has a hand held device to read bar codes, and that technology could be widespread by 2000.

Regarding savings, I am always very sceptical when I hear figures such as $16 billion being thrown out because I do not know how those figures are arrived at. I am a confirmed European, but the element of dysfunction within the EU concerns me. We recently received an EU directive on guarantees, but, for example, if a German consumer bought a Honda car in France, where they are cheaper, a German Honda dealer would not service that car. However, there is now an EU Directive on guarantees which is coming five years after the launch of the single market, so there are many dysfunctional aspects to the EU.

I gave a treatise earlier on one of the main difficulties, which relates to euro-denominated instruments. Many SMEs have told me that it would still be as cheap for them, because of the cost of clearance through different banking systems, to use a Deutschmark denominated instrument rather than a euro-denominated instrument. I will take this into account when considering applications under section 149 of the Consumer Credit Act and will try to ensure it is cheaper for an Irish SME to use the euro to send money. However, there is no single European clearing system for banks - we have the Target system, but in reality there are problems. I have received figures from the banks on relative costs, and it is very expensive to obtain instruments from some European countries.

I still believe consumers will save and that all is not lost. The major advantage is the encouragement of competition. A single currency will point up the price differences between States. It will also point up difference in VAT rates, which Ireland should take particular notice of. The European consumer can browse the Internet with his euro-denominated credit card and will quickly see whether Ireland is an expensive place to buy goods and services.

Deputy G. Mitchell: Whether the figure is £16 billion, £20 billion or £10 billion, there will be significant savings. If one went to all the EU states with £100 and changed that into every currency one would be left with approximately £12. There will be substantial cost savings and, if the Taoiseach is right, there will be an interest rate of 2 per cent this year. Given those savings, has Mr. Fagan identified any products that should come down?

Mr. Fagan: Obviously, foreign exchange will come down. Any financial service should come down, but indirectly and not because of the euro. One would probably think twice about taking out a mortgage with a French bank, but in the late 1980s a colleague of mine in Essex took out an ecu-denominated mortgage with a Belgian bank. When sterling went into freefall his mortgage went through the roof, so he backed out quickly. Perhaps he is a bad example because he is in the sterling area, but exchange rate risk is now taken out of borrowing across borders. This will probably start along the Franco-German border corridor, but it will extend here. Foreign financial institutions are very interested in Ireland. This applies not just to financial services but also to insurance. If one gets insured by a Dutch or French insurer, it will be denominated in one’s own currency.

Exchange rate risk has been taken out. The financial institutions have indicated that that risk is only 15 per cent of their costs. The extent to which businesses would be able to lower prices because of the elimination of that risk is difficult to measure.

It seems there may be built in costs based on raw materials, ordering of parts, etc., which may be eliminated. That is not a hugely significant factor because in recent years we have seen a steady relationship between most European currencies and we have seen that effect already.

Mr. G. Mitchell: I do not know whether insurance is a good example. There is still a derogation on the competition from European insurance companies and I do not know whether that has changed. The banking federation appeared before the committee and it mentioned that the annual loss to it would be £100 million per year and banks will not pass this on to the consumer. There will be a benefit of a 2 per cent reduction in interest rates if that comes about. Leaving aside financial services which will be more transparent because of the currency and interest rate situation, has Mr. Fagan sought to identify products which he expects will reduce in cost as a result of these savings to industry and commerce?

Mr. Fagan: Consumers will not see an immediate effect as a result of that. It will be more gradual because business can save on costs and be more competitive, but one will not see bananas, for example, coming down on 1 January 2002. Financial services is an area where savings will be seen for consumers. I am not aware of any studies which list those items. It should be interesting to see the famous “Big Mac” index, which seems to have become the international index for different costs, when the euro is introduced whether there is a convergence. McDonalds regularly publish this index, probably for advertising reasons, but it is a standard product. We are increasingly seeing this. if it is not the Kodak film, the Duracell battery, a bottle of Coke, the same product is seen everywhere one goes in Europe. Perhaps, it is a bad effect of the EU. I love cultural diversity and going to other countries to get other products. However, increasingly one sees the same products. Perhaps with the transparency that will arise from that we will see euro pricing. People who manufacture these products may attempt to achieve a European price. I doubt very much if they will do that and give away money at the same time. It will take time.

I can supply the only study on decimalisation I am aware of to the committee, which is that carried out by Nottingham University in 1971. It shows a remarkable assimilation by consumers in the Nottingham area. I am not aware of a parallel study in Ireland. Perhaps, an economic historian could be assigned over the next two or three years. I am not sure what benefit it would have. I will ensure the committee is supplied with the study.

Mr. G. Mitchell: If the consumer was ripped off during decimalisation, can Mr. Fagan, as Director of Consumer Affairs draw any lessons from that which will prevent a similar occurrence where people will take advantage of the change to a new currency and follow the same practice? Dr. Garret Fitzgerald argues we were not ripped off but I always believed that we were.

Mr. Fagan: We are aware of the type of practices because obviously rounding is one area where the this occurred. It would show one how it might be done. We have cogitated about how it might be stopped from happening and it is difficult to address. We must also bear in mind that the world has changed so much. I will pass on the study to the committee and if it is felt that one should be carried out, I am willing to listen to the views of the committee on that.

A question was asked about co-operation with our opposite numbers. There is a meeting under our chairmanship in Dublin next Monday. I am president of the world-wide network of consumer affairs’ officials and my presidency expires in September when the Belgians take over. We meet again in Brussels in September. We are meeting the European Commission in Dublin on Monday where we will attempt to strengthen co-operation between us. An issue, which the French in particular want to talk about, is the euro and how we will exchange information on dealing with it in different European countries. Our belief is that most people will follow the lead set by the European Commission in the three recommendations to which I referred earlier which basically look for a largely voluntary approach. I met an individual last Friday evening who had been involved in the decimal currency board and he said the big mistake made in 1971 was that business was not brought on board. Business is now on board.

The Deputy asked how we are involved in this exercise. An ex-European Commission officials works for me and he is member of the euro changeover board. The consumers association and IBEC are also on the board. Business and consumers are meeting through the board. The question arises as to whether this is sufficient. Senator Keogh also touched on this point. We already met IBEC and assisted it with its code of practice for the food trade. I attended various functions in Europe. For example, I chaired a session of the European consumer forum in Luxembourg last December on this. I like the Deputy’s suggestion of communicating Europe. We could call this communicating the euro. We constantly receive various publications such as Info Euro from the EU. I often wonder about them and recall Senator Ryan’s client who was worried about the punt being only worth 70 pence. How is this to be done in a form that is simple and recognisable but is sufficiently diverse? There is a great deal of television advertising in Europe. Businesses could contribute and assist by putting their hands in their pockets, but many of them could then say they never asked for the euro and it is a manifestation of the combined Governments of Europe. In 1971 business was allowed to do its own thing. That cannot and will not happen on this occasion.

Senator Keogh referred to SMEs. Cost is a difficulty for them. Large multiples already have computer systems and bar coding. The availability of systems is starting to spread into SMEs. I regularly give talks to groups of SMEs and the first question. I ask is how many of them use computers in their businesses. Over the years the number has increased. SMEs have a case in terms of the point I made earlier that they never asked for it and the cost of bearing it. It is a question of who supports them.

One worry I have about SMEs is that if they do not receive support generally, suppliers will offer to convert their prices and this could lead to price fixing and anti-consumer behaviour. SMEs need to be able to handle this situation and provide information to their customers as independently as possible. I do not know from where they will get this support.

There is a lot being done in terms of training. Forfás is providing information to businesses. Supporting SMEs also assists consumers because if the small business person can provide the type of information needed to their customers, it is also to their benefit.

Chairman: I am sure Mr. Fagan agrees that the concerns expressed here are not unusual as they have also been expressed elsewhere. We must be careful not to create in the minds of those who provide services, whether financial or commercial, an excuse for rounding up prices. It was suggested in 1971 that prices had to increase because of decimalisation. There was no reason to do so, but it was a convenient excuse to use afterwards. I remember the debate which took place at that time. Prices were increased but not as a result of decimalisation; that was the excuse used afterwards. We must be careful not to allow that to happen again.

There is no doubt the introduction of the euro will ensure considerable savings for those providing financial and commercial services. We are living in a world-wide market where we import and export goods using various currencies. There will be huge savings within Europe. I would not like to give a hostage to those providing services by stating that we understand the difficulties and the fact there will be extra costs involved. I am concerned about this in relation to the banks and various other institutions. I am not sure if it will cost millions of pounds because there will also be savings. We must bear that point in mind because we do not want a repetition of the excuses used in the 1970s.

Senator Ryan: What will the cost of changing software and hardware be to the European economy? I know it is a once-off figure.

I am wary about dividing 16 billion ECU among 350 million people, which gives £35 per head.

Deputy G. Mitchell: What type of economics did the Senator study?

Senator Ryan: None at all, which is to my great misfortune.

Deputy G. Mitchell: I am not talking about a saving to every citizen but to business and people who carry out transactions. Every citizen in the Union does not carry out transactions every day. The Senator should not make such comparisons.

Senator Ryan: It is a peculiar argument to make in the presence of the Director of Consumer Affairs.

Deputy G. Mitchell: It is not a peculiar argument. It is a question being asked because that is the figure being used. It is nonsense to divide it by every man, woman and child, some of whom do not travel or have transaction costs.

Senator Ryan: As regards loyalty cards, I ask the Director of Consumer Affairs to stop supermarkets from acquiring large amounts of personal information from people and telling them to tick a box at the bottom of a form if they do not want the information used in marketing tactics. People should have to give positive assent to personal information being used by large supermarkets. It should not be a question of ticking a box if they do not want it used but of stating in writing that it can be used.

Deputy U. Burke: I welcome Mr. Fagan to the committee and thank him for his contribution. When decimalisation occurred, businesses found ways of increasing prices and shoring up their profits. This changeover will be costly for businesses and I am confident they will find a way through the weights and volume pricing per unit, if not through the dual price mechanism, to increase their prices. Is there a danger that goods and services outside the euro - for example, those transacted in sterling - will increase, despite competition to reduce them or keep them at a low level?

Mr. Fagan: I could give Senator Ryan the address of an excellent website on the total cost of transactions. We know some people have attempted to calculate this cost. No changeover occurs without a cost. Either the German or the Irish taxpayers will pay for this. There is also the cost of changing systems. There will also be savings for some people. Banks with large foreign exchange departments which deal with all European currencies will now have only one currency to deal with so there will be savings. We will take all those points into account when we look at bank charge applications under the Consumer Credit Act.

The retention of information on loyalty cards is a matter for the Data Protection Commissioner. I am concerned about the use of such data for marketing purposes. I do not like forms where boxes must be ticked. The phrase used to describe that is “inertia selling”. As regards credit, we are the first country in Europe to ban inertia selling under the Consumer Credit Act. That was introduced at my instigation. It was principally used on forms for credit insurance. If a person did not want credit insurance, they had to tick a box. Now, however, they must make a positive choice. I would like to see a general ban on any type of inertia selling. People should not get anything unless they positively ask for it.

I agree with Deputy Ulick Burke about weights and volumes, about which I am totally frustrated. One can still go into a butcher in Dublin and order a pound of sausages. The reason is that silly people in Brussels insisted that we switch immediately to kilos. One kilo is 2.2 pounds and a half kilo is 1.1 pounds. I tried some years ago to introduce a code to allow half kilo price indications and the butchers and everyone else were willing to participate. However, the combined might of the Attorney General, the Department of Enterprise, Trade and Employment and the European Commission said it was not provided for in the European directive. We hope a new unit pricing directive, which has yet to be finalised, will give us more flexibility. We still talk about miles per gallon when petrol is sold in litres. However, that is more to do with motoring journalists and magazines. When will we start talking about kilometres per litre, given that we have already converted road signs to kilometres?

Mistakes have been made in the past. Legislation was drawn up without taking account of consumer behaviour.

This was where mistakes were made. There is no change in volumes and sizes. However, there is a general move away from standard sizes. The committee might remember E6 packets and so on. We have the lunacy that it is legal to sell a 440 millilitre can of beer in Newry but not in Dundalk. Britain and Ireland are both in the EU and yet there are different arrangements concerning cakes, bread and other products. There appears to be a move away from standard sizes to unit pricing on the shelf which is the price per 100 grams. This would require a lot of consumer psychology and education. In other words, to teach them that the small figure will indicate which product contains the best value tomato sauce.

I was surprised it took so long for someone to raise the old issue of sterling. I do not know what is going to happen. A journalist telephoned me this morning about people selling houses in Belfast as a good investment because sterling was likely to be strong in comparison with the euro. I said that if anyone had sufficient money and little enough common sense to do that I would not be concerned about them but no one should do so. I do not know what will happen with interest rates or currencies. I do not know what will happen with sterling. It will hit some products worse than others. However, if we are genuinely in an internal market, in theory we should be able to source elsewhere. Irish business has been addressing this matter.

We do not know whether sterling will go in the opposite direction and consumers might benefit. Over the years I have been asked by Governments to ensure that the benefits of the fall in sterling are passed on to consumers and at the same time to watch in the other direction. I have been up and down that political road. At the end of the day this is what EMU is about. It is a bigger change than simply changing the coins and notes.

Chairman: Notwithstanding what excuses or reasons might be stated by the commercial sector, we expect the transition to be positive for consumers. I have no doubt that that will be possible. With Mr. Fagan’s supervision and investigative capacity I have no doubt that it will be not only possible but a reality. I thank you for your presentation. It was important for the committee that we have this discussion and I hope it will be of some benefit to you.

Mr. Fagan: Thank you, Chairman, for this opportunity. I have noted everything said by the committee, including its concerns, and they will be taken into account.

The Joint Committee adjourned at 3.45 p.m.



Dé Céadaoin, 25 Samhain, 1998

Wednesday, 25th November, 1998

The Joint Committee met at 2.05 p.m.


Deputy Seán Barrett,

Senator Willie Farrell*,

Deputy Pat Carey,

Senator Helen Keogh,

Deputy Michael Collins,

Senator Don Lydon,

Deputy Tony Gregory,

Senator Brendan Ryan.

Deputy Séamus Kirk,


Deputy John McGuinness,


Deputy Gay Mitchell,


Deputy Jack Wall.


Deputy Bernard J. Durkan in the Chair.

Ms. Bernie Malone, MEP also attended.

Chairman: We will now deal with item 3 - a presentation by Mr. Hervé Carré on economic and monetary union. I welcome Mr. Carré, Director for Economic and Monetary Affairs of the European Commission. He has agreed to speak to the committee on general monetary affairs, particularly with reference to the forthcoming report of which Deputy Mitchell is rapporteur. The usual format is that a presentation lasts for about 20 minutes, followed by a question and answer session.

Mr. Carré: Thank you, Chairman. It is an honour to appear before the Joint Committee. In less than one month, 11 countries, including Ireland, will adopt the single currency - the euro. Europe is on the threshold of a new era. The new euro area will have a population of 290 million people. It will represent almost 20 per cent of world GDP and a similar proportion of world trade. Therefore, EMU is an immensely significant event, not only for Europe, but for the wider international system.

Today I will focus on two main areas. First, the economic, legal and technical foundations which have been laid for a sound and smooth functioning EMU.

Second, the opportunities and challenges which lie ahead as we seek to build upon these foundations. With regard to the foundations and a sound economic basis, the basic objective of EMU is to foster a more prosperous and dynamic European economy based on the highest standards of stability. We have all learned the lessons from the past - and Ireland’s experience also bears testimony to this - when “stagflation” exacted a heavy toll of low economic growth, soaring prices and heavy job losses. Now, we know that stability is a prerequisite for sustainable economic growth and employment creation.

The basis upon which EMU will be built guarantees the highest standards of macroeconomic stability and market competition: the new European Central Bank will be the most independent in the world and will have price stability as its priority objective; the stability and growth pact will ensure that member states observe fiscal discipline and so support the price-stability objective of the ECB; and with economic stability assured, the single currency will intensify market competition and so help to ensure a more efficient resource allocation within the EU economy.

The “stability culture” underlying EMU is reflected in the economic performance of the 11 member states that will adopt the euro on 1 January 1999. In this context, there is no doubt that this “stability culture” has played a major role in Ireland’s spectacular economic performance in recent years, yielding an average growth for real GNP of 6.6 per cent since 1990. As I am sure you are all aware, this rapid acceleration in growth has transformed Irish society. The most welcome aspect of the recent success has been the great strides made in reducing unemployment in Ireland. Earlier in this decade, unemployment was heading towards 16 per cent. Now, a rate of 8 per cent is clearly in sight.

In 1993, the 11 member states had an average inflation rate of 4 per cent. Today, their inflation rates have converged to an average of about 1 per cent. This convergence to historically low levels of inflation cannot be explained by cyclical factors alone. It is mainly the result of important structural changes in the member states. These structural changes include the creation of the internal market, the independence of their central banks, budgetary discipline and wage restraint. Although Ireland’s inflation rate has recently been at the higher end of the range in Euro-11 countries, Ireland’s inflation performance is fairly robust in the light of the buoyant growth rates of the past few years.

In 1993, the 11 member states had an average budget deficit of 5.5 per cent in terms of GDP. By 1997, this had been reduced to about 2.5 per cent. This record of budgetary consolidation is particularly impressive since it was achieved in conditions of relatively weak economic growth in many member states. Ireland’s recent growth performance has facilitated compliance with the fiscal deficit criterion. However, this should not detract from the fact that Ireland’s performance is by and large the result of budgetary consolidation that was undertaken in the past decade when economic conditions were much less favourable.

Much progress - albeit less impressive - has been made in reducing the ratio of public debt to GDP in the 11 member states. The average debt ratio of the 11 member states is currently about 75 per cent. Moreover, debt ratios are declining steadily in those member states with the highest levels of debt. In this context, the path followed by Ireland has proved to be an exemplary one. The debt to GDP ratio has fallen steadily from close to 100 per cent in 1990 and is expected to fall below 60 per cent this year. The elimination of borrowing means that Ireland is well placed to fulfill the conditions of the Stability and Growth Pact and prosper under EMU.

In contrast to the turbulence of the early 1990s, the 11 member states have enjoyed a high degree of exchange rate stability in recent years. This stability has been reflected in convergent short-term interest rates and demonstrates that current exchange rates are sustainable. The exchange rate of the Irish pound against the other ten currencies of the euro area has been quite stable for some time. Recent reductions in Irish official interest rates have brought Irish interest rates close to those prevailing in the core countries of the European Union.

All of these achievements have earned credibility for EMU in the financial markets. This credibility has been reflected in the convergence of long-term interest rates to very low levels in the 11 member states. This favourable trend in long-term interest rates is of particular significance. It demonstrates that convergence in inflation and budgetary variables has been achieved on a lasting basis.

As well as a sound economic basis, EMU will also benefit from a robust legal framework. A strong legal structure is essential to provide legal certainty and full security to users of the euro. The legal framework was put in place by the Amsterdam European Council of June 1997 and can be described in two parts. The first regulation, which was adopted in June 1997, covers the replacement of references to the ECU by the euro at a rate of one to one at the start of the third stage. This applies in the first place to the ECU as referred to in the Treaty. Moreover, a presumption is established that all references to the ECU in private law are to be read as references to the ECU as defined in EU law.

It also covers the continuity of contracts which means that the introduction of the euro does not constitute an event that might call the continuity of contracts into question. Furthermore, it shall not have the effect of altering any term of a legal instrument nor give a party the right unilaterally to alter or terminate a legal instrument. Similar legislation has been adopted in third country jurisdictions such as New York, Illinois, California and Hong Kong.

The second regulation which was adopted in May 1998 includes all other provisions of the monetary law of the single currency. It covers the definition of the legal status of the euro and, during the transitional period, the status of national currency units. From 1 January 1999 the euro will be the currency of the participating member states, while the national currency units become mere subdivisions of the euro. It also covers the use of the euro in private and public law - the regulation gives content to the principle of “no compulsion, no prohibition” while ensuring a legally enforceable equivalence between the euro and the national currency units. Important exceptions to the “no obligation” principle are re-denomination of outstanding debt, and the change of the unit of account of organised markets.

Robust technical preparations have been made that will ensure the smooth transition to the euro and the long-term stability of the euro area. The European Central Bank has set out a framework for the conduct of the single monetary policy in stage three. The infrastructure necessary for the conduct of policy is now being put in place, that is the payments settlement system TARGET. The governments of the 11 member states have already announced how they plan to re-denominate their outstanding public debts into euro. National administrations have adopted changeover plans and they have been made public.

Market participants are generally responsible for market preparations and have been able to reach agreement on harmonised basic standards for future euro-denominated markets, in terms of conventions, rules and practices to apply in securities markets, money markets and foreign exchange markets. These new conventions were set out in a joint statement issued on 16 July 1998 by the leading international financial market associations.

Financial institutions are preparing their systems for trading and accounting. They are also preparing their staff to operate in the euro from 1 January 1999. Wholesale markets are preparing to switch to the use of the euro over the long weekend from 1 to 4 January 1999 so that from the start of business on 4 January 1999 all operations will be in euro.

The Commission issued communications in 1997 on the impact of the introduction of the euro on capital markets and on the practical aspects of the introduction of the euro. The first aim was to identify how certain issues would need to be addressed to ensure euro-denominated markets were as efficient, deep and liquid as possible. Other aims were to provide information on the ongoing practical preparations at national and European levels and to bring to the attention of national Governments those issues that still require decisions to be taken.

The careful preparations of the past years have ensured that EMU will be launched on a solid foundation in economic, legal and technical terms. As we build upon these foundations, EMU is certain to bring major opportunities for Europe. As ever, these opportunities will be accompanied by challenges. If EMU is to be a long-term success, it is vital that we are ready to grasp the opportunities and overcome the challenges as they arise. In my remaining remarks, I would like to focus on some of these opportunities and challenges which will confront the policy-makers of EMU.

First we must safeguard macro-economic stability. It is clear that the desire for economic stability is a main driving force behind EMU. The institutional framework of EMU has been tailored to this end. However, the opportunities of a stable economic environment, in terms of sustainable output growth and employment creation present a challenge. That challenge is the need for constant vigilance against inflation in the conduct of monetary and fiscal policies.

The European Central Bank will inherit much credibility from the national central banks of member states. It can be relied upon to pursue its price stability objective with single-mindedness. However, the ECB will be a new institution and it will need to find its way in a new institutional and economic environment.

We can expect the conduct of an anti-inflationary monetary policy - always fraught with uncertainties - to be even more uncertain in the early years of EMU. Thus, there will be a particular onus on member states to support monetary policy by adhering to strict budgetary discipline.

This is not the only argument in support of budgetary discipline. In EMU, there will be no system of federal budget transfers. Member states will retain full responsibility for fiscal stabilisation in their own economies. It is imperative, therefore, that they create a capacity for a budgetary response to downturns in the economic cycle. To this end, it has already been agreed in the Stability and Growth Pact that euro-area member states should target a budget close to balance or in surplus over the medium term.

Substantial progress has been made in preparing for EMU, but more needs to be done. Of the eleven member states recommended to adopt the euro next year, few have achieved budget balance. Many of them have burdensome levels of public debt. If EMU is to function smoothly, budgetary consolidation in these member states must continue, and in some cases must intensify.

The second challenge is the need to strengthen economic policy co-ordination. Member states in EMU will share a single monetary policy as defined and implemented by the independent European Central Bank. However, other economic policies will remain the responsibility of national governments. To ensure consistency between the common monetary policy and these other policies, there is a need for member states to intensify policy co-ordination.

Last year, it was agreed to enhance co-ordination in relation to those national policies that could influence the common monetary policy and the internal market. These include budgetary policy, structural policies in labour, product and services markets and taxation policy. The necessary framework for policy co-ordination already exists in the Treaty. This framework will be supported by the creation of the informal Euro XI Council. This will be an informal gathering of economic and finance ministers from the member states adopting the euro. The objective of this gathering is to intensify policy co-ordination within the euro area. In short, it will allow the euro area to speak with one voice on economic issues of common interest.

We cannot prescribe the necessary level or scope of co-ordination in advance. We must learn by doing as EMU evolves. In particular, we must ensure there is always an appropriate balance between enhanced policy co-ordination and the prerogatives of national governments.

Structural reform will be another source of opportunities and challenges. EMU has already brought a macro-economic regime change to Europe. In the future, EMU can be expected to bring about changes of a similar scale at the micro-economic and structural level.

Private sector enterprises, particularly financial institutions, are already gearing up to face the stiffer competition implied by a single-currency environment. Greater flexibility in Europe’s private sector will optimise the benefits of the single internal market.

The problem of labour market rigidities must also be addressed. The effect of structural rigidities in the European Union labour market is all too evident in the steady rise in structural unemployment in Europe since the 1970s. In the absence of more flexible labour markets, there is a risk of regional concentrations of low economic growth and unemployment in EMU. The emergence of such economic blackspots could weaken the effectiveness of the European Central Bank and create tensions within EMU.

To address the need for greater economic flexibility, structural reform has moved to the top of the EU policy agenda. All member states have already embarked on programmes of structural reform. It is clear, therefore, that EMU is already acting as a catalyst for structural reform in Europe.

Before leaving the issue of structural reform, I would like to add two comments. First, the requirements of EMU undoubtedly accentuate the need for structural change. However, it is wrong to pretend that this change could be avoided in the absence of EMU. EMU is merely the catalyst, which will prompt Europe to respond to the inevitable challenges of a globalised economy.

Second we must never lose sight of the fact that structural reform is good for Europe, whatever the challenges involved. Europe must be ready to compete in a world economy that is increasingly integrated. If we are to safeguard the future prosperity of Europe and the employment of its citizens, we must respond appropriately to the challenges of new international environment. And, EMU is a major element of Europe’s response to these challenges.

The last issue I would like to address is the impetus for a more stable international financial system. The benefits of the EMU will not be confined to Europe. Europe is already the largest free trade area in the world. Therefore our international trading partners will share the efficiency gains from EMU.

The euro will be a credible currency, underpinned by sound and stable economic fundamentals and comparable with the best of Europe’s national currencies today. The credibility of the euro will give it the potential to evolve into a major currency alongside the dollar and the yen, in the following ways:

-As a store of value in denominating financial liability. The US dollar is the dominant currency in total funds raised on international markets. However, the EU currencies already have a major presence in this regard so that demand for the euro would start from a sound base.

-As a portfolio currency. The introduction of the euro will induce euro-area Member States to diversify into other currencies. This implies that portfolio demand for the euro will be less than the sum of demand for the national currencies that it replaces. However, it is probable that the greater liquidity and depth of the new euro financial markets will attract more than offsetting inflows to the euro.

-As a unit of account in trade. The commercial weight of the euro area and the macro-economic stability promised by EMU should ensure that the euro is important as a unit of account in trade. The use of the euro is also likely to be used as a unit of account in third countries with strong trade links to the euro area, i.e. the central and eastern European countries and the Mediterranean countries

-As an means of payment. The US dollar is involved in a substantially larger share of currency transactions than the EU currencies combined. The creation of the euro will not by itself change this situation but the availability of euro-denominated assets on highly competitive terms is likely to generate increased usage of the euro in currency transactions. Accordingly, there is a general expectation that the euro will evolve as at least the second most important currency in terms of foreign exchange transactions.

-As an official reserve currency. The US dollar has experienced a secular decline in its share of total official reserves since the mid seventies. In contrast the share of EU 11 currencies - notably the DEM - has increased over this period but still remains at less than half the share of the US dollar. The use of the euro as an official reserve currency is likely to rise in line with private demand for the euro.

The likely emergence of the euro as an international currency will help to rebalance the international monetary system. It would be wrong to see this re-balancing as a “zero-sum game” in which Europe gains at the expense of others. The true benefit of the euro will be in helping to create a more stable financial environment not just for Europe but for the global economy as a whole. However, the challenge may be the need to provide for a higher degree of macro-economic co-ordination at international level.

Let me conclude my remarks by recalling that the commitments and provisions of the Treaty have been fully respected and that EMU will be launched on the due date. Preparations are well advanced and the conditions for a sound, stable and sustainable EMU are in place. With EMU we will begin a new era in European integration. This era will bring major opportunities for Europe and for Ireland. As ever, opportunities will be accompanied by challenges. These challenges must be addressed to make EMU a success and to create a more dynamic, confident and prosperous Europe in the next century.

Chairman: Thank you very much Mr. Carré. It was very interesting and you touched on all the important elements. There is no doubt that the remainder of the session will be of considerable benefit to the Committee.

Deputy G. Mitchell: May I join with you in thanking Mr. Carré. We do not often have the opportunity to have an exchange of this kind. I am particularly pleased to see the Director for Monetary Affairs of the European Commission has taken time to come here today even if he did have a rocky flight. Would it be possible Chairman to get a copy of the remarks made by the Director for my report which I will be circulating to the Committee before the next meeting?

Mr. Carré referred to the European Central Bank as being the most independent central bank in the World. In Ireland we are used to having an independent central bank. Could you explain to the Committee what it means for a central bank to be more independent than the Irish Central Bank. Will the European Central Bank be capable of changing priorities and reacting to the needs of priorities of the European States with the EMU when perhaps price stability is not always the first priority. In other words will it be possible to set broad parameters for the ECB which they will then independently apply. What does he see is the relationship between the European Central Bank and the European system of central banks in practical terms? What is the role of ECOFIN 11 in all of this and their relationship with ECB and what role will the remaining four will have in ECOFIN in relation to EMU. In other words the countries that are not joining.

As rapporteur I am anxious to press a few questions if I may. Could Mr. Carré give his views on Britain joining the EMU. I believe they will and that the majority in parliament on both sides want them to join but nobody will speak about this.

We have a tricky situation and one that I am sure you are aware of. The Government have decided that when the 10 per cent corporation tax for manufacturing industry and for certain traded services runs out that it will be replaced by a single rate of corporation tax at 12.5 per cent. I read recently where some Member States are pressing for harmonisation of corporation tax rates and they are doing this on the back of the Single Market and EMU which is meant to complement the Single Market. Surely matters of this kind are for Member States themselves. I would be interested to hear your views on that. Is there pressure on Ireland’s proposed 12.5 per cent? The former British Chancellor of the Exchequer Denis Healy was forecasting recently that EMU will only last a short number of years and then break up. What is your response to that?

You mentioned the lack of possible federal transfers within the EMU area unlike within the United States.

How then will it become a strong currency, one which will be supported by all 11 member states come hell or high water, if there is not to be some sort of increase in the EU budget which will allow for federal transfers along the lines of what happens in the US?

What dangers does Mr. Carré see on the horizon for inflation in Ireland, given that low interest rates are being pressed upon us at a time when perhaps we would not want them being made available for reasons which are known?

I would like Mr. Carré to say a few words about the relationship between Ireland and Britain. We still export between one quarter and one third of our exports to Britain. Most of these are from Irish indigenous industries and, therefore, have a high employment content. Any competitive advantage which Britain might have in terms of devaluation would have serious implications for us. Does Mr. Carré see any danger of that or, in reality, does he feel that there will be sufficient pressure on Britain to meet its broad obligations and certainly to meet its obligations to have a two-year track record before joining EMU at some stage in the future? In other words, is that a real or imagined danger?

The different economies in Europe are at different cycles. What are the implications of the different cycles for the member state economies of having one currency? Has that been thought out by the Commission?

With regard to the debt/GNP ratios of Belgium and Italy which remain very high, Mr. Carré said that the Maastricht criteria had been met in full. They have been met, if you fudge the debt/GNP ratio for some of the member states who have been allowed to join. Will the pressure continue on Italy and Belgium to reduce their debt/GNP ratio and what is the trend in that regard?

Deputy Kirk: I join with you, Chairman, and Deputy Mitchell in welcoming Mr. Carré to the committee. We are grateful to him for coming to us to make his presentation and to deal with the various questions which will be posed. In many ways Deputy Mitchell in his comprehensive questioning process has anticipated what others will be asking, but it might not be any harm if we looked at them from a number of different angles.

Inflation is not a difficult problem in Ireland at present. Those who are long enough around in the political arena know that for a long time it caused serious difficulties in the economy. There were traditional ways of dealing with inflation but they will no longer be available to the Minister for Finance. If there was unanticipated turbulence in the economy which triggered inflation and Ireland was locked into the new EMU system, how satisfactory or palatable would be the corrective measures which would be put in place?

On the question of UK entry, Deputy Mitchell referred to the significant percentage of Irish exports to the UK. While there is some anticipation that the UK may join EMU and become part of the euro catchment, there is the question of when can we anticipate that they might join. In the meantime, what are the downsides of Ireland’s relationship as a frontier state with the UK?

With regard to demographic changes within the Community, from time to time we read about the ageing process which is taking place in some of the larger member states in the Community. What are the implications of that for the balance between wealth creation and dependency within the Community and the implications for the well being of the member state economies where that is a problem?

With regard to enlargement and the entry of the east European states, I doubt there is any argument but that they have some distance to come in terms of development before they will near a level playing field with the existing member states.

There is the question of the decline of major and significant industries within the Community. I am thinking in terms of the dramatic policy changes which have taken place in the agricultural industry. While agriculture might not be as important to other member states as it is to Ireland, the implications of many of the proposals contained in Agenda 2000 will see a significant decline in the numbers employed in the industry. Given the structural problems which exist here, all the economic forecasts state that there will be an accelerated and significant departure of people from the industry either into part-time farming or out of the industry. That must have implications across the Community.

What about the spending patterns of the normal domestic household, a significant percentage of which in the past was spent on food? That has changed now where people are spending more on accommodation, health care, education and discretionary spending on such things as holidays.

Mr. Carré: I am impressed by the wide range of issues. In fact, the Deputies have covered all the ground of EMU and also the future of the European Union.

Deputy Mitchell: That is only for openers.

Mr. Carré: I will begin at the beginning. The Deputy raised the question of the independence of the European Central Bank. The ECB is, by construction, the most independent because it has only one objective, that is price stability. If one looks at the Bundesbank charter and the US Federal Reserve charter, there is either a vague wording or, in the case of the US, a mixed objective of price stability and support to employment and growth. The Maastrict Treaty is much clearer or at least single-minded. The priority objective of the ECB is price stability and subject to this objective it shall support the general economic policy objectives of the Community.

In fact, the ECB has only one task, to preserve or maintain price stability. To the extent that this objective is not undermined, it will support the other objective. It is clear that the ECB is not living in a vacuum. Mr. Duisenberg already speaks to the Minister for Finance even if the press is not always reflecting the smooth path of talks.

Deputy Mitchell: It is a little like God talking to Moses; he hands down the rules.

Mr. Carré: Maybe. The press has tended to exaggerate some slight differences because basically they are in tune as far as I know. I do not see any major change in the economic policy which has been applied these past two years and the one which will be implemented next year. Monetary policy which will be implemented as of 1 January will reflect continuty. There will be no change vis-à-vis the present stances. I am pretty sure.

The relationship between the ECB and the national central banks within the European system of central banks is quite complex. To some extent it is a new instituation. There are still some teething problems to know exactly who does what. However, the Treaty is quite clear. The ECB is the decision making centre. The national central banks are the implementation centres but they do not decide by themselves. They will implement what has been decided collectively by the ECB. The Governing Council of the European Central Bank, which comprises an executive board of six members and the governors of the 11 national central banks, will meet every other week and will make the necessary decisions.

Deputy G. Mitchell: By majority?

Mr. Carré: Yes, by simple majority. Decisions will be made bearing in mind the entire euro area, not regional considerations. The President of the Bundesbank has exactly the same power-one voice-as the Governor of the Central Bank of Ireland or the Governor of the Central Bank of Luxembourg.

Regarding the Euro-11 and its role vis-a-vis ECOFIN, it is an informal gathering, the idea for which was suggested by the French Minister in recognition that the countries sharing the currency could have matters to discuss. This was gist of the idea in so far as people may wish to discuss the development of exchange rates and budget policy. Until now, Euro-11 meetings have been mainly devoted to the budgetary stance in the 11 participating countries. There is a clear need for stronger co-ordination between the countries participating in the currency as opposed to the larger group of 15. The Euro-11 does not make any decisions. Members just talk and try to understand each other. Decisions are made by the ECOFIN Council. The Euro-11 meets before ECOFIN so that any necessary decisions can be made or taken by the ECOFIN Council.

It is more politically correct to speak of countries being “pre-ins” rather than “outs” in EMU. Relations have not always been smooth in the process of building the EMU. However, all the negotiations since the signing of the Maastricht Treaty, such as the adoption of the scenario for the introduction of the single currency, have all taken place between the 15 member states and agreement has been reached between them, not just those who have adopted the single currency. This means there will be no renegotiation of what was agreed beforehand when those who will not be members on this occasion eventually join. That is very important.

Questions were asked about taxation. The adoption of the single currency highlights the need for more harmonisation but how that will take place is difficult to say. At one extreme, one can share the position of some US academics or British europhobes according to which a single currency can only work if there is a single Government and that there should be a European Government to ensure all construction is lasting. In that case, there would be the same levels of taxation. We are very far from that. Europe is still being built and we are in the process of building something which is federal. I believe the Maastricht Treaty is the extreme of what European populations are ready to accept and there will be no strong elements of harmonisation in the near future. Perhaps matters will have changed in five or ten years’ time. It is parliarments which shape the opinion of populations, not the Commission. We are just a bunch of technocrats.

Harmful tax competition must be avoided according to a resolution of the European Council last year. It is difficult to give a precise definition of what is meant by harmful tax competition. I have never, in my work in DGII, heard any criticism of the single Irish rate. The main criticism is the difference between the taxation on labour and on capital. That is the main problem as perceived by many Members of the European Parliament and several Governments. With a single currency and unified financial market, there will be a temptation to reduce or eliminate all taxation on capital gains or dividends and, correspondingly, to increase taxation on labour. That discrepancy is the problem, not the individual tax regimes in countries. I do not know what will happen in future. It is not possible for there to be no taxation in one area and very high taxation in another. A compromise must be found, although it is difficult to know how this might be achieved. The US is a single market where taxation differs significantly from one state to another.

Deputy Barrett: What happens where a political philosophy is at issue? If one country decided to load all taxation on to certain types of indirect taxation, such as company taxes, and eliminate all personal taxes, and another country did the opposite and lowered taxation on investment and raised personal taxes, surely it is terrible interference in the affairs of a country that it would be excluded from taking one of those courses of action because another country had opted for a different choice? It is on that which we seek clarification. At what point can it be said that a certain rate is acceptable? Surely the existence of harmful tax competition depends on the policies of individual Governments.

Deputy Kirk: On the issue raised by Deputy Barrett, how does Mr. Carré see the balance between member states and the European Central Bank functioning?

Mr. Carré: The Central Bank has nothing to say on taxation. It is purely the responsibility of member states. I am not an expert on taxation. There is a director general for taxation in the Commission and it may be interesting for members to hear his opinions.

Speaking as an economist, taxation issues are politically sensible, but it is very difficult in economic terms to design what is an optimal tax system because it is always relative. There are fashions in taxation as there are in every other science. The current trends are for eliminating exemptions and lowering the average tax rates. However, apart from this general trend, it is difficult to say what would be the correct rate. I would not do it. I was impressed by the fact that, when we negotiated the Maastricht Treaty, all figures were included in the protocol and not in the Treaty, such as the three percent deficit which applies to the government budgetary position.

There is no assessment about what should be the level of public expenditure. It is possible to reach 3 per cent with expenditure of 25 per cent or 55 per cent of GDP, as in the case of Portugal and Sweden respectively. These are not the same kind of societies. It leaves national parliaments to decide on levels of taxation. It is a very complex issue and I am not in a position to present all the thinking of the Commission on this matter because I am not aware of it. I was busy preparing for Economic and Monetary Union.

Deputy Barrett: I had not heard about the agreement among Ministers regarding harmful tax cuts.

Mr. Carré: It was among the Heads of State and Government. They agreed to limit harmful tax competition. Who could be against that? What is harmful tax competition? There is no agreed definition and I suspect Member States would have different ideas about what it means.

Some people in Britain believe that the euro area will break up after a few years. The price to be paid in terms of a break up would be so huge that it is impossible to envisage. EMU is the answer to globalisation, especially for those countries which are too small to meet its challenges. It is also the answer to the challenges posed by ageing populations.

Europe is on the verge of big change with a generally ageing population. Japan faces the same problem. We must change and adapt the way pensions are funded over Europe to face this new reality. The establishment of a single financial market will help. It is not the only answer but it will facilitate matters.

The possibility of a break-up of the euro area represents a doomsday scenario. The price to be paid would be so high it would be impossible to return to the status quo.

Deputy G. Mitchell: You referred to the federal system in the US. It will be preparing and presenting this report on EMU in the coming week. Speaking as devil’s advocate, I have already quoted views expressed by the former British Chancellor of the Exchequer, Denis Healy. In addition, the different economies of the EU are at different cycles in their trading. The sole term of reference of the ECB is price stability, whereas the central banks in Europe had additional terms of reference. There may not be a significant increase in the EU budget to allow for transfers to regions which are finding it difficult in their economic cycle. For example, in a region like Ireland low interest rates do not complement what is required to counteract inflation. Countries could be brought under pressure when they will not have the facility for competitive devaluation and will not get transfers from the centre. Could that in time lead to a break up and do sceptics like Denis Healy have a point here?

Mr. Carré: I do not believe so. Regional discrepancies will still appear. For example, in the US, short-term economic developments in California are often out of sync. With Texas and levels of federal transfers are quite low. Recent research in the US indicates that the major equalising factors is not so much transfers as market-driven capital flows. There is a very wide and efficient capital market in the US.

This issue has been debated at length, especially in the UK. I do not believe the scenarios anticipated by sceptics are possible because short-term economic developments are becoming increasingly synchronised in Europe. At present, peripheral countries, such as Ireland and perhaps also Finland and Portugal, are ahead of the economic cycle of the core economies. This is a temporary phenomenon. I am sure that in three to five years the whole euro area will be more or less in tune.

Deputy Barrett: On the question of maintaining an agreed percentage of debt relative to GDP, we have a current budget surplus and, like any business, we must decide whether to pay it off against existing debt, taking into account the likely savings arising from low interest rates. Alternatively we must decide whether to invest it-say it is £1 billion - in necessary infrastructure for the future. If an investment is made the yield from the investment may, in time, far exceed the benefit of reducing the debt. Given that Structural Funds will reduce in the future do you not concede that a country like Ireland needs to continue investing to maintain the strength in the economy?

I maintain that much of our success has arisen because of Structural Funds and the buoyancy on the current side from outward investment. That will decline over the coming years and we must, therefore, replace it with sound investment where the GDP to debt ratio could be affected for a period of time. How would that fit into the requirements of EMU?

Mr. Carré: The requirements of EMU are not straightforward in this area. Decisions made here will be more political than economic. The national debt puts a burden on future generations at a time when demographic challenges must be considered. I agree that investment is required, not only in Ireland but also throughout Europe. However, what is a good investment? Choosing the right investment is not simple. There are many examples of waste in public investment in my country. I am sure that you will find examples of that throughout Europe. It is a difficult decision to take. To me it is a political decision based on economic arguments.

Deputy Barrett: Do we have a choice?

Mr. Carré: Yes, 60 per cent is quite large and leaves a great deal of room for manoeuvre. It is a reference value. You asked about Italy and Belgium. Those countries have net GDP ratios of 100 per cent but they are declining fast. They are clearly taking the Irish decreasing debt ratio as a model. Ireland was the first country to hit and go beyond the 100 per cent of dept to GDP ratio. It is also the first to come down under 60 per cent. Ireland is the success story of the European Union and the model for EMU.

Deputy Kirk: Will the support of ageing populations in places such as Germany continue to be dependent on the social security system and the occupational pension arrangements? Is there any question of a transfer of resources to meet that? There could be severe deterioration of the wealth creation capacity of a contracting demographic dividend, as we have now. That would affect the ability to fund the system while the younger population is in the education system and not contributing to wealth creation.

Mr. Carré: Most of the pension schemes in Europe are unfunded. There is a drive towards the establishment of a funded pension scheme which would come on top of the existing one. It is not easy to switch from one regime to another. There is much discussion about the effectiveness of the two and there is evidence that the unfunded scheme is appropriate given certain assumptions about the demographic changes. There is no simple answer.

We are building something which is close to a federation in Europe, but it is my firm belief that for the time being there is no political consensus to increase the Brussels budget.

Deputy G. Mitchell: I sat around many tables where 1.27 per cent was the top limit for everyone and that is the agreed continued level of budget.

I asked specifically about relations between Ireland and Britain, since we export between a quarter and a third of our produce to that market and the effect of those exports on indigenous Irish industry and, therefore, employment.

This is the last examination we will undertake before the committee considers its report and for that reason I want to look at the possibility of a break up of EMU. As far as I am aware there is nothing in the criteria of the Maastricht Treaty which prohibits a member state from leaving EMU. Since each member state will continue to have a central bank, and there will be a European System of Central Banks, I presume it is at the backs of the minds of Ministers for Finance that it might happen. California cannot withdraw from the United States, it is part of a fully federal system. Does this fact that it is possible for a member state to withdraw from EMU without it affecting its access to the single market-four member states are outside EMU but continue to have access to it - create an uncertainty?

Mr Carré: It is a difficult question because it is political in nature. There is no plan B.

Deputy G. Mitchell: We could form an escape committee.

Mr. Carré: We have a different perception of Europe. It is not only a free trade area, it is a common vision of a shared future.

Mr. G. Mitchell: I share that view.

Mr. Carré: This is the prevalent perception of those countries which have signed the Maastricht Treaty. The idea of withdrawing because it is not beneficial enough has never existed at the negotiating table. It would be a catastrophe, especially for the country which decides to withdraw. The price would be enormous, in interest rates in particular. Look at Sweden and Denmark. On long-term interest rates they have to pay huge premiums over and above the present core level. Long-term interest rates are lower in Italy than in the UK. It is incredible. Who could have imagined that situation five years ago?

Deputy G. Mitchell: But the UK is not rushing to join EMU even though that is the case. Why is that?

Mr. Carré: I do not know when the UK will join. We expect it to join because there is a very strong lobby in favour among large businesses and in the City. It is largely a political issue to the extent that when negotiating the Maastricht Treaty the UK obtained and opt-out. It is clear that it will join when it is ready. I do not think the single market could continue indefinitely with freely fluctuating currencies.

Chairman: What mechanism has the Commission considered which might be available to individual central banks and Governments, given that the previous access they had to increasing interest rates will not necessarily be available, in the event that a member state has a difficulty in that area?

Mr. Carré: There is no specific mechanism for that. Monetary policy is only one instrument of economic policy. Fiscal policy is still in the hands of national Governments. If you want to cool down the economy, you will have to use the fiscal arm.

Deputy G. Mitchell: You did not deal with the question I asked about the British.

Mr. Carré: The share of trade between the two countries is decreasing. It has been decreasing since the accession of Ireland to the European Union and it will continue to do so. As far as I know the largest trade partner for Ireland is no longer the UK, it is Germany. That is symptomatic. The future of Ireland is with mainland Europe, not with the UK, as far as trade is concerned. Sterling will go up and down. It will be difficult to accept too large fluctuations but it will be very difficult to impose sanctions. This will reflect the outcome of different economic policies.

Deputy G. Mitchell: Given Britain’s experience in ERM on the last occasion, it is unlikely they will join ERM 2. Does Mr. Carré believe that Britain will shadow EMU and, therefore, de facto come within some sort of exchange rate mechanism?

Mr. Carré: The Treaty criteria make it clear that before joining EMU, currencies must have participated in the ERM for two years. This will apply to sterling as it does to all other currencies. However, two years did not apply to the Italian lira and the Finnish markka.

Deputy G. Mitchell: If Britain does not join for five years, then the two year criterion will not apply for three years. It does not seem likely that Britain will join within two years. If so, does Mr. Carré think they will shadow EMU and that they will de facto keep pace with ERM 2?

Mr. Carré: I think so.

Deputy G. Mitchell: Is there an understanding?

Mr. Carré: As far as I know there is no understanding. The UK is in a peculiar position because it has to treat its exchange rate policy as a matter of common interest. The UK Government and UK Government officials believe there is no exchange rate policy and that exchange rate developments are the outcome of other economic policies. This is a different concept. It is difficult to negotiate on this basis. The major trade partners of the UK are other European States. A stable relationship between the pound sterling and the euro will be to the major benefit of UK trade.

Deputy G. Mitchell: Could I ask Mr. Carré to say something about the euro as a reserve currency and where he sees things going in the future in that regard. Under the Maastricht criteria, inflation rates, Government indebtedness, budget deficits and exchange rates were set down in the Delors report. On what economic foundation are these criteria based? Are they sufficient criteria to sustain economic and monetary union in terms of the euro?

Mr. Carré: They are not sufficient. They were laid down in the Delors report and the Werner report. The idea behind the criteria is that monetary policy should not be impaired by fiscal vagaries and irresponsible fiscal policies; one should avoid free rider behaviour from countries, especially on the fiscal side. The specific figures are consistent with a 3 per cent deficit and 3 per cent real growth rate. A 2 per cent inflation rate will make the debt to GDP ratio convert to 60 per cent. Furthermore 60 per cent was the average debt to GDP ratio within 15 member states in 1991. There must be no major discrepancies in the inflation rates within EMU. This does not exclude regional variations. If one looks at regional indices, for example each German region publishes its own inflation rate, inflation has differed by up to 2 percentage points in a year between Berlin and Hamburg. This does not impair the single currency. In Ireland, inflationary trends are more pronounced than in the rest of the Community. To the extent that productivity growth in Ireland is very high, higher than in the remaining member states, there is no problem. I do not think the inflationary trend in Ireland will persist. I believe it will go down because there are signs of this happening already.

I believe the euro will become an alternative reserve currency. We are setting up a financial market which will be the same size as the US market. This is a major advantage. Many central banks throughout the world already have Deutschmark assets and some have French franc assets. As from 1 January 1999 the DM will become euros. It would be an advantage for Ireland to have reserves weighted according to trade between these currency blocs. For the time being the only reserve is the dollar. With the euro backed by the very large financial market, there will be a strong argument to hold euro reserves in the same proportion as trade with the European Union which is a major international partner. But it will be up to the Central Bank to decide on this matter. I think this will take place sooner rather than later.

Ms Malone: I am sorry I was late but I was attending an important meeting. I have just been elected to the General Council of the Labour Party.

I am delighted to welcome Mr. Carré to Dublin, the city I represent in the European Parliament. I would ask Mr. Carré to comment on recent media reports that the left in Europe is somehow trying to change the whole emphasis in terms of the introduction of the single currency. The left is being criticised for linking that introduction with the question of employability. It was socialists and socialist governments, by and large, who pushed this project from Delors to when Deputy Ruairi Quinn negotiated the stability pact. The media seems to forget that politicians in the left in European politics have been constantly promoting this exciting challenge. Mr. Carré might also comment on the link with sterling. When I spoke in the parliament during the historic meeting on 2 May, I said to Gordon Brown, who was then President, that those countries who are not in the 11 have responsibilities as members of the EU. Any sudden devaluation of sterling, which would have a devastating effect on Ireland as its nearest partner, would be very worrying. I received some assurance but what sanctions, if any, can be imposed after 1 January?

Deputy Barrett: This has been an interesting discussion regarding economics and so on. However, the ordinary punter might ask what the euro will mean and whether a kilogram of carrots will cost more after 4 January? How would Mr. Carré explain the meaning of the euro in simple English? I have my own message. However, what will be the situation after 4 January for the small business person doing business in Germany who is concerned about the value of the punt against the Deutschmark? This is all about day one - how many euros will people get for £100? What will be the comparison between paying a debt from punts to deutschmarks? Will there be a difference from day one?

Decimalisation brought about price increases. Will there be price increases for the ordinary person? Will the consumer have to pay more for tomatoes imported from Spain? Will the exchange rate on the January 4 cost small businesses or consumers? We all have our own way of explaining these issues but I would like to hear Mr. Carrés explanation.

Chairman: I do not anticipate a conversion from the pint of Guinness to the litre of Guinness. It might be welcome in some quarters but it could have practical difficulties. Mr. Carré emphasised the independence of the ECB and this is understandable. How do you see that independence in the context of the need and the requirement, in some quarters, for some degree of accountability? Can you be sure that the accountability does not turn into influence by individual Governments, in which case, smaller countries such as Ireland, could have difficulties? Can you ensure that the ECB will take the requirements of the entire EU into account?

Mr. Carré: The ECB is independent. It is also accountable through the regular discussions within the relevant committee of the European Parliament. Mr. Duisenberg has announced that he will appear before the committee at regular intervals, every month or two months, to explain what he is doing. Within the Governing Council, a commissioner and the President of the Council will attend each meeting. A member of the Commission will always attend and the President of the ECOFIN Council has the right to attend in order to put forward arguments. This is important even if there is no right to vote.

The issue of accountability has been overestimated by some adversaries of monetary union. The Treaty is clear about the independence of the ECB. It has a limited mandate - price stability. Furthermore, the idea of political influence is not relevant. There is a clear voting system of one man one vote. This will avoid political squabbling. That is very clear.

The question of practicalities associated with the move to the euro is very important and may be the most difficult to answer. From one day to another, one has to change one’s reference values. The Commission does not have a trick for achieving this. It relies on Governments to find the most suitable method. We do not think one can provide the same answer to Germany as to Portugal as their concerns are not the same. Each country is best suited to find the right answer.

The benefits are obvious. There should not be any price increases as a result of the changeover. In theory, one can round up and round down. Some retailers have already announced that they will systematically round down in order to gain a competitive edge. I do not see any reason for price increases. The reverse should be the case.

The main advantages for the consumer will be price transparency. We expect a limitation on the differences in car prices across Europe, highlighted by recent reports of the European Bureau of Consumer Associations. For small and medium size enterprises, the euro will mean that, for the first time, they will have access to the single market. Many small and medium size enterprises in Brittany, from where I come, have stopped exporting to the UK because they thought they were being robbed by the banks when calculating exchange rates, or following the devaluation or revaluation of sterling. They limited themselves to their own market. The euro will allow businesses to expand their markets to the whole euro area. This will give a boost to growth and employment. We are not introducing a single currency for the sake of it. First and foremost, it is being done to foster growth and to provide more employment in Europe. Unemployment is Europe’s main problem so these benefits are simple to explain.

There will never be any sanctions for possible devaluations. However, one cannot exclude difficulties at a political level following devaluation. This happened in 1995 following the devaluation of the Italian lira and the Spanish peseta. There was a great deal of political noise in France and Austria about unfair competition coming from devaluing countries. It is not that simple. At the time it could be argued it was the consequence of several years of forced fixed exchange rates which artificially distorted relative prices in the country. Nevertheless, there is no provision either in the Treaty or in present EU legislation for the imposition of sanctions on a country which would devalue - it would be very difficult.

As regards the change in emphasis following the change in Government in Germany, I would refer to the change in Government in France one year ago when the Socialists came into power. They had campaigned against the Stability Pact which was being negotiated. The first thing they did was to sign the Pact. This has to be qualified. They signed the stability pact by adding a further word “Growth” and by requiring their fellow leaders to agree on employment guidelines. The essence of the Stability Pact was not only agreed but they added something. There is a shift of emphasis to employment, which is the right one.

We need to take care of the unemployment issues. The employment objectives and targets will be implemented by the European Council in Vienna. This has put the employment problem on the top of the agenda. This was beneficial. It is not only a cosmetic shift. The recent change in Germany will not change the traditional German emphasis on fiscal discipline and stability.

Chairman: I thank Mr. Carré for his interesting and informative responses. We hope we have not inconvenienced him too much, despite the turbulence in air traffic. Perhaps following the introduction of the euro there will be a synchronisation in air traffic control timetables. We look forward to meeting with Mr. Carré again, either here or in Brussels.

* Deputy Matt Brennan substituted for Deputy Pat Carey (for part of the meeting).

* Senator Willie Farrell substituted for Senator Paddy McGowan.

* Senator Willie Farrell substituted for Senator Paddy McGowan.