Committee Reports > List of Committees > Joint > 1998 > Committee on European Affairs > Report - Economic and Monetary Union

Foreward

The Joint Committee was established in November 1997.

As part of its 1998 Work Programme the Joint Committee decided to examine Economic and Monetary Union.

The Joint Committee heard presentations on this subject from:

Institute of European Affairs,

Governor of the Central Bank of Ireland,

Irish Bankers’ Federation,

Director of Consumer Affairs, and

European Commission.

The Joint Committee is grateful to Deputy Gay Mitchell who acted as Rapporteur on this subject and researched and prepared the draft report.

The Joint Committee requests that the issues raised in the report be the subject of a debate in both Houses of the Oireachtas.

__________________

Bernard J. Durkan, T.D.

Chairman

December 1998

Acknowledgements

1.The Joint Committee on European Affairs at its meeting of 6 May, 1998 appointed Mr. Gay Mitchell, T.D. as rapporteur on the question of Economic and Monetary Union.

2.The Joint Committee heard presentations from the following in connection with this topic:

(i)Institute of European Affairs on 11 February, 1998

Mr. Terry Stewart, Director General,

Mr. Pat McArdle, Head of EMU Planning, Ulster Bank, Project Leader, IEA EMU Group, and

Dr. Dónal de Buitléir, General Manager, Office of the Group Chief Executive, AIB Member, IEA EMU Group;

(ii)Governor of the Central Bank of Ireland on 3 June, 1998

Mr. Maurice O’Connell;

(iii)Irish Bankers’ Federation on 25 June, 1998

Mr. Jim Bardon, Director General, Irish Bankers’ Federation,

Mr. Pat Ryan, Chairman of IBF/IMSA EMU Steering Committee and Group Treasurer, AIB Bank,

Mr. Michael Watson, Vice-Chairman of the IBF/IMSA EMU Committee and Head of EMU Planning and Development, Bank of Ireland,

Mr. Frank Sexton, Deputy Director General, Irish Bankers’ Federation, and

Mr. Felix O’Regan, Manager of the Irish Banks’ Information Service;

(iv)Director of Consumer Affairs on 1 July, 1998

Mr. William Fagan, Director of Consumer Affairs, and

Ms. Rady Redmond, Principal Officer;

(v)European Commission on 26 November, 1998

Mr. Hervé Carré, Director of Monetary Affairs.

Gay Mitchell, T.D.

Rapporteur

December 1998

Introduction

This report sets out the background to EU Economic and Monetary Union and the implications that this may have for Ireland. EMU, coupled with EU Enlargement, will ensure that states which have applied to join the EU, of which there are 11, as well as the 15 existing EU states will have to become more competitive and more productive.

The report gives the background to Ireland’s experience as an EU Member.

The report considers some Value Added Tax (VAT) issues and outlines GDP/GNP rates for the 15 member states of the EU as well as the 11 applicant states as these are relevant to issues of transparency in pricing and competition.

The report concludes by making recommendations.

Background to EMU

Twice in the first half of this century, wars started in Europe engulfed the world and left tens of millions dead and injured. In Europe alone 60 million were killed and a continent was shattered.

Out of the ashes of these conflicts came leaders like Adenauer, Schumann and De Gasperi determined to build a new continent based on co-operation and the pooling of sovereignty in a united, peaceful and prosperous Europe.

These leaders founded what we now know as the European Union as the instrument through which that new Europe could be constructed. Starting with the raw materials of war - coal and steel, then agriculture, and then gradually extending into other areas - environment, social policy, fisheries, trade policy, foreign policy, building a European Union which has enjoyed an unprecedented four decades of peace and growing prosperity.

Led by men like Seán Lemass, Jack Lynch, Liam Cosgrave and Garret Fitzgerald, Ireland joined the European Community, as it then was, in 1973 and has been a party to its development ever since.

The European Union now stands on the very edge of the next phase of its development - with the start of the third phase of Economic and Monetary Union (EMU), the irrevocable inter-locking of the exchange rates of the eleven countries joining EMU on 1 January, 1999.

EMU is both an economic and political project whose central objective is to build an ever closer and more prosperous Europe.

EMU is not just an idea of the last few years, indeed the goal of EMU was first set at a meeting of the heads of Government of the then six member European Community in 1969 with 1980 as a target date. EMU was re-launched by Roy Jenkins, President of the Commission, in 1977 and was again taken up by Jacques Delors in 1985. It was mentioned both in the Preamble and the Amendment to the Treaty of Rome contained in the Single European Act of 1986. In 1988 work began on the Delors Report and this led to the decision to convene an Intergovernmental Conference on EMU, the conclusions of which were a key part of the Maastricht Treaty of 1992 which also set out the convergence criteria. In January 1994 the European Monetary Institute began assuming a co-ordinating role in preparation for EMU. In June 1997 the Stability and Growth Pact was agreed at the Amsterdam European Council meeting. Never before has a European project been so clearly heralded or so carefully prepared for.

Ireland has played a full role in these preparations particularly during our Presidency of the EU in the second half of 1996.

Some commentators have expressed concern that some of the independence of the Irish Central Bank is being surrendered to Europe. The reality is that Ireland has, in the past, had to react to decisions made in London and Frankfurt by central bankers and politicians more concerned about their national needs that those of their neighbours. These decisions will now be taken by a European Central Bank taking into account the needs of all 11 participating states. This is fairer, more democratic and more worthy of a progressively integrating Union.

Ireland and the EU

Before looking at the objectives of EMU and their possible implications for Ireland, it is worthwhile to look first at the Irish experience in Europe since 1973 and at the other great challenge facing the European Union, its enlargement from 15 member states to perhaps as many as 26 states, taking in the countries of Central and Eastern Europe. When Ireland joined the European Community in 1973 our per capita income was 56 per cent. (on a GDP basis) of the EC average. In a larger and much wealthier Union of 15, Ireland’s per capita income is now estimated at 105 per cent. on a GDP basis or 90 per cent. on a GNP basis. In addition, Ireland’s economy is now growing at twice the European Union average and has been doing so far a number of years. With this growth Ireland’s per capita income, however measured, will shortly exceed the EU average and Ireland, after many years of being a net recipient, will soon become a net contributor to the EU budget.

Our employment, direct and indirect, used to depend on agriculture to the extent that almost 50 per cent. of employment in Ireland was related to agriculture. The number employed directly in agriculture, forestry and fisheries in Ireland in 1973 (the year we joined) was 255,000. In 1997 this had almost halved to 134,000. Other traditional industries such as motor car assembly went to the wall. Ireland’s unemployment rate grew to 18.5 per cent. Over time, however, new jobs were created and the Irish unemployment rate is now down to single figures, it is below the European Union average and continues to decline. The total number of people at work in 1973 was 1.07 million, in 1997 this stood at 1.34 million, an increase of 25 per cent. After years of emigration we now have net immigration, including a growing “foreign” population.

In 1986 there were 2.2 dependants per worker, now there are only 1.6. This has enabled successive Governments to reduce tax, invest in education, build up the infrastructure and thus help fuel economic expansion. Sacrifices and investments made in the 1970s and 1980s laid the foundation for today’s prosperity. But much remains to be done.

Since 1973 Ireland has become a much more industrialised economy. We now export more computer software per capita than any other European country. We are the world’s second largest exporters of software, second only in terms of volume to the United States. Ireland exported over IR£3 billion ($4.07B US Dollars) in software products in 1997. Over 40 per cent. of all PC package software and 60 per cent. of business application software, sold in Europe is produced in Ireland. 20,000 people are now employed in this sector and it is growing at a rate of 2,000 jobs per annum. In the early stages the ratio of international companies to indigenous companies was about 2 to 1. Now 40 per cent. of the software industry is indigenous and this is growing at a faster rate than the international sector.

Ireland now has an International Financial Services Centre (IFSC) which is challenging Luxembourg as a centre for location. 7,500 jobs, direct and indirect, will have been created because of the IFSC by the turn of the century. As late as the 1980s we still had waiting lists for telephones. Ireland invested $5 billion in telecommunications in the last fifteen years to make it one of the most advanced “feature rich” networks in Europe, leap-frogging many states. There are some indications that we may again need to take steps to keep up with changing technology and this is being considered by the Government. Without this facility an International Financial Services Centre could not thrive.

Much of the structural funds and cohesion funds we have received from the EU have gone into improving our infrastructure and re-training our people for the employment opportunities which exist within the European Union’s Single Market of 350 million people. However, further investment in infrastructure is needed and the competitive environment which EMU will engender underlines the need for such continued investment.

In 1973, 335,000 were employed in industry and 477,000 in services. Industry now employs 386,000 (up 15 per cent.) and services 818,000 (up 71 per cent.) This mirrored to some extent the move to services in other developed economies. Commerce, Insurance and Finance have provided over 105,000 of those jobs. At the same time, as stated earlier, the number of jobs in agriculture almost halved. There has been no gain without pain but the pain has been worth it.

Our success has been assisted by a 10 per cent. Corporation Tax Rate for manufacturing industry and financial services, a young and skilled workforce, with an extensive supply of business and language skills, and a competitive cost environment with cheaper employment and operating costs than most other European countries. This environment must continue to be nurtured. A Single Currency is meant to enhance our capacity to be competitive but is not without risk.

In the five years to 1997 Ireland’s growth rate was roughly four times the European average, this made Ireland not just the fastest growing economy in Europe but also the fastest growing economy in the OECD. Proportionately Ireland has created more jobs than the United States economy over that period.

Ireland had a baby boom in the 1970s and this has now fed through to the workforce. If the workforce had not risen, unemployment in Ireland would have fallen to less than three per cent. at present, the Government plan a rate of seven per cent. by 2000, to decline to five per cent. shortly thereafter. (Down from a high of 18.5 per cent. as mentioned earlier.)

Forecasts anticipate that Ireland’s debt/GNP ratio will decline to about 30 per cent. in the first five years of the new century.

This remarkable situation has come about without higher inflation to date, as might have been expected. On the contrary, the rapid growth in output has been accompanied by an inflation rate which has been significantly lower than the European average. There has been roughly six times greater inflation in the European Union, per unit of growth, than in Ireland.

Membership of the European Union has not been without its difficulties and challenges but overall it has been an immensely positive experience helping us to build a society of unprecedented prosperity and opportunity, albeit with serious pockets of deprivation still present.

Membership of the EU has enhanced our sovereignty and given Ireland a more meaningful role in international affairs.

Ireland has held the Presidency of the European Union on five occasions in the last 25 years, most recently chairing the Inter-Governmental Conference preparing the Amsterdam Treaty at a crucial time during the process, at the same time as it held the EU Presidency. Ireland has supplied Commissioners who shaped European social, trade and agriculture policy and it was Ireland which, on behalf of the EU, agreed the first comprehensive agreement between the EU and the Third World - The Lomé Convention.

As mentioned already EMU will mark the next stage in Ireland’s relationship with our partners in the EU. For the first time an Irish Central Bank Governor will have a real say in the interest rates which affect the Irish people, based on what is best in terms of price stability for all participating states rather than, as previously, just having to respond to decisions already made in London and Frankfurt based on British or German national interest.

Enlargement

The European Union has a population of approximately 350 million people in 15 countries (Britain, Ireland, France, Germany, Italy, Spain, Portugal, Belgium, Netherlands, Luxembourg, Austria, Greece, Sweden, Denmark and Finland). The Union originally had six member states. There are 11 European states waiting to join the Union, these are Poland, Hungary, Czech Republic, Slovakia, Slovenia, Romania, Bulgaria, Estonia, Lithuania, Latvia and Cyprus. If democracy can be restored to the former Yugoslavia more of these states will also apply to join the Union.

Within the 11 applicant states, six (often referred to as five + one, the one being Cyprus) are considered by the Union to be in a more advanced state of democracy and economic preparation than the others. These are, therefore, likely to become members of the European Union before the remaining five, possibly some time between 2002 and 2005. The six are Cyprus, Poland, Hungary, Czech Republic, Estonia and Slovenia. Turkey has also applied to join the European Union but its application is not likely to succeed at this time.

The institutional challenges of the next phase of EU Enlargement, for example how do we actually accommodate 26 or more states around the table of a meeting of the Council of Ministers, at the Commission table and in the European Parliament, without having unmanageable bodies, are further complicated by the fact that most of the applicant states are only emerging democracies and emerging market economies.

There are approximately 106 million people in these applicant states and if the GNP of all 11 were added together it would equate to that of one medium sized existing EU state, e.g. the Netherlands. Therefore, the next stages of enlargement present huge challenges for the existing union and for the applicant states themselves.

In preparation for enlargement the European Union is spending considerable amounts of money in the applicant states helping them to convert their economies and to prepare their legislative systems. When they do become full member states it is likely that they will benefit from cohesion funds and structural funds, i.e. large transfers of monies from the European Union to help them develop their economies and retrain their people to meet the challenges of a single market.

These economies need to become more social market orientated and more competitive. For existing EU states such as Ireland, the challenge posed by low cost goods and services from the applicant states means that we will also have to become more productive and competitive. This will be even more necessary after EMU.

Objectives and intended operation of EMU

EMU sets out to achieve the following economic benefits:

(i)elimination of exchange rate uncertainty and transaction costs for trade, investment and tourism among participating states. One estimate puts transactions and hedging costs to European business at present to be about $16 billion per year, although it is very difficult to obtain an exact figure;

(ii)convergence of interest rates among participating member states, expected to give long-term low interest rate certainty; and

(iii)a significant deepening of the Single Market.

From 1 January, 1999 the third stage of EMU will commence with the irrevocable fixing of conversion rates between participating member state currencies and the Euro. The Euro will be used in non-cash form from that date and the legislation for the introduction of the Euro will enter into force. A single monetary and foreign exchange rate policy will be conducted in the Euro zone by the European Central Bank and all new tradable public debt will be issued in Euros by participating member states from that date.

There will be a transition period for three years, i.e. to 1 January, 2002 during which the changeover of the public and private sectors of participating member states to the Euro will be carried out. Euro bank notes and coins are due to be introduced on 1 January, 2002. National bank notes and coins will be withdrawn having circulated alongside the Euro notes and coins for a maximum of six months. By 1 July, 2002 at the latest the transition will be complete when national bank notes and coins lose legal tender status. The Committee is concerned at the length of the proposed switchover of bank notes and coins - six months. As we will elaborate on later, we believe a shorter period would be in the best interest of business and the consumers (see recommendations).

Stability and Growth Pact

EMU will mean a major change in the regime to which we have been accustomed. We will, of course, lose our “independence” in relation to exchange rate policy and such flexibility as we had in relation to interest rates. However, such independence and flexibility can be overstated as, to date, in effect, we have had to follow decisions taken in London and/or Frankfurt as a matter of course. However, it is clear that the budgetary burden of EMU membership will have implications for future fiscal policy. Evidence was given to the Committee that coping with fluctuations in the economic cycle means that we should be running a budget surplus in the current booming economy. This is particularly true when account is taken of the uncertainty of the level of continued EU funding post 2000. The worst of all possible worlds would be that we would have to make major financial cutbacks when finances are not as buoyant as they are now.

The stability and growth pact imposes continuing constraints on Government borrowing. This may increase the pressure to privatise some areas of public ownership as under-performing assets in the public sector may accentuate future potential difficulties.

The Committee is concerned to be kept informed of how the constraints imposed by the stability and growth pact are being managed. The Committee recommends that the Department of Finance lay a report on the continuing implications for the Irish economy of the stability and growth pact before the Oireachtas twice annually, and before any such report is submitted to European institutions (see recommendations).

Implications of EMU

(i) Price Comparisons and Transparency

One of the most dramatic and potentially far reaching effects of EMU will be that it will allow easy price comparisons across the 11 participating states with goods and services priced in the same currency. The development of Internet commerce and targeted direct mail marketing will enhance the competitive effect of this price transparency.

From 1 January, 1999 the Euro will be useable in non-cash transactions. In Ireland, for example, from 1 January, 1999:

(a)Government Departments will accept payment in Euro as well as in Irish pounds;

(b)The Revenue Commissioners will accept payment of tax in Euro as well as in Irish pounds and businesses will have the facility to make returns and declarations in the Euro;

(c)Companies may file their accounts with the Companies Registration Office in Euros;

(d)Banks and building societies will process lodgements and payments expressed in either Irish pounds or in Euros, regardless of which of these the customer’s account is denominated in;

(e)Any banking service required in Euros will be available in Ireland; and

(f)Irish equities will be traded and settled on the Irish Stock Exchange in Euros only.

One Irish Bank recently announced that it would supply two cheque books and two lodgement books, one in Irish pounds, one in Euros, and suggested that clients may ask for invoices in Euros.

Other EMU member states will have similar arrangements.

The introduction of the Euro will significantly change the environment in which business is done in the 11 participating states. It will make trade and investment among EMU countries simpler, cheaper and more transparent.

Companies are strongly advised to review the prices of their products and services against those of potential EMU competitors to assess whether price transparency is likely to be an issue for their particular business. This exercise should be approached in a positive way - “how can I improve my market share?” rather than in a defensive “how can I compete against such a large competitor?”. If the product/service is good enough then with effective marketing, an Irish company can be even more successful in the Euro zone and the enlarging EU than in just the small Irish market.

(ii) Dual Pricing and Invoicing

From 1 January, 1999 to 1 July, 2002 at the latest, the Euro and the Irish pound will both be used in transactions. For the first three years, the Euro will operate on a “no compulsion, no prohibition” basis, i.e. legally businesses will neither be forced nor prevented from using the Euro. However, in practice, firms may effectively be forced by customer preferences to transact in the Euro during this period. For the final 6 months businesses will be legally obliged to accept both currencies.

As mentioned already the Committee is strongly of the view that the final six-month period (January - July 2002) of dual currencies is poorly thought out. Firstly to introduce the Euro notes and coins on 1 January, 2002 right in the middle of the post Christmas sales seems a recipe for confusion and perhaps even chaos. A date like 1 February, 2002 would allow retailers and consumers to tackle the change in a less frenzied atmosphere.

Secondly the length of the changeover period - six months seems excessively long. With proper planning there is no reason why the process could not be completed in a two-month period (1 February to 31 March) and therefore completed prior to Easter 2002. The longer the period the greater the confusion for consumers and the greater the cost for retailers in dual pricing displays and dual tills.

The Committee recommends that the Minister for Finance raise at ECOFIN and the Taoiseach raise at the European Council, the issue of revising the final changeover period with a view to a more effective and efficient launch of the new Euro currency (see recommendations).

(iii) Customer Service and Communication

In each EMU member state an agency is preparing public opinion and business entities for the changeover. In Ireland this is the responsibility of FORFÁS. Some of the foregoing and following information comes from documentation circulated by them. They advise that consumers may be confused by the changeover and suspicious of price increases during the changeover period.

Such suspicion will be natural given that the Euro is worth less than the punt so all prices will superficially have “gone up”. For example, the loaf of bread which cost IR£1 will cost E1.20 Euros (same value but different denomination).

Customers will therefore need to be vigilant as will the Director of Consumer Affairs on their behalf. Customers will need assistance in understanding how the Euro will affect business transactions.

The Joint Committee heard from Mr. William Fagan, Director of Consumer Affairs that after 1 January, 1999 the 2.5 per cent. spread which constitutes 83 per cent. of the banks income on foreign currency transactions will effectively be illegal for Euro area currencies and that they would “almost certainly” apply for an increase in commission rates. The Joint Committee notes that the Director’s 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 that the same applies if an Irish business wishes to transact business in euro with another European country”.

FORFÁS suggest that businesses inform consumers on the practical changes in order to gain their acceptance, e.g. by providing fact sheets on prices, letters, shop notices or conversion charts. For business customers, they suggest they communicate their planned changes well in advance and gain feedback. This has implications for clients of Irish businesses in EMU member states.

(iv) Consumer Affairs

The Committee heard evidence from the Director of Consumer Affairs. Two issues in particular are of concern to the Committee arising from its deliberations:

(a)Consumer protection in general, and

(b)Protection of those who pay interest to moneylenders.

Firstly, in relation to consumer protection in general, the Committee notes that price transparency as well as the fact that a large proportion of Euro coins will be of a lesser value than our present pennies and two-pences, should contribute towards protection for consumers against price increases. However, it would be difficult to pick a worse date than 1 January to change a currency from a consumer viewpoint. This is because of the holiday period when banks are closed and New Year sales commence.

The interests of the Consumer are central to the Commmittee’s concerns, as are the implications of price increases for inflation. Therefore, the Committee recommends that the Director of Consumer Affairs should be authorised, and funded, to appoint a “Yell and Tell” consumer representative in each Euro-parliament constituency on a modest fee, free-lance basis during the change-over period (see recommendations).

Secondly, the Committee is concerned about the possible effect of money lending practices on lower socio-economic groups, and, in particular, that the benefits of low interest rates may not be passed on. Without commenting on the practice of money lending in general, the Committee is anxious to ensure that poorer persons are not further exploited. We therefore recommend that the Director of Consumer Affairs pay particular attention to this issue (see recommendations).

(v) Human Resources

Businesses will need to educate employees and customers in advance about the process and the issues surrounding the Euro to avoid confusion. As yet many Irish businesses do not seem to have put in place such training programmes for employees, nor have they engaged in dialogue with their suppliers and customers. The Committee recommends that FORFÁS and IBEC intensify their efforts in this area, encouraging companies and helping to design specific programmes (see recommendations).

(vi) Contracts

The legal framework for the continuity of contracts over the transition period and technical rules for the conversion rates (including rounding) have basically been finalised by the European Union. The regulations, which were endorsed by the EU Council of Finance Ministers during Ireland’s EU Presidency, will guarantee the continuity of existing contracts.

Under law:

(a)The introduction of the Euro will not have the effect of altering any term of a contract nor give the right unilaterally to terminate a contract or excuse performance.

(b)From 1999 onwards, any reference to a currency of a participating country for example, Irish Pound, French Franc, DM in a contract will be interchangeable with the Euro unit at the appropriate conversion rate.

(c)Contracts denominated in ECUs (European Currency Units) will be converted to Euros at a rate of 1 for 1.

For contracts denominated in the currency and governed by the laws of Non-EU countries (e.g. some US contracts) legal advice may be necessary, and should be taken, on the impact of EMU on these contracts where they exist.

(vii) Display of Prices

EU directives will be issued to cover the legal aspects of how and when firms should display prices in both currencies. Firms must comply with EU or national regulations on the display of prices or fixed conversion rates, sizes and use of symbols. Firms must also comply with regulations on what commission may be charged on currency exchange and threshold and rounding rules.

(viii) Accounting and Finance implications of the Euro

During the changeover period (1 January, 1999 to 31 December, 2001), entities must select the desired reporting currency, be it Euros or the existing national currency, in which their financial statements will be presented. The key-determining factor in this will be the requirements of users of financial statements such as shareholders, bankers and the revenue authorities.

Several options are available to Irish entities (and presumably will be available in all 11 EMU member states) including:

(a)a dual approach, i.e. publishing two sets of financial statements, one in Irish Pounds and one in Euros;

(b)publishing a single set of financial statements with the financial information denominated in both Euros and Irish Pounds; or

(c)opting for either Irish Pounds or Euros and producing a single set of financial statements in the selected way.

(ix) Information Technology

The introduction of the Euro could have a significant impact on companies IT systems (software, hardware and data). All systems referencing currency may need converting. Not all existing systems can cope with dual currency. Consequently the impact needs to be assessed so that a company can decide:

(a)the extent of resources required to adapt existing systems, and

(b)when adaptation needs to take place to ensure that systems are ready on time.

This issue may have implications for Irish businesses as well as for clients of Irish businesses in EMU participating states.

All businesses are being advised by FORFÁS, as a first step, to designate responsibility for the preparation of that business for the Euro to one person in each organisation. The Committee strongly believes that any business, which has not yet done so, should appoint such a person immediately. It is important that the person be aware of the scope of the task involved. To the extent that there is an awareness of Euro changeover issues they seem to concentrate solely on information technology issues. Important as IT matters no doubt are, there are numerous other implications for business as outlined in this report.

FORFÁS (the Authority responsible for advising businesses on the new currency) advise five steps in planning.

1.Assign responsibility.

2.Conduct a business impact analysis.

3.Identify functional implications.

4.Prepare work plans.

5.Design, test and implement changes.

In February of this year the Committee was informed that hardly any software companies had produced computer packages which companies can buy off the shelves to assist them with Euro-Conversion, though packages were promised for late in 1998. The Committee recommends that this concern be given priority consideration by Government, if not addressed by the time this report is issued (see recommendations).

(x) SMEs (Small and medium sized Enterprises)

The Committee is concerned with evidence given that very limited preparation for EMU is being made by SMEs.

1.The Committee recommends that the campaign of FORFÁS and the Euro Changeover Board be re-examined by the relevant Government departments so as to ensure that SMEs are targeted for special assistance towards preparation for EMU (see recommendations).

2.The Committee notes the evidence of the Director of Consumer Affairs that many SMEs had told him that it would still be cheap for them, because of the cost of clearance through different banking systems, to, for example, use a Deutschmark denominated instrument rather than a Euro denominated instrument in Euro business transactions. This arises because, while currencies will have been harmonised, the banking or clearing systems will not have been harmonised and charges for such services will continue to apply. The Committee notes the Director’s assurance that in considering applications under section 149 of the Consumer Credit Act he will try to ensure that it is cheaper for an Irish SME to use the Euro to send money. The Committee recommends that the Director publish details of his intentions in this regard as soon as possible (see recommendations).

(xi) Industry in general

The Committee notes the evidence given that there is a need for some industry norms and standards. Industry can decide, for example, when in the three-year period from 1999 to 2001 it will switch its invoicing to Euros. The suggestion that certain sectors of industry all change to Euro invoicing together where practicable was put to the Committee. This idea, on the face of it, seems eminently sensible.

The Committee recommends that FORFÁS and the Euro Changeover Board give careful consideration to ways and means of advancing this idea. (see recommendations)

Communicating Europe Task Force

The Committee notes the transfer of the Communicating Europe Task Force to the Department of Foreign Affairs.

Given the challenges of EMU, EU Enlargement, Agenda 2000, etc. the Committee recommends that this task force be again chaired by a Minister of State, as was the norm before its transfer to the Department of Foreign Affairs, and that the Task Force report on its activities twice annually to the Houses of the Oireachtas (see recommendations).

Risks attached to EMU

It has to be emphasised that there are risks attached to Ireland joining EMU. All decisions of this nature are based on risk. The balance of risk favours Ireland’s entry to EMU, as has been reported upon by ESRI. How this risk is managed will be central to Ireland’s successful participation. Asymmetric economic shocks will have to be managed without recourse to, for example competitive devaluation.

In any event devaluation is only a short-term solution to underlying problems of competitiveness which long term must be addressed.

Ireland and the U.K.

Irish exports to the U.K. have significantly reduced, as a percentage of total Irish exports, since Ireland joined the EU. Approximately 25 per cent. of our exports now go to the U.K., less than half the percentage which prevailed 25 years ago. In terms of employment these remain centrally important as much of these exports relate to indigenous Irish industry with high employment content.

In relation to ERM II it is evident that the U.K. will resist joining, not least because of the U.K. experience in the period 1990 - 1992. This could present difficulties for Ireland in certain circumstances. However, the possible difficulties for Ireland arising from the decision by the U.K. not to join EMU at the outset, and not to join ERM II, can be overstated. It should be remembered that the requirement to qualify for future EMU membership, 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 of the applicants ability to meet EMU qualifying criteria.

Furthermore, the Maastricht Treaty requires that all EU member states should treat exchange rate policy as a matter of common interest. The Bank of England will participate in the General Council of the European System of Central Banks (ESCB) and will be subject to the obligations this imposes.

The recent British Euro Awareness campaign for business and the British Government’s declared intention to publish a Euro changeover plan are positive signs of Britain’s preparedness to consider eventually joining the Euro zone.

The advent of the Euro will have other immediate implications for the conduct of business in and with the U.K. For example, in passing, it is worth noting that British Steel recently announced that it would ask its suppliers to invoice in Euros even though Britain is not joining EMU at this stage. British Steel has business subsidiaries throughout the EU. A substantial part of British Steel sales are either in German Marks (DM) or influenced by German Marks (DM).

The difficulties for the Irish economy, which would be created by U.K. devaluation, are regularly speculated upon. However unlikely such a devaluation may appear, it is clear that sterling devaluation could cause serious problems for Irish indigenous industry. The Committee therefore recommends that a special strategy be put in place to provide for such a possible eventuality. The Minister for Finance should lay plans for such a strategy before both Houses of the Oireachtas (see recommendations).

Investment in Infrastructure

It is clear that we are going to have to compete with the leading economies of Europe, and telecommunications and transport, in particular are two key areas which will require further investment. Given the implications of future reductions in EU funding that the constraints on future Government borrowing, it seems desirable to have much more public/private partnership in the financing of future infrastructure investment. Accordingly, the Committee recommends that part of the forecasted annual budget surplus be allocated to investment in needed additional infrastructure in such a way as to attract private partnership co-funding thereby maximising the effect of expenditure (see recommendations).

This consideration should be given priority over considerations of debt repayment or reduction, especially given that the debt GNP ratio is forecasted to reduce to 30 per cent. early in the next decade.

Asset Inflation

As stated earlier Ireland has enjoyed a period of unprecedented economic growth in recent years while maintaining a low level of inflation. Continued low inflation is an essential prerequisite for success in the Euro zone. Bearing this in mind the Committee is deeply concerned at the emergence of asset inflation, particularly in housing costs, which has taken root and needs to be tackled if a broader inflation problem is not to develop as the workforce seeks compensation to meet rising house costs. (This rise in house costs is accentuated by increased demand from returned Irish emigrants who accounted for over 23,000 of the estimated 44,000 who migrated into the State in the year to April 1998. Net immigration - the balance between inward and outward migration - reached 22,800 in the same period.) This issue should be tackled within the terms of continued social partnership if it is not to contribute to post-EMU difficulties for the economy.

In parts of the country housing costs have become prohibitive, this is especially true of Dublin. An examination of Dublin Corporation’s House Building Programme for recent years shows the following results:

1988 (148); 1989 (nil); 1990 (25); 1991 (74); 1992 (80); 1993 (71); 1994 (277); 1995 (366); 1996 (310); 1997 (181); 1998 (230 estimate). This compares to a high of over 1,700 per annum in the early 1980s (source: Dublin Corporation).

This reduction in house building is partly accounted for by the lack of land owned by Dublin Corporation on which to build. It is understood that Dublin Corporation has initiated discussions with the other three Dublin Councils with a view to creating a common housing list throughout Dublin for all four authorities. If agreed, this should result in more land becoming available to Dublin Corporation to meet its housing needs which are clearly at crisis point as less than 2,000 sites remain available to the Corporation for house building in the city at the end of the century.

By increasing the supply of local authority houses throughout the country, not only in Dublin, demand for available private housing should ease and this in turn should contribute to an easing in inflationary housing costs. This should assist with the negotiations of future social partnership agreements aimed at controlling inflation and meeting EMU criteria.

The Committee therefore recommends that consideration be given to setting specified increased local authority house building quotas, and financing this in part out of forecasted budget surpluses thereby reducing these surpluses by investing in new local authority housing stock, accompanied, where appropriate, by upgraded infrastructure such as roads, rail, etc. (see recommendations).

National Contingency Fund

Given that forecasts anticipate a debt/GNP ratio of about 30 per cent. in the first five years of the new century, as well as anticipated future Government budget surpluses, it would not seem prudent to apply forecasted budget surpluses to simply reducing Government indebtedness, especially where wise investment in housing, and other infrastructure remains a priority. However, the Committee suggests that consideration be given to the creation of a National Contingency Fund, into which part of the forecasted future budget surpluses be paid to provide for possible unforseen events arising from EMU (see recommendations).

Ireland’s exceptional economic performance has been assisted by transfers from the European Union, of the order of IR. £23 billion since we joined in 1973. These transfers enabled Ireland to transform its infrastructure, building a modern telecommunications system and a modern road network. But much more investment in infrastructure needs to be made if we are to meet the competitive challenges which lie ahead and which EMU will accentuate. Transfers also enabled us to invest in education to the point where we have one of the highest levels of participation in third level education of any OECD member state. However, for many years while these transfers took place Ireland’s growth rate did not convert into employment.

Social Partnership

This changed when successive Irish Governments entered into partnership with the social partners i.e. business, trade unions and farming organisations. This began with the Programme for National Recovery (PNR) in 1987, which was succeed by the Programme for Economic and Social Progress (PESP 1) and then PESP 2, in turn succeed by the Programme for Competitiveness and Growth and currently Partnership 2000. these national agreements, from 1987 to 2000, between the Government of the day and social partners, set macro economic targets such as Debt/GNP ratio, general budget deficit, and related expenditure targets. They also set agreed tax cutting targets, inflation targets and national rates of pay increases over a period to met these targets. The result has been that the Irish economy has become more competitive and more productive and the smaller pay increases in the hands of the worker have been more beneficial.

Profit-Sharing Incentives

The continuation of this partnership approach will be essential to the success of Ireland’s participation in the EMU project. Because the EMU project reduces the number of adjustments which can be made in the economy it is very important that efforts be made to increase the income flexibility of the economy to cope with shocks. Private sector companies should consider extending profit/loss sharing schemes more widely and should consider moving towards extending bonus payment systems. Some way should be found of extending this practice to the public sector. The Committee recommends that the ESRI be asked to undertake further studies on how this practice might be extended in the private sector and implemented in the public sector (see recommendations).

Taxation Issues

In the 1998 Budget, the Minister for Finance confirmed the Government’s intention to introduce a 12.5 per cent. rate of corporation tax for trading profits for all sectors with a 25 per cent. rate for passive non-trading profits for all sectors. This will be phased in over the coming years to eventually replace the current dual rate structure which provides a 10 per cent. rate for manufacturing and certain internationally traded services and a higher standard rate for other activities (25 per cent. on first £50,000 and 32 per cent. on balance, at present).

The retention of dual rate structure, with a 10 per cent. rate for specific sectors of the economy and a higher rate for other sectors, is not tenable in the long term in view of the more rigorous enforcement of EU State Aid rules by the European Commission and the recent adoption by the ECOFIN Council (EU Finance Ministers) of a code of conduct for business taxation.

There is also a strong economic rationale for plans to equalise, over the medium term, the level of corporation tax across all sectors of business activity especially in the context of one currency and grater pricing transparency. The services sector now accounts for an increasing share of Ireland’s employment growth and it is, therefore, desirable to move progressively to a corporate tax system which treats services on the same basis as manufacturing, according to this philosophy.

The EU and Value Added Tax (VAT)

In relation to VAT, the 1997 sixth EU Directive on VAT covers the areas of agreement to date and a transitional system has been in operation in the EU since the introduction of the Single Market on 1 January, 1993.

This system continues automatically until the Council of Ministers of the EU decide on definite system. In July 1996, the European Commission brought forward a work programme which involves a phased presentation of proposals to the end of 1999 in order to works towards a common VAT system throughout the EU. No major changes are expected to be in force over the next 5 years.

The Commission have indicated that their proposals will be based on a single place of registration for traders and will involve considerable harmonisation of the existing rating structure. This is described as the origin system and would result in VAT being charged in country of origin irrespective of destination within the EU. Rates range from 15 per cent. to 26 per cent. across the EU at present as VAT rates continue to diverge. In time a new standard rate, possible 17per cent. or 18 per cent., it is suggested, could be set within a narrow band and a small number of reduced VAT rates would be allowed, but their number and scope would be limited. The Commission has only recently begun to table formal proposals from their work programme and their proposal on the main elements and in relation to the rating structure have yet to emerge.

As EMU takes root such considerations will become more active. The following is an extract from the proposals circulated by the Commission. In relation to the promotion of economic growth and reducing unemployment the document states:

At the heart of all such considerations is the Single Market. Its aim was, and still is, to convert 15 separate national markets to a Single European Market, to open up new opportunities for our industry by giving immediate access to over 350 million consumers, and so to strengthen our economies competitiveness in the world. The rapid progress towards an increasingly global economy demonstrates how important it was to prepare for this steadily increasing internationalisation. A further strengthening of our Single Market policy is necessary if full advantage is to be taken of its initial conception. This is particularly true for a tax like VAT…

When discussing the implications of EMU it needs to be borne in mind that EMU is part of a long-term project of building a closer and more prosperous European Union, an essential part of which is the deepening and enhancement of the Single Market. In that context EMU has not just short-term implications as discussed elsewhere in this report, but also medium-term implications on issues like VAT.

GDP/GNP Issues

As mentioned earlier Ireland has a GDP estimated at 105 per cent. of the EU average (90 per cent. on a GNP basis). The GDP figures include price transferring. Many American companies locate in Ireland for the 10 per cent. tax rate and therefore GNP is probably a more accurate rate for the comparative level of wealth in Ireland at this stage. Presumably, the same applies to the other 14 Member states.

The attached table (Table 1) is of GDP and GNP per capita on a Purchasing Power Standards basis (PPS). In the case of Portugal both their GDP and GNP is rated as 72 per cent. of the EU average, for Greece it is 67 per cent. and 68 per cent. respectively, 78 per cent. and 78 per cent. for Spain, in the case of Luxembourg they have 163 per cent. on a GDP basis and 174 per cent. on a GNP basis.

The second attached table (Table 2) is a bar chart of GDP per capita in the 15 EU states plus the 11 applicant states, and the third table (Table 3) expands on this chart.

The fourth attached table (Table 4) gives average gross hourly earnings in industry per EU state (dated October 1994 but contained in European Union data for 1996).

The table does not include information for France, Italy and Sweden as this was not available at the time of compiling this report.

Taking the ECU as a common European currency measure, the table gives average gross hourly earnings in industry for manual workers (males an females) for all industries. This starts with a low of 4.04 ECUs in Greece and goes to a high of 12.94 ECUs for Germany.

The GDP/GNP figures and the average gross hourly earnings in industry for manual workers data may be of assistance to Irish businesses, trade unions, public representatives and others in considering the management of risk attaching to EMU.

It should be remembered that invoicing rates will become more transparent across the 11 Euro participating states [and in other states where some businesses will require invoicing in Euros (British Steel, for example)] as one currency is used, in due course.

PURCHASING POWER STANDARDS (PPS) TABLE 1

EU 15, GDP/GNP 1997

Source: EU Commission Autumn Forecasts, 1997

TABLE 2

APPLICANT COUNTRIES OF CENTRAL AND EASTERN EUROPE AND EU MEMBER STATES MEMBER STATES

GDP PER CAPITA (at Purchasing Power Standards), 1995

TABLE 3

APPLICANT COUNTRIES OF CENTRAL AND EASTERN EUROPE AND EU MEMBER STATES

Basic Data (Year 1995)

TABLE 4

Average Gross Hourly Earnings in Industry - October 1994

Manual Workers (Males and Females)

All Industries (NACE 1-5)

Source:Eurostat 33rd edition of basic statistics of the European Union 1996 Data for Denmark, France, Italy, Austria and Sweden unavailable.

Recommendations

The following is a summary of the recommendations made in the body of the report:

1.The committee recommends that the proposed six months of dual currencies (January-June 2000) be shortened to perhaps two months starting on 1 February, 2002. In this way the winter sales would be over and also a shorter “dual period” would be less confusing for consumers and less expensive for retailers. The Minister for Finance and the Taoiseach should report back to the Oireachtas on their efforts with ECOFIN and the European Council in this regard (see pages 14 and 17).

2.The committee recommends that the Department of Finance lay a report on the continuing implications for the Irish economy of the Stability and Growth Pact before the Oireachtas twice annually, before any such report is submitted to European institutions (see page 14).

3.The Director of Consumer Affairs should be authorised, and funded to appoint a “Yell and Tell” Consumer Representative in each Euro-Parliamentary constituency on a modest fee, free-lance basis during the changeover period (see page 18).

4.The Committee recommends that the Director of Consumer Affairs pay particular attention to money-lending practices and how interest rates are applied by moneylenders, to ensure that poorer persons are not further exploited in terms of interest charges (see page 19).

5.The Committee recommends that FORFÁS and IBEC intensify their efforts to educate employees and customers in advance about issues surrounding the Euro, encouraging companies and helping to design specific programmes (see page 19).

6.The Committee recommends that concerns it raises regarding the availability of computer packages be given priority consideration by Government, if not addressed by the time this report is issued (see page 23).

7.The Committee recommends that the campaign of FORFÁS and the Euro Changeover Board be re-examined so as to ensure that SMEs are targeted for special assistance towards preparation for EMU (see page 23).

8.The Committee recommends that the Director of Consumer Affairs publish details of his intentions in relation to assistance to SMEs, especially under Section 149 of the Consumer Credit Act, as soon as possible (see page 23).

9.The Committee recommends that FORFÁS and the Euro Changeover Board give careful consideration to ways and means of assisting sectors of industry to change to Euro invoicing together where practicable (see page 24).

10.The Committee recommends that the Communicating European Task Force be again chaired by a Minister of State, as was the norm before its transfer to the Department of Foreign Affairs, and that the Task Force report on its activities twice annually to the Houses of the Oireachtas (see page 24).

11.Sterling devaluation could cause serious problems for Irish indigenous industry. The Committee therefore recommends that a special strategy be put in place to provide for such a possible eventuality. The Minister for Finance should lay plans for such a strategy before both Houses of the Oireachtas (see page 26).

Anticipating future budget surpluses and a forecasted debt/GNP ratio of about 30 per cent. in the first 5 years of the new century, it would not seem prudent to apply forecasted surpluses to simply reducing Government indebtedness, especially when wise investment in housing, and other infrastructure, is badly needed.

12.The Committee recommends that part of the forecasted annual budget surpluses be allocated to investment in needed additional infrastructure in such a way as to attract private partnership co-funding (see page 26).

13.The Committee recommends that consideration be given to setting specified increased local authority house building quotas, and financing this in part out of forecasted budget surpluses, thereby reducing these surpluses, by investing in new local authority housing stock, accompanied, where appropriate, by upgraded infrastructure such as roads, rail, etc. (see page 27).

14.The Committee suggests that consideration be given to the creation of a National Contingency Fund, into which part of the forecasted future budget surpluses be paid to provide for possible unforeseen events arising from EMU (see page 28).

15.The Committee recommends that the ESRI be asked to undertake further studies on how income flexibility to cope with economic shocks can be extended in the private sector and implemented in the public sector (see page 29).