Appearance before the Joint Committee on Finance, Public Expenditure & Reform
Tuesday 19 June 2012
I would like to thank the Chairman and Committee members for inviting me to speak to you today in advance of the Ecofin Council of Ministers later this week. I would like to open by giving an overview of the European and International dimension to the work of the Ecofin Council. As this will be the final Ecofin under the Danish Presidency, I will take the opportunity to brief you on some of their noteworthy achievements. Lastly, I will speak about the agenda for Friday’s meeting, after which I will be happy to take questions and observations from Committee members.
Process: The work of the Ecofin Council, is heavily influenced by the work of the European Commission; the priorities of the rotating Presidency, currently held by Denmark; the work of Heads of State and Government, which meets regularly in European Council Summits in Brussels; the ongoing volatile situation in the financial markets relating to the crisis in the Euro area; and the work of the G20 and the IMF.
Specifically in relation to ongoing international developments, the G-20 is meeting as we speak in Mexico and it will also be considering a number of the issues that we are going to be discussing later in the week at the Ecofin Council. The G20 Summit will end today and it is expected that the Mexican Presidency will issue the usual Communiqué, setting out decisions taken.
Next Friday’s Ecofin will be the final meeting under the Danish Presidency, and consequently there is a heavy agenda proposed. The Danish Presidency has achieved some notable successes during its chairing of the Ecofin Council, including:
Agreement to initiate a pilot phase on European project bonds in 2012-13. This project will contribute to enhancing Europe’s competitiveness and thereby enhance the prospects for economic growth, which we can all agree is vital to the resolution of the ongoing crisis in the Euro area. The pilot phase on project bonds will make cooperation easier between private stakeholders and the European Investment Bank (EIB), EU and the member states on infrastructure projects within transport, energy, and information technology and communication technology.
Agreement that will strengthen the regulation of credit rating agencies. The new rules are intended to improve credit ratings so that they reflect the true credit risk. The rules will also reduce dependency on credit ratings – both for investors and in financial regulation. The new rules will furthermore improve the possibility for investors and issuers to hold a credit rating agency liable if it fails to comply with the rules. This agreement will be an important driver of improved risk assessments by credit rating agencies, which will in turn restore confidence to the financial markets and ultimately make it easier for Governments to access credit.
Council general agreement on the Capital Requirements Regulation and Directive. The strengthening of banks’ capital requirements is an important part of the overall prevention of future crises and the rules imply extensive regulation of the financial sector, including more and better capital and liquidity in banks, the possible imposition of different, temporary additional requirements for banks to ensure financial stability and elements of good corporate governance and a tightening of the requirements for the member states’ sanctions towards non-complying institutions. Discussions are ongoing with the European Parliament on this proposal.
Turning now to next Friday’s Ecofin meeting, my Department has already supplied the Committee with the latest draft agenda for the meeting and I will now highlight some of the key issues that will be discussed:
1.There will be a presentation by the Commission of its recently published proposal for recovery and resolution of credit institutions and investment firms. Since late 2008, on foot of a request from Ecofin, the Commission has been working to develop a proposal for an EU Framework for Bank Recovery and Resolution. The publication has taken place against the wider backdrop of the proposals for a banking union that has received media coverage in the last number of days following Commission President Barroso’s statements. The banking resolution proposal is one of the main elements of this. Ireland has been supportive of the Commission’s work to prepare its proposal. Now that it has been published, officials from the Department of Finance, the Central Bank and the NTMA will examine it in detail in consultation with interested stakeholders to formulate an Irish view.
2.There will be an orientation debate on the Energy Taxation Directive. The Presidency has outlined a number of questions for answer by Ministers regarding the orientation of future work on this topic which relate specifically to the issues of (a) a carbon tax element to energy taxation, (b) potential removal of the principle of relativity between fuels for similar use, (c) minimum tax rates and (d) the relationship between the Energy Tax Directive and the EU Emissions Trading Scheme. There are a number of fundamental differences between Member States on this proposal and, despite a number of discussions during the last three Presidencies, progress has been very slow. Ireland can support the idea of an orientation debate at this point in discussion of the proposed revision of the Energy Tax Directive. Ireland would have liked to see a mandatory EU-wide carbon tax but it has become very clear that this did not receive the unanimous support required. To this end, Ireland would support an optional carbon tax and a system that allows Member States to apply a structure of taxation combining two components if they so wish.
3.There will also be an orientation debate on the Financial Transaction Tax proposal. Opinions on the FTT are polarised. Some countries – notably Austria, France and Germany – are strongly in favour of an FTT, while others – notably the Netherlands, Sweden and the UK – are strongly against. Agreement on the current proposal is not looking likely at an EU wide level and agreement for others to move forward on an enhanced co-operation approach may be sought.
4.Ireland has indicated that an FTT, in whatever final form it might take, should apply on a wide international basis to include, in particular, the major financial centres. This is in line with the Commission’s desire that the tax should be applied on a global basis. Such an approach would avoid the danger of activities gravitating to jurisdictions where taxes are not levied on financial transactions. Ireland also thinks it is important that any such tax should apply on an EU wide basis, rather than only in the Euro zone, to prevent any distortion of activity within the Union.
5.Council conclusions on the report of the Code of Conduct for business taxation. The Code of Conduct group was established in the late 90s, with the aim of identifying and abolishing harmful tax practices. This report presents a progress report on achievements during the Danish Presidency. It is now becoming the norm for these reports to be presented at the end of each Presidency term.
6.There are no issues of particular concern to Ireland contained in the report and indeed, this item has become an ‘A’ point, which will allow for its approval with no discussion.
7.In preparation for the European Council meeting on 28 June, ECOFIN may be asked to endorse two Reports on tax issues. The High Level Working Party on Tax issues (HLWP) has prepared this report for endorsement by Ecofin in advance of its presentation to the European Council. The report provides an update on the state-of-play for each of the legislative proposals that are currently being discussed at the various working groups, as well as highlighting progress in certain areas of tax co-ordination.
8.The report is factual and provides a fair assessment of the current situation. There are no particular issues raised which are a concern for Ireland.
9.Ministers will be asked to approve draft Council Recommendations on the National Reform Programmes 2012 to each Member State and draft Council Opinions on the updated Stability or Convergence Programmes. Ministers will also discuss a draft Council Recommendation on the implementation of the broad guidelines for the economic policies of Member States whose currency is the euro. Ministers will be asked to approve the draft Council Recommendation on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro.
10. Following a series of meetings at official level an amended text has been arrived at, which reflects the views of all Member States, including Ireland. The recommendation addressed to Ireland was to continue with the implementation of the EU/ECB/IMF programme. The text now recommends that those Member States whose currency is the euro should take action within the period 2012-2013 to, among other things:
-Strengthen fiscal discipline and fiscal institutions at both national and sub-national levels to enhance market confidence in the medium- and long-term sustainability of public finances in the euro area.
-Pursue fiscal consolidation in line with the rules of the Stability and Growth Pact, which account for country-specific macro-financial situation.
-Take action to improve the functioning and stability of the financial system in the euro area. Accelerate the steps towards a more integrated financial architecture, comprising banking supervision and cross-border crisis resolution.
- Implement structural reforms, which also promote flexible wage adjustments.
11. We will discuss in restricted session issues related to the implementation of the Stability and Growth Pact, namely the Council Decisions abrogating Excessive Deficit Procedures for Germany and Bulgaria and a Council Implementing Decision lifting the suspension of commitments from the Cohesion Fund for Hungary. The abrogation of the EDP for both Germany and Bulgaria is expected to be a straight forward process as both countries have corrected their excessive deficits in a durable manner. In relation to Hungary, on foot of a request from the Ecofin Council, the Commission has assessed that the country has taken effective action in response to a recommendation from the Council and, accordingly is proposing a Council decision to the effect that the suspension of cohesion funds, effective from early next year, should be lifted.
12. There will also be an exchange of views on the Convergence Reports from the Commission and the ECB which have been recently published. The origin of these reports is a Treaty requirement for both institutions to assess convergence in Member States with a derogation at least once every two years. The recently-published analysis concludes that none of the eight Member States with a derogation currently fulfill the conditions for adoption of the euro.
13. Finally, Commissioner Rehn will inform Ecofin Ministers about the discussions at and proposed follow-up to the G20 Summit (Mexico, 18-19 June 2012), which I alluded to earlier.
Ireland’s Economic Situation
Before concluding, I would like to say a word on our own economic and budgetary situation. My Department’s latest projections were set out in the 2012 Stability Programme Update (SPU), which was published on April 27. GDP growth of 0.7 per cent is projected for this year, which would be the second successive year of positive – albeit modest – growth. Yesterday, the ESRI published a fairly similar assessment. The exporting sectors are leading the recovery, and this underscores the importance of restoring sustainable growth in the euro area which is a key trading partner for Ireland. In this context, resolving the difficulties in the euro area will be vital. Furthermore taking account of the Exchequer Returns for the first 5 months of this year, our budget is on track.
Resolving the crisis
The June European Council will build on President Van Rompuy’s statement following the informal Heads of State & Government summit on 23 May. This statement sets out what needs to be done to bring the EU as a whole back to a situation of economic and monetary stability. Central to the statement is that EU policies must fully support growth. We need to find innovative ways to finance new investment and allow SME’s better access to credit and above all we need to address the issue of job creation and get people back to work. If the EU can do this and individual member states can address their Government deficit and debt issues, we can look forward to a more positive and stable future.
Ireland will mark forty years as a committed member of the European Union next year during our Presidency. We take up the Presidency of the European Union on 1 January 2013 and will work in collaboration with the other members of our “Trio” - Lithuania and Greece. During that time, membership of the EU has been good for Ireland in terms of attracting significant foreign direct investment and in the provision of access to a much bigger market for our exports. Equally Ireland has been perceived by our European Partners and successive members of the European Institutions as a diligent, pragmatic and constructive member of the Union. We have demonstrated this continuously during the past six occasions when we held the Presidency of the EU and have gained a reputation for holding efficient, businesslike and pragmatic Presidencies – Indeed in 2004 we presided over the enlargement of the EU to 25 Member States. The Government believes that Ireland’s future is intimately linked with continued membership of a strong and vibrant EU and as a member of the Euro area. It is the intention of this Government to continue to proactively engage with senior officials in the EU Institutions and our EU partners in the implementation of policies aimed at strengthening growth and stabilizing turbulent financial markets.
Thank you for your attention and I will be happy to respond to any questions or observations you may have.