Second Stage Speech by Minister for Finance Mr. Michael Noonan, T.D. on 7th June 2012
I move that the European Stability Mechanism Bill 2012 be now read a Second Time.
I would like to thank the House for agreeing to discuss this Bill 2012 today.
As Deputies will be aware, the Government published this Bill at the beginning of last month, in line with our explicit commitment to make available, well in advance of the referendum, all legislative proposals which were in any way related to the Stability Treaty.
I am looking forward to a constructive debate on the ESM Treaty and the ESM Bill today. The Bill is required to allow Ireland to ratify the ESM Treaty, in accordance with the agreement by the Euro Area Heads of State or Government, on 9 December 2011 on the acceleration of the ESM into force by July 2012.
Before I turn to the specifics of the ESM Treaty and the ESM Bill 2012, I would like to say a few words on recent developments.
Ireland has made significant progress in implementation of our EU-IMF Programme of Financial Support. Our programme is on track, we have met all of our commitments and exceeded many - completing over 100 actions to date - and we are on track to reduce our deficit to below 3% in 2015. We have also negotiated a number of improvements to the programme since taking office including the reduction in the interest rate, reversal of the minimum wage cut, the Jobs Initiative, the deferral of the promissory note payment and most recently the agreement to reinvest at least 50% of the proceeds from the sale of state assets into viable projects. However, significant external challenges remain.
Last week, the people of this country voted in favour of the Stability Treaty – another step on the road towards economic recovery. I welcome that and thank everyone who came out to Vote Yes. The people of this country have recognised the importance of restoring confidence in a stable euro, ensuring Ireland has the assurance of access to EU Funds under the ESM Treaty, should they be required, and the importance of good housekeeping for our economy.
Put simply, we cannot continue to spend more than we raise in taxes, increasing our debt levels and draining the resources intended for stimulating economic growth, job creation and public services in order to service our spiralling debt. The yes vote last week recognises that we have to manage our debt and budgets. Ratifying the Stability Treaty will demonstrate our commitment to do just that.
The Government will now begin the process of ratification of the Stability Treaty. As we have already said, we will also participate proactively in the discussions on a growth strategy agenda for Europe which will be the foremost item for discussion when the European council meets later this month.
Access to ESM funding as a safety net
Turning to the ESM, this Government believes the availability to Ireland of a credible funding backup as provided by the ESM Treaty will be very important in terms of market re-entry and leaving the EU / IMF Programme of Support. There is no clear answer to the question as to where else financial assistance could be found were a situation to evolve in which we required further assistance.
Enacting the ESM Bill 2012 before us today and ratifying the ESM Treaty will ensure that Ireland has access to this funding safety net if our efforts to reaccess the market are delayed in any way and we need to resort to further assistance.
The effective lending capacity of the ESM will be €500 billion. Following the Eurogroup meeting held on 30 March 2012, it was decided that the EFSF would remain active until July 2013. The ESM will be the main instrument to finance new programmes as from July 2012. The EFSF will, as a rule, only remain active in financing programmes that have started before that date. For a transitional period until 2013, EFSF may engage in new programmes in order to ensure a full fresh lending capacity of €500 billion for the ESM. After 2013, the EFSF will continue in an administrative capacity until all outstanding bonds have been repaid. In this context, I should point out that there is provision that the ESM may assume the rights and responsibilities of the EFSF. Such an event would not however affect the existing terms and conditions of our EFSF loans.
European Stability Mechanism
Turning to the ESM Treaty and its provisions, the Treaty set out in the schedule to this Bill was signed by Euro Area Member States on 2 February 2012. The original version of the treaty was signed on 11 July 2011, but was subsequently modified to incorporate decisions taken by the Euro Area Heads of State or Government on 21 July and 9 December 2011 aimed at improving the effectiveness of the mechanism.
The ESM will perform the same activities as the European Financial Stability Framework, which it is to replace, that is
·issue bonds or other debt instruments on the market to raise the funds needed to provide loans to countries in financial difficulties.
·intervene in the primary and secondary debt markets
·act on the basis of a precautionary programme
·finance recapitalisations of financial institutions through loans to governments including in non-programme countries
All financial assistance to Member States will be provided under appropriate conditionality, appropriate to the financial instrument chosen.
The ESM will use an appropriate funding strategy so as to ensure access to broad funding sources and enable it to extend financial assistance packages to Member States under all market conditions.
Calls to extend the ESM to directly recapitalise banks
As Deputies will be aware, there has been considerable attention on the challenges facing the banking sector in Europe in recent weeks. There are increasing calls for the ESM’s tools to be extended to allow the ESM directly recapitalize systemically important financial institutions rather than recapitalisation through loans to ESM members for the specific purpose of recapitalizing its financial institutions - thereby not adding to national debt by separating sovereign and banking debt.
As the Taoiseach said last week the developing situation in Europe's banking sector needs a comprehensive solution and Ireland's banking debt must form part of that solution. We will continue to monitor closely developments in Spain and elsewhere and we will seek a solution that works for Ireland – that assists our economic and financial recovery – to ensure that Ireland’s bank debt is made more sustainable.
Date of ESM coming into force
The ESM Treaty will enter into force as of the date when instruments of ratification, approval or acceptance have been deposited by signatories whose initial subscriptions represent no less than 90% of the total subscriptions set out in the Treaty. To date, France, Greece and Slovenia have ratified the ESM Treaty and the remaining Euro Area Member States are on track for ratification and the coming into force of the ESM in July.
As Deputies will be well aware by now, the ESM Treaty provides that the granting of financial assistance in the framework of new programmes under the ESM will be conditional, as of 1 March 2013, on the ratification of the Stability Treaty by the ESM Member concerned and on implementation of the balanced budget rule as specified in the Stability Treaty within the agreed timeline - one year after entry into force of the latter. The Stability Treaty contains a mirroring provision.
As Deputies will also be aware, the linkage of both the ESM and the Stability Treaty refers to new applications for assistance under the ESM and will not affect the transfer to the ESM of undisbursed amounts under the EFSF to Ireland and other programme countries. Thus, while the ESM will replace the EFSF and may assume the rights and obligations of the EFSF, this will not affect the terms and conditions of any amounts consequently transferred to the ESM and subsequently disbursed to Ireland.
Capital structure of the ESM
To obtain the highest possible credit rating, the capital structure of the ESM will have a total subscribed capital of €700bn. Of this amount, €80bn will be in the form of paid-in capital by the Euro Area Member States, paid in five equal installments from July 2012. The balance of €620bn will be callable capital. The contribution key for each Member State is set out in Annex 1 of the Treaty and is based on the ECB capital contribution key. For Ireland the key is 1.592% of the total paid and committed capital.
Ireland’s share of the €80bn in paid-in capital, based on the contribution key, will be just above €1.27bn. We will pay this into the ESM in five equal installments of €254m. Unlike the EFSF, there is no “stepping out facility” in the ESM when members enter a programme of support. Every member must therefore contribute its paid-in capital.
The ESM is being established as an as an intergovernmental organisation under public international law. Ireland’s contribution will be treated as a financial transaction. This means that while it will impact on Ireland’s Exchequer Borrowing Requirement, it will not impact on its General Government Deficit. Ireland’s share of the €620bn callable capital is based on the same key, i.e. 1.592% of €620bn making the callable capital €9.87bn which will be accounted for as a contingent liability on the State.
Following the decision of the Eurogroup on 30 March 2012, the paid-in capital will be made available more quickly than initially foreseen in the original ESM Treaty. Two tranches of capital will be paid in 2012; the first one in July, the second one by October. Another two tranches will be paid in 2013 and a final tranche in the first half of 2014. In line with the ESM Treaty, the payment of the capital will be further accelerated if needed to maintain a 15% ratio between the paid-in capital and the outstanding amount of ESM issuances.
Any decision to change the authorised capital stock of the ESM will require a unanimous decision of the ESM’s Board of Governors. I will be Governor for Ireland at the Board and serve to ensure Ireland’s interests are represented and protected.
Finally, before I turn to the Bill itself, I’d like to address specific issues which have arisen in recent weeks.
Firstly, this Government has no intention of trying to the veto the ESM, nor can Ireland prevent the establishment of the ESM. As I have already mentioned the ESM will come into force once the ESM Treaty has been ratified by Euro Area Member States representing 90% of the ESM capital commitments. Ireland represents 1.592%.
In addition to the 17 euro countries ratifying the Treaty establishing the ESM, all 27 Member States are in the process of ratifying an amendment to Article 136 of the EU Treaties, which deals with arrangements for the euro, to include a reference to the possibility of a stability mechanism (such as the ESM).
The second issue I want to address concerns calls for a referendum on the ESM Treaty. The reason we are not holding a referendum on the ESM is very simple. The ESM is a funding agreement which is fully compatible with the Irish Constitution. Ireland’s participation in the ESM does not in any way serve to limit the sovereignty of the State in the exercise of its economic affairs. It merely indicates the State’s willingness to participate as an equal sovereign nation in the permanent stability mechanism.
ESM Bill 2012
Turning to the ESM Bill 2012 itself - the purpose of this Bill is to further facilitate, in the public interest, the financial stability of the European Union by establishing a permanent stability mechanism to assume the tasks of the EFSF and the EFSM in providing, where needed, financial assistance to Euro Area Member States.
Section 1 provides the definitions to the legislation.
Section 2 provides to the Minister for Finance the authority to make payments to the ESM to cover Ireland’s contribution to our share of the authorized capital stock of the ESM in accordance with the Treaty.
Section 3 provides for payments to the ESM in respect of Ireland’s contribution to the ESM’s authorised capital stock to be paid out of the Central Fund. This provision caps payment at €11,145,400,400 being Ireland’s share of the authorised capital stock as set out in Annex II of the ESM Treaty. I should clarify that the covers both paid in capital and callable capital. As I have already outlined, paid in capital will amount to €1.27 billion with the remainder callable should the need arise.
Section 4 provides that any monies received from the ESM be it in the form of dividends or otherwise be paid into the Exchequer.
Section 5 provides that the ESM be immune from legal proceedings and enjoy inviolability in respect of official papers and documents.
Section 6 provides that the ESM shall be exempt from the requirement to be authorised or regulated by the Central Bank of Ireland.
Section 7 provides that the ESM be exempt from taxation; income tax, corporation tax, capital gains tax and any other taxation provided for by Article 36 of the ESM Treaty.
Section 8 provides that the Minister for Finance shall arrange for six-monthly reports on payments made to the ESM by Ireland and any monies received by Ireland from the ESM to be laid before Dáil Éireann.
Section 9 provides that expenses incurred by the Minister for Finance in the administration of this legislation shall be paid out of monies provided by the Oireachtas.
Section 10 is a standard section defining the short title of the Act.
Schedule 1 contains the text of the ESM Treaty in the Irish language
Schedule 2 contains the text of the ESM Treaty in the English language.
As the Deputies will be aware the ESM Treaty itself includes provisions on membership and purpose of the ESM, governance, authorised capital stock, operations and financial management, general provisions and transitional arrangements to apply on the move from the EFSF to the ESM
I look forward to a constructive debate on this Bill. Now is a time for unity amongst Euro Area countries to ensure financial stability within the Euro Area. The purpose of this Bill is to facilitate the stability of the European Union and the safeguarding of the Euro Area as a whole. Ireland must play its part, and stand in solidarity with our fellow Euro Area Member States. It is in the interests of this country and the Euro Area. Therefore, I would urge Deputies to support the ESM Bill 2012.