Financial Assistance (Ireland)

Alan Johnson Excerpts

Monday 22nd November 2010 Commons Chamber

[The Chancellor of the Exchequer (Mr George Osborne)]

With permission, Mr Speaker, I should like to make a statement regarding financial assistance for Ireland.

I hope Members will understand that an announcement had to be made at the weekend, ahead of markets opening this morning. Last night, I spoke to the Chair of the Treasury Committee and the shadow Chancellor to keep them informed of the latest developments.

The United Kingdom, alongside the International Monetary Fund, the European Union, the eurozone and other member states, is participating in the international financial assistance package for Ireland announced last night. We are doing this because it is overwhelmingly in Britain’s national interest that we have a stable Irish economy and banking system.

The current Irish situation has become unsustainable. Its sovereign debt markets had effectively closed and had little prospect of reopening. While Britain’s market interest rates had fallen over the past six months, Ireland’s had risen to record levels, and Ireland’s banks had become completely reliant on central bank funding to maintain their operations. In the judgment of the Irish Government, as well as of the IMF and others, this situation could not go on.

Members will understand that it would not have been appropriate for us in recent weeks to have engaged in public speculation about whether Ireland should request assistance from the international community, but I can now report that we have been engaged in intensive private discussions with the G7, the IMF, the EU and the Irish Government on plans for the eventuality that Ireland would request support. At the G20 meeting in South Korea two weeks ago, I was one of the European Finance Ministers who issued a joint statement that provided a brief respite. At the ECOFIN meeting last Wednesday, my colleagues and I discussed the Irish situation with Finance Minister Brian Lenihan, with whom I have also kept in touch directly. Following meetings in Brussels, the Irish Government committed to engage in a short and focused consultation with the IMF and the EU. On Thursday a joint mission arrived in Dublin, and in the last few days I engaged with my counterparts in the G7, the euro area and the EU about the way forward.

Following intense work over the weekend between the Irish and international authorities, last night Ireland’s Prime Minister, Brian Cowen, made a formal request for assistance. This was followed by statements from the G7, the IMF, the Eurogroup and European Finance Ministers that they would

“provide the necessary financial resources for Ireland to implement its fiscal reform plans and stabilise its banking system.”

The statements made it clear that there were two components to the rescue package. The first puts beyond doubt Ireland’s ability to fund itself. The international assistance package will support an ambitious four-year fiscal strategy which the Irish government will set out later this week. This will see a fiscal consolidation of €15 billion by 2014, of which €6 billion will be implemented next year, as part of a strategy leading to a target budget deficit of 3% of GDP in four years’ time. The second part of the assistance package is a fund for potential future capital needs of the banking sector. This will support measures to promote deleveraging and ensure restructuring of Ireland’s banks, so that its banking system can perform its role in supporting the economy.

Let me turn to how the package will be financed. This is a joint programme, with funding from both the IMF and the EU. The amount of money involved will, in part, depend on the IMF’s analysis of what is needed, and Prime Minister Cowen has said that he expects it to be less than €100 billion. The international community is working on the rough assumption that the IMF will contribute about one third of the total. The total European package will provide the other two thirds. Based on the significant reform of the IMF agreed by G20 Finance Ministers last month, the IMF is well placed to play a leading role in this international effort. The UK, of course, is an important shareholder of the IMF and we will meet these multilateral obligations. I would like to reassure the House that the IMF is currently well resourced and able to meet the cost of the package for Ireland.

The European element of this package will primarily come from two sources of funding agreed in May before this Government came into office: the €60 billion European financial stabilisation mechanism; and the €440 billion European financial stability facility. The balance between the European mechanism and the eurozone facility will be determined in the coming days. The United Kingdom is not a member of the euro, and will not be a member of the euro while we are in government, and so we will not participate in the eurozone stability fund. To be fair to my predecessor, he kept us out of that fund, but he did agree to the UK’s involvement in the European mechanism two days before we took office. I made it clear at the time that I did not believe he should make that commitment. However, it operates according to qualified majority voting and so we cannot stop it being used, and to exercise that vote at this time would, I judge, be very disruptive. So the EU will lend money to Ireland on behalf of all 27 member states, and the UK must accept its share of this contingent liability, which would arise in the unlikely scenario that Ireland should default on its obligations to the EU.

On top of this, I have agreed that the UK should consider offering a bilateral loan to Ireland, as part of the IMF and European package. I judge this to be in Britain’s national interest. Let me explain why. We have strong economic relations with Ireland. Ireland accounts for 5% of Britain’s total exports—indeed, we export more to Ireland than to Brazil, Russia, India and China put together. Ireland is the only country with which we share a land border, and in Northern Ireland our economies are particularly linked, with two fifths of its exports going to the Republic.

Just as our two economies are connected, our two banking sectors are also interconnected. I should stress that the resilience of our own banks, which are now well capitalised, means that they are well placed to manage any impact from the situation in Ireland. But two of the four largest high street banks operating in Northern Ireland are Irish-owned, accounting for almost a quarter of personal accounts. The Irish banks have an important presence in the UK. What is more, two Irish banks are actual issuers of sterling notes in Northern Ireland. It is clearly in Britain’s interest that we have a growing Irish economy and a stable Irish banking system. By considering a bilateral loan, we are recognising these deep connections between our two countries and, crucially, it has helped us to be at the centre of the discussions that have shaped the conditions of an international assistance package that is of huge importance to our economy. Of course, this is a loan and we can expect to be repaid. In fact, Sweden has already deemed it to be in its national interest to consider a bilateral loan to Ireland.

Now that the Irish Government have requested assistance, a lot of the detailed work of putting together the package can take place. I understand that Members are keen to hear the specifics, such as the rate of interest on the loans, the repayment periods and the contribution from each of the various elements of the package. I shall keep the House informed.

Later this week, the Secretary of State for Northern Ireland and my hon. Friend the Financial Secretary to the Treasury will be in Northern Ireland to discuss the situation there. I will ensure there is a specific discussion in the House if there is a bilateral loan, and we will need to take primary powers.

Finally, let me say something about the future of the various European support funds, which are being discussed later this year. Both the Prime Minister and I are very clear that when it comes to putting in place a permanent eurozone bail-out mechanism, the UK will not be part of that.

This is a situation of great difficulty for Ireland and it is a tragedy when it did so much to improve its competitiveness with low taxes and flexible labour markets, but the truth is that it had a hugely leveraged banking sector that was badly regulated—a pattern that we have had to deal with in our own country. In addition, because Ireland is a member of the euro, exchange rate flexibility and independent monetary policy were not tools available to it when the crisis took hold. The arguments against Britain joining the euro are well rehearsed, not least by me, but although “I told you so” might be correct, it does not amount to an economic policy.

When the coalition Government came into office, Britain was in the financial danger zone. We have taken action to put our house in order. We were once seen as part of the problem, but we are now part of the solution. Ireland is a friend in need and it is in our national interests that we should be prepared to help at this difficult time. I commend the statement to the House.

[Alan Johnson (Kingston upon Hull West and Hessle) (Lab)]

I thank the Chancellor for advance notice of his statement and for keeping me informed about developments over the weekend.

The Opposition agree with the Chancellor’s basic argument that Ireland is a friend in need and that Britain should not simply ignore the plight of one of our biggest trading partners because it is in the eurozone and we are not. So we are in principle content to support a role for the UK in assisting Ireland to secure economic stability.

The Chancellor talked about the resilience of our banks, and the question that many people will be asking today is why he thought it was wrong for the previous Government to support British banks but right for his Government to support Ireland’s banks. On the crucial question of ensuring that Britain’s contribution is fair and balanced, will he first explain how our relative share of the burden will be calculated and what his definition of “fair” will be?

Secondly, will the Chancellor give his expectation of the proportion of UK support that will go through each European route—the European financial stability facility, the stabilisation mechanism and the bilateral arrangements—and the rationale for that distribution? He said that he disagreed with the agreement that my right hon. Friend the Member for Edinburgh South West (Mr Darling) made in May to enter the European stabilisation mechanism, yet the Chancellor is seeking to provide bilateral support. Why does he need to provide bilateral support when the other routes are available? Will he also tell the House how, when and where each element will appear in Government accounts?

Thirdly, what interest rate is to be charged on our loans, what form will it take and when does the Chancellor expect to receive full repayment? I understand the issues he mentioned about not being able to tell us now, but if he cannot give us any indication, when and how will that information be reported to the House?

Fourthly, what conditions will the Chancellor seek to apply, and is he preparing this proposal unilaterally or in conjunction with our European partners? Will there be any attempt to interfere with Ireland’s right to set its own tax rates? Will the Chancellor tell us to what degree he believes the difficulties are a consequence of Ireland’s adoption of the euro? What does he think this will mean for the future of the single currency? When his right hon. Friend the Foreign Secretary was asked if he thought the euro would survive, he shrugged his shoulders and said, “Who knows?” That strikes me as being at the least undiplomatic and at most unworthy of the great office he holds. It could even be said to be making “I told you so” into an economic policy. How would the Chancellor answer the question about whether the euro will survive?

Finally, it is clear that Ireland’s efforts to cut its deficit so deeply and quickly have failed to lead to growth in the economy. The private sector has not taken up the slack caused by the huge cuts to public services, so will the Chancellor agree that growth is crucial to Ireland, Europe and, indeed, to the UK’s full recovery and tell us what steps he is taking to encourage growth as part of this package? In 2006, he said that we should “Look and learn from across the Irish Sea”. In a eulogy of the deregulation of the financial services sector, he asked:

“What has caused this Irish miracle, and how can we in Britain emulate it?”

Now he needs to assure us that he has learned other lessons from across the Irish sea. The last time he made a statement from that Dispatch Box, he said that Britain was on “the brink of bankruptcy”, but that was clearly not the case. Now he is proposing to make a substantial contribution to a country that really is on the brink. One lesson from Ireland should be salutary: exaggerated rhetoric affects confidence and loss of confidence can lead to economic disaster.

[Mr Osborne]

I certainly agree with that last statement. First, I welcome the support in principle that the Opposition have given to this decision and I well understand that the shadow Chancellor, like everyone else in the House, will want to see the specific terms and conditions. The IMF-EU team hope to conclude those in the next couple of weeks and then, of course, I will bring those details to the House.

On burden sharing between the different European channels, we will make no contribution through the stability facility—the eurozone facility. In relation to the mechanism—money lent off the back of the EU—if Ireland were, in an extraordinary situation, to default on that then we, as one of the 27 members of the European Union, would have a contingent liability. That is how the mechanism operates. On the terms of the bilateral loan, we have not yet set a figure on that, but it will be in the billions, not the tens of billions. On that, too, I will come to the House when I have a specific figure. As I have said, we will be required to take primary powers to make that bilateral loan and I would hope to have Members’ support in doing that.

The shadow Chancellor mentioned the mechanism. In the period between the general election and the creation of this Government, to be fair, as I said in the statement, the former Chancellor of the Exchequer made it clear that he did not want the UK to be part of the eurozone facility, but he did agree to the use of the mechanism. It is based on article 122, the original intention of which was to provide support to eurozone members in dealing with natural disasters. At that time, I said that I did not think that we should be committing to that, but that debate was had in May. The mechanism exists and, frankly, for the UK to say now that we will vote against its use would, as I have said, be very disruptive.

The question of the accounts is for the Office for National Statistics and the Office for Budget Responsibility. My understanding is that the loan will of course add to borrowing but that we will get an asset in return—an Irish commitment to pay back the loan—and that it will not add to the deficit.

On the conditions attached to the loan, I would expect them to be part of the international package agreed with the IMF and European Union contributions, so I would not expect radically different conditions for the UK.

I think it is well known that corporation tax has been the subject of discussion in some European Union capitals, but not here—we believe that countries should be free to set their own tax rates. The Irish Government have to make some very difficult decisions about their fiscal package over the next four years, and how that package is composed should be a decision for them—provided, of course, that the international community is satisfied that it is credible, and I am absolutely sure that we will be satisfied.

Finally, the right hon. Gentleman asked two questions, one about the future of the euro and so on. As I have said, we made lots of arguments about not joining the euro 10 years ago and I do not—[Interruption.] I cannot remember what the Opposition’s official policy is, but it probably does not bear consideration. I would just make the point that I am dealing with the situation as I find it today. We can debate the merits of the euro at another time; I have to deal with the Irish situation.

On the deficit and Ireland’s decisions, I have to say that in all the discussions I have been involved in during recent weeks, not a single person around the international tables has suggested that Ireland should be doing less to address its fiscal situation. I would have thought that the current economic environment in the world would surely remind everyone of the risks run by countries with very high budget deficits and no credible plan to deal with them. Unfortunately, we inherited a higher budget deficit than Ireland’s, so I hope that the right hon. Gentleman and the Leader of the Opposition, in this big rethink they are having, will re-evaluate their opposition to a fiscal plan that has taken Britain out of the financial danger zone, which means that we are not one of the countries speculated about at the moment. I hear today that the Leader of the Opposition says that their economic policy is a blank sheet of paper. Quite frankly, I do not think that it would be much use taking that into an international negotiation.