Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht -
Thursday, 1 Feb 2018

European Union Matters: Commissioner Valdis Dombrovskis

Chairman

I welcome Commissioner Dombrovskis, Vice-President for the euro and social dialogue. He is also responsible for financial stability, financial services and the capital markets union. I welcome his colleagues from the European Commission.

I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. I invite the Commissioner to make his opening statement.

Mr. Valdis Dombrovskis

Good morning distinguished Members of the Seanad and Dáil. I thank the Chairman and members for welcoming me to Dublin and giving me this opportunity to come to the Oireachtas to discuss the European semester and economic developments in Ireland and the European Union.

My visit is taking place in the context of the European semester, which has become our main economic and fiscal policy co-ordination tool, and we have an opportunity to discuss with member states key fiscal, economic and social challenges. In the European Semester Office we prepare country reports. In line with the practice established last year, we sent the analytical parts of the draft country reports to the member states, waiting for their factual comments and inputs. The negotiated country reports provide countries with the opportunity to view the factual feedback. We found it quite useful when we first did it last year.

As regards the situation in Ireland and Ireland's position as regards the European semester, first, we have seen strong economic growth in Ireland last year, close to 5%, and this year the economic growth is close to 4%. The economy is developing, unemployment is reducing and job creation is proceeding at a good pace. All in all, we see positive developments in the Irish economy.

As regards Ireland's fiscal performance, Ireland has made a major adjustment since the crisis and this year we expect Ireland to meet its medium-term budgetary objective. According to the European semester, we set the medium-term budgetary objectives for each EU member state to meet. In the case of Ireland, it is 0.5% of GDP structural deficit and now we forecast that Ireland will actually reach the medium-term budgetary objective. What is important is that public debt is reducing. The figures for public debt need to be interpreted with caution because in 2015 there was a major readjustment of the calculation of Irish GDP and also the debt-to-GDP ratio decreased very rapidly, but if we use other measures to do this assessment, like public debt per capita or public debt per tax revenue, we still see that Ireland has quite high public debt and is exceeding the Maastricht criteria threshold of 60% of GDP. It is important to stay the course and continue to reduce the public debt. It is also important in the context of potential economic shocks, which Ireland may face. In our assessment, a most immediate and imminent issue which we will need to deal with is Brexit. Brexit is a potential source of uncertainty, especially in Ireland which has the closest economic links with the United Kingdom of the EU 27 countries. The European Union is ready to stand by Ireland and support Ireland in this process and also to address negative economic consequences that Brexit may bring.

As regards the European semester, we also issue country-specific recommendations to address certain challenges which we think are important. In the case of Ireland, we have three country-specific recommendations. First is a fiscal recommendation and I touched on this when I spoke about the medium-term budgetary objective. I stressed the need to continue to reduce public debt. In terms of the prioritisation of public expenditure, we propose to prioritise investment, especially in areas of transport, energy, water supplies and also to enhance social infrastructure, including social housing and child care facilities. This is one of the directions where we think there are infrastructural bottlenecks which need to be addressed.

On the social side, we see that while unemployment is decreasing, there are still issues in terms of activation policies and a relatively high share of low-skilled workers. The level of participation of women in the marketplace is below the EU average. We recommend the delivery of an integrated package of activation policies to improve the employment prospects of certain categories of people.

Our third recommendation concerns the financial sector and the need to address the level of non-performing loans. This is in a sense a legacy of the crisis not only in Ireland but in many European countries, so we are currently developing action plans to reduce the number of non-performing loans at EU level.

It is worth pointing out that, primarily, this is still the work of the member states and much progress has been done on this in Ireland. In mid-2017, which are the latest verified figures we have, the non-performing loans, NPLs, ratio stood at 11.6%, which is still high compared with most historical levels and with other EU countries. Further work is needed on NPLs. We will also be bring forward an action plan to reduce NPLs at European level, working on several directions, requiring banks to put sufficient means or to create sufficient buffers to cover losses if new loans become non-performing, to tackle delays in debt recovery, and, in terms of insolvency and loan enforcement frameworks, to open up secondary markets. We will bring forward a blueprint on how to set up national asset management companies within the EU state aid and banking union framework. Of course, Ireland has the National Asset Management Agency, which is already working. Perhaps this work theme is not so relevant in the case of Ireland. Those are our main findings in terms of the European Semester. Overall, in Europe we currently have good economic development. The latest figures show that last year we had 2.5% growth both in the EU as a whole and in the euro area. We should be using this good economic momentum to continue the work on deepening the economic and monetary union, EMU.

I will say a few words on that work stream. As the members will be aware, in December the European Commission put forward a package of proposals on how to proceed with deepening the EMU. We consider the most immediate priority to be the completion of the banking union and capital markets union. In the case of the banking union, all the elements are already on the table. I refer to our bank reform package, which we put forward in November 2016, which mainly concerns risk reduction, and the ongoing work on reducing non-performing loans. Also, last October we came forward with some ideas on how to unblock the discussions regarding the European deposit insurance scheme. We believe it is important to reach an agreement on the fiscal backstop for a single resolution fund. We believe this can be done on the basis of the European Stability Mechanism or, potentially, as we propose to transpose it to the European monetary fund.

Looking forward in terms of deepening EMU, we want to reach two objectives to strengthen the resilience of the EMU and to improve the crisis management tools of EMU. In terms of resilience, there are the risk reduction measures, which I already described, but also a continued focus on structural reforms. We have some proposals on how we can further support structural reforms in member states. We propose a structural reform delivery tool as a support mechanism and we propose to extend our existing structural reform support programme.

In terms of crisis management tools, we already have the European Stability Mechanism, ESM, which we propose to strengthen and transpose into the European monetary fund, anchored in a European Union legal framework. We propose to create a euro area of fiscal stabilisation function to help countries to address large economic shocks, asymmetric economic shocks, and this euro area of fiscal stabilisation function could take place in a form of European investment protection scheme. The problem is often that investment is the first item to be cut in times of fiscal strain and then it undermines the recovery and potential growth of a country. Therefore, we propose this European investment protection scheme to sustain a level of investment during the crisis.

We also propose to have a dedicated convergence facility to support those EU member states which are working towards euro adoption. Primarily, I am talking about technical assistance and, in some cases, it can also be financial assistance. It will send an important signal that the euro area is open and transparent to non-euro countries, that we do not want to create new dividing lines in Europe and that we are willing to support those countries which are working towards euro accession. That, at a glance, outlines the main ideas and elements of our deepening of the EMU package. Those are my introductory remarks and I am open to hearing members' comments and taking their questions.

Chairman

Thank you, Mr. Dombrovskis. I call Deputy Michael McGrath.

Deputy Michael McGrath

The Commissioner and Vice-President of the European Commission and his team are very welcome. I would like to raise a few issues with him. I note his list of responsibilities includes proposing measures to make financial services work better for consumers and retail investors. A key consumer issue in Ireland regarding financial services is the very high mortgage interest rates charged to Irish consumers. In Ireland, the official Central Bank Statistics show that for all new mortgages, whether they be variable or fixed rate, 3.18% is the average rate. In the eurozone the equivalent is 1.83%. We regularly see publicity around interest rates as low as 1% to 1.5% across Europe and consumers here are paying, in some cases, more than 4%. We do not have a fully functioning Single Market in the area of financial services. Therefore, people in Ireland find it difficult to understand why they cannot access cheap mortgage rates that are available elsewhere in Europe. Does the Commissioner have any plans to deal with that issue?

Mr. Valdis Dombrovskis

Yes, we have been dealing with and continue to deal with this issue. Since the crisis we have seen certain weaknesses in the organisation of the financial systems, so the financial sector integration has reduced and financial sector activities increasingly were taking place along national borders. It is certainly an issue. We are now looking at ways that we can promote such cross-border financial sector activity. Currently only 7% of European citizens use cross-border financial services. We are not talking about large-scale integration. Among other things, we are assessing cross-border loans, namely, what are the obstacles to cross-border loans. Our analysis shows it is mainly to do with loan enforcement frameworks. If a bank is to provide loans or mortgages with a collateral across a border in another EU member state, there is at least a perception of the financial sector in terms of the banks and their associated costs if there is a need for loan enforcement in case the loan becomes non-performing. We would work with the country, especially if the loans are not very big, to enforce as a collateral. We will bring forward some proposals in this area. We will put forward a proposal on accelerated extrajudicial collateral collection mechanism while providing safeguards to customers towards some kind of aggressive loan collection practices.

That could be one mechanism to address this obstacle in terms of cross-border loans. From the point of view of the European Union, we would be willing to see more financial integration, more cross-border financial services and therefore more competition, which eventually would result in lower interest rates for consumers. That is something we are very much willing to support and facilitate. It is part of our work on a retail financial services action plan.

Deputy Michael McGrath

I thank the Commissioner. I suggest to him that it should be a priority because if we are to have a full single market for financial services and at a time when all of the larger banks are being regulated directly by the Single Supervisory Mechanism, which is European-wide, it should be the case that all consumers, certainly those within the eurozone, should be able to avail of products being sold by banks that are regulated by the European-wide regulator. That seems perfectly logical to me. What people will want to know from the Commissioner is when he expects to see practical progress in respect of this issue because Irish consumers are paying way over the odds not just in regard to mortgage rates, which apply to residential customers, but business customers as well, and also in regard to insurance where, again, we do not have access to products that are being sold elsewhere in Europe. When does the Commissioner expect actual progress from which people will be able to benefit?

Mr. Valdis Dombrovskis

In terms of actual progress, we will come forward with a specific proposal to deal with one of the obstacles to cross-border loans in the spring. It will then take a year or so. It is a legislative process so there will have to be discussions with the EU Council, member states and the European Parliament before it is adopted and becomes applicable. It is not the only measure we are assessing in terms of the provision of cross-border financial services. We had been doing that already through the payment services directive as regards payment services. We also see obstacles in areas on cross-border money transfers, for example. We are a single European payment area but it is actually a single eurozone payment area, not an EU payment area, so we propose to extend it to the entire European Union. There are a number of obstacles to cross-border financial services and we will be coming forward with several proposals in the spring.

Deputy Michael McGrath

I have two other questions. One relates to non-performing loans, which the Commissioner addressed in his opening statement. The rate in Ireland is falling but it is still high. The way we would like to see banks reduce their non-performing loans is by reaching agreements with borrowers and restructuring loans but what we find here in practice is that the main banks are reducing their level of non-performing loans by selling loan portfolios to international funds, commonly known here as vulture funds. That is the main method being used here to reduce the level of non-performing loans so while it might improve the balance sheet of the financial institution concerned, it can create other knock-on problems and consequences, particularly for the borrower whose loan may now be owned by a fund that takes a much more aggressive stance by way of foreclosure, enforcement and so on. It is the Commissioner's objective to reduce non-performing loans but does he have any view on how that should be done?

Mr. Valdis Dombrovskis

As regards non-performing loans, it is also related to the Deputy's previous question. If banks held a high share of non-performing loans, it means they are suffering losses on those non-performing loans and that cost is passed to the customers. That results in, among other things, higher interest rates, which banks are charging Irish customers, and we see the same tendency in other countries with a high non-performing loans ratio. Ireland is not among the countries with the very highest level of non-performing loans. The three countries with the highest levels are Greece, Cyprus and Portugal, but in any case this is an issue.

I mentioned in my introductory remarks our non-performing loans action plan on which we are working for direction. The first is the prudential regulations as regards buffers. Banks need to build for non-performing loans and we will be coming forward with a proposal for new loans which may become non-performing.

The second is insolvency and loan enforcement frameworks where we are doing some benchmarking. We do not believe it is realistic to achieve a harmonisation in that regard because systems are very different and countries are very reluctant to change them. We are doing the benchmarking, therefore, which we can then address through the European semester to see what is working in insolvency systems, what is not working, what are the best practices and then, through country-specific recommendations, show the countries possibilities to address this problem.

The third is the secondary markets of non-performing loans. One problem is loan enforcement practices, which the Deputy mentioned. There have to be strong consumer safeguards in that regard and also consumer protection organisations which fight against aggressive practices. That is clearly not acceptable. From the point of view of financial stability, in terms of a spread between bid and ask prices, we see there is an information asymmetry that needs to be addressed if we want this market to be functional.

Fourth, I already mentioned the blueprint for national asset management companies. Ireland already has a national asset management company, which is working. Recently, the European Commission also found that the way it was set up is in line also with EU state aid rules. There had been some complaints so the European Commission had been assessing that and found it to be in compliance.

Those are the four work directions of non-performing loans. We will come forward with complete proposals on the European side on non-performing loans in the spring.

Deputy Michael McGrath

Regarding Brexit, I want to acknowledge the support of the European Commission for the Irish position and the support of the other European institutions. We hope that continues right through to the end but is it the objective of the European Union to ultimately negotiate a free trade agreement with the United Kingdom? We are now moving into a new phase and there is talk of the transition period and so on. Having a free trade agreement will come with certain obligations on the UK but is that the position of the European Union? Is the objective to negotiate a free trade agreement that is tantamount to what we currently have within the Single Market?

Mr. Valdis Dombrovskis

I can confirm the position we have on Brexit where we also take the Irish interest strongly into consideration, including the question of the Border between the Republic of Ireland and Northern Ireland, which needs to be addressed. That is very much on the EU's agenda. As I said, the EU will continue to support Ireland in the context of Brexit because we recognise that of the EU 27, Ireland is the country most affected by Brexit.

In the Brexit negotiations, we are currently concentrating on the transitional period. We are now doing preparatory work on a mandate from the member states on future relations and to start the negotiations on future relations with the UK. The free trade agreement will be one of the main elements in future relations. Those future relations will probably not be tantamount to the EU Single Market. There are certain conditions for access to the EU Single Market, which the UK has decided it is not willing to respect. We talk about respect for freedoms, including the free movement of labour, a financial contribution to the EU budget and the jurisdiction of the European Court of Justice. There are certain choices the UK has to make because the Internal Market does not come for free. There are certain conditions that countries that are members of the Internal Market must respect.

Deputy Paul Murphy

I welcome the Commissioner and his team. I want to explore the area of the European semester and economic governance. I will explain where I am coming from. I was in the European Parliament from 2011 to 2014 when some of these measures were introduced, including the six pack, the two pack, austerity, and the fiscal treaty. What we saw was an example of the shock doctrine of using a crisis of capitalism to enshrine some of the neoliberal laws in European law and to reduce democracy at a European and national level. That is the effect of those laws. What democratic legitimacy does the Commission have to be engaged in instructing, directing or recommending governments to implement certain budgetary decisions? In the Commission's engagement with Italy, it stressed that the adoption of the 2018 budget with no watering down of its key provisions would be crucial. It underlined the importance of sticking to the important structural reforms, notably as regards pensions. What democratic legitimacy does the Commission have to be demanding so-called structural reforms from democratically elected governments?

Mr. Valdis Dombrovskis

First I will address the broader question of EU economic policy, including the Stability and Growth Pact, and then I will come to the question on democratic legitimacy. Something that a number of countries have experienced during the crisis, including Latvia, which is the country I know best, Ireland and a number of other countries, is that if they want to pursue contracyclical fiscal policies during the crisis, and that is what has been discussed, they also need to pursue contracyclical policy during the good times, meaning they have the fiscal space or room for manoeuvre in case of economic shocks. Unfortunately, for those countries that had not been doing so before the crisis, there was no fiscal space or room for manoeuvre during the crisis and countries were being shut out of the financial markets. The other question is how a country can finance its debt and deficit. What are the sources of finance? That is where the question of restoring financial stability and the EU rules on restoring financial stability came in.

Regarding the democratic legitimacy of the European Commission and the decision-making, first it must be said that the European Commission has rights and obligations that EU member states with their democratically elected parliaments and appointed governments have delegated to it. It is enshrined in the EU treaty which has been ratified by all EU member states and where the role of the European Commission as a guardian of the treaty is also foreseen. At the same time, it must be said that any decisions that are taken at EU level are Council decisions. When we come up with draft decisions as a European Commission, whether on the fiscal or structural reform side, they are draft decisions and those draft decisions have to be approved by the Council. It concerns fiscal decisions, any other decisions and any legislative proposals. They are called legislative proposals because the Commission comes up with a proposal. It is for co-legislators, the European Council and the European Parliament, to make the binding decisions.

On structural reforms, it is also important not to mix certain elements. Italy is in a preventive arm of the Stability and Growth Pact, as is Ireland. We address country-specific recommendations on structural reforms to member states, but first, as the name suggests, they are recommendations. Second, those proposals, in any case, are endorsed by the Council. That is how the structure works and that is where democratic legitimacy comes from. Its functions are delegated to the Commission by EU member states with their democratic decision-making process.

Deputy Paul Murphy

I will respond to two points. Mr. Dombrovskis said the rationale for the fiscal rules was the idea that the crisis resulted from irresponsible public spending and rising debt, etc. That is not the reality across the world or, in general, across the European Union. It certainly was not the reality in Ireland. In Ireland, pre-crisis, we had a debt-to-GDP ratio of 25%, which was as low as Germany's. The reason it exploded was because of a private sector banking collapse that was then taken onto the shoulders of the public. None of the fiscal rules that existed, if they had existed pre-crisis, would have made a difference to the crisis. The idea that it is a response to the crisis does not hold water.

In defending the democratic legitimacy of the process, Mr. Dombrovskis put significant weight on the fact that the Commission proposes and goes to the European Council and that the governments are at the European Council. What he did not say is that the voting process at the European Council is turned on its head. Instead of needing a majority or a qualified majority to pass the Commission proposal, is it not the case that when it comes to economic governance proposals, a reverse qualified majority is required? In other words, to reject something, there has to be a substantial majority of member states. How is it democratic to reverse either a simple majority process or, even worse, to have a reverse qualified majority process? How can it be claimed that there is endorsement by the Council for proposals when that process has been reversed in that way?

Mr. Valdis Dombrovskis

On the first question, the fiscal rules existed in Europe before the crisis. The Stability and Growth pact set a 3% limit on government deficit and a 60% limit on debt. It all existed before the crisis.

What was done after the crisis is that, first, a European semester was introduced as an annual cycle of fiscal and economic policy co-ordination, so it was recognised that a more systematic overview of the member states' fiscal and macroeconomic policies is needed. A macroeconomic imbalances procedure was introduced because it was recognised that countries not only face fiscal problems, but also macroeconomic problems and there was more emphasis on prevention such as the preventative arm of the Stability and Growth Pact, the setting of medium-term budgetary objectives and aiming for a balanced budget in the economic cycle. Those were the things that were introduced.

As regards Ireland, we are fully aware that many of the Irish fiscal problems stem from the collapse of the banking system and an unprecedented scale of bailouts which Ireland undertook. Nevertheless, that did not remove the question that if those decisions were taken, what are the sources of financing of the debt and deficit. This question, nevertheless, was still there and those bailouts, which we saw in a number of countries, were the reason for introducing the banking union. As members know, the basic principle of the banking union right now is not for a bailout but a bail-in, meaning that first the shareholders and creditors of a bank take the losses and the taxpayer is not first in line to pay for the mistakes of the banking sector. It was also a lesson learned from the crisis and that is an underlying principle of the banking union and underlying reason for strengthening bank supervision and also a regulatory framework for introducing a single rulebook and a single supervisory mechanism.

On decision-making processes, once again, all the decision-making processes as they are enshrined in a treaty or EU legislation are decision-making processes decided by EU member states and on different procedures it can vary from unanimity to qualified majority, to simple majority, to reverse qualified majority but once again those are decisions taken by member states in line with democratic procedures

Deputy Paul Murphy

If people vote for a dictatorship, it does not mean that it is not a dictatorship. Does Mr. Dombrovskis know what I mean? One can have something that emerges from a formerly democratic procedure that is undemocratic. Could I ask one more question?

Chairman

I am conscious of the time.

Deputy Paul Murphy

Sure. I will come back at the end.

Chairman

I am sorry about that. I call Senator Conway-Walsh.

Senator Rose Conway-Walsh

I thank the Vice-President for being with us this morning. I appreciate that he has limited time. It might seem to some now that the EU has moved on from the Irish question given the recent agreement of sorts. It is my belief that the EU could still play a crucial role in protecting Ireland, both North and South, in a very direct way from the damage of Brexit, first, by ensuring that the EU energy and infrastructure programmes look at the needs of the island of Ireland as a whole. Has the Government requested a review of the TEN-T and TEN-E projects in transport and energy so that the new reality of Ireland's geographical position relative to the EU is taken into account? Are we being considered? We do not want to be left behind. We want to be front and centre of decisions that are being made in Europe in relation to our vulnerability to Brexit.

Mr. Valdis Dombrovskis

On this issue perhaps Senator Conway-Walsh will also ask the representatives of the Commission here in Dublin to comment in more detail. As regards TEN projects, it is worth noting that the European Commission has a certain distribution of responsibilities and TEN-T and TEN-E projects are the responsibility of the transport and energy Commissioners so I am not working directly on those areas and I cannot give a qualified comment on it. It is worth noting that we are now also preparing negotiations for the next multi-annual financial framework which will set the EU budget for the next period, post 2020, and that is a good moment also to address issues and new challenges. There are a number of challenges which stem directly from Brexit, also in the case of Ireland in terms of infrastructure. Perhaps Mr. Kiely could add more specific information and explain about projects in Ireland.

Mr. Gerry Kiely

Not really. It has been raised in discussions with Commissioners but I am not sure any formal request has been submitted. As the Vice-President said, given where we are in the TEN programme we have gone past the review stage so it would be in the context of the post 2020 period. I am not aware that any formal request has been submitted but I can check and come back to Senator Conway-Walsh.

Senator Rose Conway-Walsh

Could I suggest that a formal request would be made, perhaps by this committee, because otherwise we will miss opportunities? There is no point in trying to close the door after the horse has bolted. The witnesses will be very aware of the infrastructure deficits, the regional imbalance and inequality that was reported even last week in the ESRI report. There is an urgent need for infrastructure. Adding Brexit into that context makes it a very worrying time for all of us, but especially for people like me who live in the regions.

Does Mr. Dombrovskis believe that Brexit constitutes exceptional circumstances and that the EU should now allow for derogation from the rules to allow the Government the adequate scope to invest North and South to protect against the fallout from Brexit but also to put the country into a prime position to thrive thereafter? What specific measures of flexibility from the EU fiscal rules does he think Ireland should seek? It seems that the flexibility in our investment must be a priority. Does he agree with that? What suggestions does he have for us?

Mr. Valdis Dombrovskis

First of all, of course we must see the final agreement of Brexit to assess potential economic consequences, including for Ireland. As I said, the member states are still preparing a mandate for the European Commission to negotiate its future relationship so at this stage we cannot really say what exact implications it will have and what response will be required.

In terms of flexibility within EU fiscal rules, as I mentioned in my introductory remarks, there is a certain flexibility and there is an investment clause allowing countries to temporarily deviate to facilitate EU co-financed investment. There is a structural reform clause to support structural reforms. There is an exceptional circumstances clause which has been used, for example, in the case of natural disasters and also in the context of the migration crisis in 2015. There are different possibilities which are available according to EU fiscal rules. When and which of those tools are used and when and which of those tools are requested is also the competence of the Irish authorities. I discussed that also yesterday with the Minister for Finance, Deputy Donohoe. It is also clear that it is important to find the appropriate timing. When an economy is growing like now by 4% to 5% a year, which is the Commission forecast, and if anything the outcome may be at least as good, if not better, as our autumn forecast then it may not, therefore, be the best moment to trigger all the flexibility clauses.

If there is a Brexit that triggers large negative economic consequences then those clauses are there and can be triggered. It provides a certain fiscal buffer in a more forward looking way. When I described our proposals on deepening the economic and monetary union, one of the proposals is a euro area fiscal stabilisation function to protect investment. While it is a new proposal and needs to be discussed by EU members states and by the European Parliament and eventually agreed, if it becomes part of the decisions that are taken in the context of deepening economic and monetary union then, once again, it is possible to use. This fiscal stabilisation function is exactly there to support countries in case of large asymmetric economic shocks.

Senator Rose Conway-Walsh

I will not ask any more questions but I think the headline figures really belie what is happening in Ireland, particularly in the regions. In the areas I come from we have unemployment rates of 20% to 30%, no broadband and very inadequate infrastructure. We very much rely on the EU for support there. As the witness has said, it is up to our own national Government to make those requests and to tell the real story of what is happening here and tell of the real challenges that citizens across the island are facing.

Former EU Commission President Barroso established a task force, the aim of which was to make sure that Ireland was achieving the maximum possible level of EU funding. Is there scope for that here?

Mr. Valdis Dombrovskis

With regard to EU funding the current period of 2014-2020 is decided and we are past the mid-term review. The discussions are starting around the next planning period post 2020. We expect complicated discussions because Brexit will, once again, leave a hole in our EU budget. The UK is one of the largest net contributors to the EU budget. We will need to address this hole in the budget and there are only two ways to do this is; either through more contributions to the EU budget by member states or by developing or strengthening our current own resources system, thereby reducing expenditure. Already we are hearing very different signals from different member states. Not surprisingly they are coming down more or less along the lines of net payers and net contributors. We will, however, need to balance this. First we will need to address this shortfall from Brexit and we will also need to find fiscal space for new priorities.

Chairman

I invite Senator O'Donnell to speak and again remind members about the time limits.

Senator Kieran O'Donnell

I thank the Chairman and I will be brief. I just have one query on Brexit. Does Commissioner Dombrovskis feel that Brexit will be of benefit to the UK, the European Union or to Ireland? What is his view on the financial impact of Brexit?

Mr. Valdis Dombrovskis

There will, of course, be a negative economic impact. We conducted some assessments immediately after the referendum in the UK. I cannot say with a large degree of certainty, because we still do not know the future relationship model of Brexit. The economic model will depend directly on this but it is very clear that if we are untangling decades of economic and financial sector integration it will have a disruptive effect. We will need to address this disruption. First we need to define our future relationship to see how disruptive it is going to be. We already know that some of the political choices the UK has made on Brexit will mean leaving the EU Single Market, and potentially the customs union. All of these decisions are adding to the negative economic impact. The European Commission is also preparing for different scenarios, including the so-called "cliff edge" scenario. We need to be ready for that although it is certainly not something we would aim for. While we aim to reach agreement and to minimise this disruption, we also need to be realistic about it.

Senator Kieran O'Donnell

In that context, a former Taoiseach, John Bruton, who is probably known to the Commissioner, has recently stated that he feels the transitional period of two years may not be sufficient. Does Commissioner Dombrovskis have a view on that statement? I believe that under Article 50 it is possible to extend the time, if there is unanimity among the European Council members.

Mr. Valdis Dombrovskis

On the transitional period and the exact timing, as the members are aware, the timing that is currently being discussed is linked with the end of the current multi-annual financial framework, which is the end of 2020. On the one hand the UK maintains its access to the Single Market and on the other hand it respects all the conditions such as free movement, payment to the EU budget and recognising the European Court of Justice jurisdiction. Post-2020 we will be in a new multi-annual financial framework. Any transition periods post-2020 would imply a new negotiation on the UK financial contribution to the EU budget. In any case that could be complicated. This is why the current thinking is for the end of 2020.

Senator Kieran O'Donnell

If the UK does not see some common sense on the impact that Brexit will have and if Brexit proceeds, does the Commissioner see the relationship being in the form of the current Norwegian model? Norway currently has a financial model with the EU so could the UK have a similar relationship with the EU?

Mr. Valdis Dombrovskis

No. The UK itself has excluded this option. Norway's model provides Norway with access to the EU Single Market but on exact conditions. Norway respect the four freedoms including the free movement of labour, the European Court of Justice jurisdiction and the contribution to the EU budget directly to EU member states via the Norwegian financial instrument. This provides the Norwegian financial contribution, which is quite substantial. The capitation is significantly higher than that paid by the UK. Those were not conditions that the UK was willing to accept. This is why there will not be a Norway model or European Economic Area model. This is why the relationship will be less close, with the UK being outside the Single Market.

Senator Paddy Burke

I welcome the vice president and his staff.

Mr. Dombrovskis stated: "But EMU deepening should be seen in a comprehensive way, with a view to both private and public mechanisms, tackling risk-reduction and risk-sharing in parallel, strengthening our tools to prevent crisis situations as well as those to deal with a crisis when it does happen." What happens in a crisis? Is there a mechanism to deal with it? Are there breaches? When there are beaches, are there sanctions that can be imposed on countries?

Mr. Valdis Dombrovskis

Breaches of what?

Senator Paddy Burke

Financial breaches. The Commission is the watchdog.

Mr. Valdis Dombrovskis

Fiscal breaches?

Senator Paddy Burke

Yes, fiscal breaches.

Mr. Valdis Dombrovskis

On the point the Senator made on risk reduction and risk sharing, we typically use the mechanism in the context of banking union. The idea is that we need to complete the banking union. There are discussions among member states. Some are putting more emphasis on risk-reduction measures and some are putting more emphasis on risk-sharing measures. To move forward, both need to move in parallel.

If the Senator is interested in banking union, we can go into it more deeply. I will explain the context of the sentence that the Senator quoted. As regards fiscal rules, we have the EU fiscal framework and certain associated enforcement mechanisms. Currently, we do not need to use any sanctions because we see that the fiscal circumstances are improving. Average budget deficit and debt levels are going down in both the EU and the euro area. Countries are correcting their excessive deficits. In the spring, we will assess France. It corrected its excessive deficit in 2017, as foreseen. Given that this is the case, we will have only one country left that is subject to an excessive deficit procedure, that being Spain. It will need to correct its excessive deficit this year.

As regards the preventive arm, we see that countries are moving towards their medium-term budgetary objectives. Some are at risk of deviation so we are working more in respect of those countries. There is one country against which we have launched a so-called significant deviation procedure, namely, Romania. It is the second fastest-growing European country, yet balances, in terms of budget deficit, around 3% of GDP and risks ending up being in excessive deficit. We forecast that Ireland will meet its medium-term budgetary objectives this year. We see that things are on track.

Senator Paddy Burke

There are no sanctions against countries that do not reach their targets. Is the Commission a kind of toothless tiger?

Mr. Valdis Dombrovskis

There are sanctions foreseen in the Stability and Growth Pact that can be applied. We are currently not applying sanctions because we see that fiscal imbalances are being corrected.

Senator Paddy Burke

We see that Brussels is probably the second largest lobbying city in the world. Mr. Dombrovskis is saying pressure is being put on banks to sell off non-performing loans. When pressure is put on the banks to sell off those loans, he will note most groups that buy them are vulture funds. This committee has tried to get vulture funds to come here to talk to us but they will not do so. Has Mr. Dombrovskis been lobbied on the question of why the non-performing loans should be sold off? Has he any mechanism for governments to buy the non-performing loans? Governments can borrow money at 0%, 1% or other very low interest rates. There is no reason governments could not buy non-performing loans. Why is Mr. Dombrovskis not saying the governments should buy them? Why is it that the vulture funds buy the non-performing loans in most cases? We can see at first hand what vulture funds are doing with the non-performing loans and to the borrowers. Has the Commission come up with any proposals on how governments could buy these loans? If so, we have not heard them.

Mr. Valdis Dombrovskis

First, there is a non-performing loans action plan, which was requested by member states. We are currently implementing it. I was speaking at length on this to others this morning. I will be responding to other members' questions so I probably will not be able to elaborate in detail on the action plan. I will just outline, therefore, what we are recommending specifically to Ireland. We have a recommendation for Ireland specifically on non-performing loans: "Encourage a more durable reduction in non-performing loans through resolution strategies that involve write-offs for viable businesses and households, with a special emphasis on resolving long-term arrears." Our recommendation to Ireland is a resolution strategy that involves write-offs. To be clear, that is what we are recommending specifically to Ireland.

Senator Paddy Burke

Write-offs.

Mr. Valdis Dombrovskis

It is recommendation No. 3.

Senator Gerry Horkan

Mr. Dombrovskis acknowledged in his opening statement that debt–GDP ratios sometimes improve not so much because debt is falling, but because GDP is rising. This is particularly the case in Ireland, where GDP made huge jumps. I made this point to the Minister for Public Expenditure and Reform when he was here last year. He agreed with me.

With regard to our debt, the previous Minister for Finance, Deputy Michael Noonan, pointed out to us on his last day in the Seanad that Ireland has the second highest level of debt per head of population in the world, after Japan. Some 40% of our corporation tax receipts are from ten companies, and approximately 80% of our corporation tax is related to American foreign direct investment. What point does Mr. Dombrovskis have to make to us on the vulnerability of the Irish economy even if a quite small number of factors change? The debt is significant. Corporation tax receipts are vital if we are to manage to reduce our debt. We are very vulnerable, particularly in the context of proposals in terms of the taxation of the digital economy. Mr. Dombrovskis is looking at us from above. What points has he to make to us that he has not already covered in his statement?

Mr. Valdis Dombrovskis

With respect to the debt–GDP ratio, as I said in my introductory remarks, the debt–GDP statistics have to be taken with a pinch of salt, especially in the case of Ireland. I would not reach the far-reaching conclusions the Senator outlined on public debt per capita because we see that countries in the EU that have substantially higher debt–GDP ratios, including debt–GDP ratios that existed prior to Irish GDP recalculation-----

Senator Gerry Horkan

If Mr. Dombrovskis-----

Chairman

The Senator should allow Mr. Dombrovskis to conclude.

Mr. Valdis Dombrovskis

If one considers the debt-GDP ratios in Greece, Portugal and Italy, one notes they were substantially higher than before the Irish GDP adjustment.

With regard to public and private debt, of course levels of debt are high in Ireland. We also see the process of deleveraging. That is why we are also emphasising the need to continue to reduce the general government debt ratio. It is in our country-specific recommendations. The emphasis is still there.

On the question on the taxation of the digital economy, we have already touched on this. It is still work in progress. The European Commission is currently ascertaining the best way to address the taxation of the digital economy. We have had discussions on this with the Irish Government.

It is also recognised that we need to adjust digital taxation because our tax system is basically outdated. This area has been developed for an economy that is tangible and that includes tangible assets and goods. It is not adapted for the increasing share of digital economy. We can only predict that this share will continue to increase.

We expect digital economy companies to pay their fair share of taxes. We want to reflect the principle that taxes should be paid where real economic activity is taking place. If companies are making profit in Europe but not paying taxes in Europe, it is a problem and we believe that needs to be addressed. Of course member states will need to have discussions to find the right balance. As committee members are aware, in the area of taxation the unanimity principle applies and all member states need to agree. We are ready to have those discussions. Ideally, this would move forward at international level in the context of the OECD framework and the fight against base erosion and profit-shifting. If we see that this international war is not advancing sufficiently, then Europe should be ready to act and move forward.

Chairman

Thank you. In the short time that is left I wish to refer to your opening remarks, Mr. Dombrovskis. You have stated that Ireland's recovery has been fast-paced and broad-based. It has been fast-paced but there remains significant disadvantage in the country, especially in the regions, as outlined by Senator Conway-Walsh. A significant number of the people we represent have not enjoyed any lift in their quality of life. Much work remains to be done. I would not like that statement to go without comment.

You said in your opening statement, Mr. Dombrovskis, that the performance of the banking sector has returned to normal. It is far from normal. Small businesses cannot get banking loans. I presume you are aware of the tracker mortgage issue in this country. Significant numbers of people have not been paid or put back on the correct rates. Banking is far from normal. In fact, if something is not done in banking we will get back to a situation where the banks will act as recklessly as before.

You referred to the broad tax base. Our corporate tax continues to be talked about in Europe. It is central to our economic well-being and development. We would not like to see interference from Europe that would in any way damage our prospects of being able to secure further outside investment in the country.

You referred to banking union, Mr. Dombrovskis. This committee has written several times to Mario Draghi in respect of his appearance. I have written to him on a personal level in respect of the tracker mortgage issue. His response has been quite pathetic in terms of understanding the issues we face and our efforts to deal with them.

Reference was made to non-performing loans. You said that the resilience of the Irish banking sector has improved significantly. It has not. It is living on taxpayers' money. A vast amount of money was paid in by the Government to keep the banks afloat at a time when Europe did not do many favours for this country by insisting that we could not burn the bondholders. That is what has us in this situation that we are not in. The Commission is pushing for non-performing loans to be dealt with. However, it has to understand that, up to recently anyway, the banks completely ignored country-specific recommendation No. 3, which you cited earlier, Mr. Dombrovskis. You referred to write-offs for viable businesses and households with a special emphasis on resolving long-term arrears. The banks have persecuted small businesses and individuals. We have significant levels of deaths by suicide, family disruption and trauma, all from the fact that the banks refuse to deal with the issues before them in a way that shows some degree of compassion and humanity.

It is my opinion that Europe stands idly by and watches as our citizens are punished for something they did not inflict upon themselves. I am simply giving you my views.

Mr. Valdis Dombrovskis

I will comment first on a procedural point. When discussing economic, financial and fiscal issues with a parliament, typically I like to have an open exchange of views. You referred, Chairman, to some written remarks and not to the speech that I delivered. In a sense I have not read out that statement. This point was made clear to colleagues at the beginning of this meeting. That is exactly the problem but let us clarify this point. I stand by the statement, by the way - that is not a problem. There was strong insistence from colleagues that they wanted a written statement from me. However, I am saying that I prefer not to deliver a written statement in meetings such as this. I prefer to have more open discussions. It would probably be better to refer to what I was actually saying in the meeting and to check against delivery. It is not that I am willing to deny anything that I have written. It is simply a procedural point.

I will come back on the substance of some of the points raised. You referred to the broad-based recovery, Chairman. You may agree or you may not agree, but the assessment of the Commission is that the Irish economy has made a remarkable turnaround. We see it in the fast economic growth and decreasing unemployment. We see it in the rapid development in many sectors of the economy. We are not saying that everything is solved.

Let us consider the EU economic policy priorities - they are equally valid in Ireland. We are saying now that we have economic recovery. At the same time, we must work to make growth inclusive, address income inequality and restart the process of convergence both within and among EU member states. That is our focus. Our economic policy priorities indicate that is exactly what we need to focus on now.

The next set of country-specific recommendations is in development. I am talking more generally rather than prejudging specifically the country-specific recommendations for Ireland. They will help to focus on the reduction of income equality and on the implementation of the European Pillar of Social Rights, recently agreed by member states. They will help to put more emphasis on addressing the special social problems that you have raised, Chairman.

You referred to the banking sector, Chairman. We see once again that the level of non-performing loans in the Irish banking sector has reduced rather substantially. Actually, it has been one of the fastest reductions. Of course we are aware that this entire issue is sensitive and we need to tackle it with strong consumer safeguards. It is a matter for national supervisors and national consumer protection institutions to prevent aggressive loan-collection strategies, something also emphasised during this meeting.

You raised the question of the European Central Bank and comments by Mario Draghi, Chairman. I cannot comment, because we must respect the independence of the ECB. The European Commission does not comment on the decisions of the European Central Bank - it is an independent institution that responds for itself.

Chairman

I thank the vice president for coming today. On the basis of today's questions, he may take it that a longer exchange might be necessary on his next visit. I thank him and his colleagues for being present.

Sitting suspended at 10.20 a.m. and resumed at 10.40 a.m.