My purpose today is to link Ireland’s strategic interests to our engagement with the European Union and the current turmoil in markets surrounding the Euro.

The Euro itself is in many respects a great success. Even in recent times it has increased in value against the dollar. It has helped to deliver growth in the Euro area in its first decade at a rate per person that is more or less equal to that of the US. Within the Euro area there has been an increase of 50% in trade volumes over the first years of the Euro and Ireland has been a great beneficiary of this. Average inflation for the first 12 years was 1.97% which is far better than any Euro member had achieved over preceding years (including Germany). Also looked at collectively, the budget deficit of the Eurozone is 6% as against over 10% in the US. The success of the EU itself and the Euro in particular is vital to our national interest because we are a small open economy depending overwhelmingly on free access to European markets.

Ireland therefore has a vital interest not merely in managing our own affairs properly but also in contributing as best we can to sustaining the European project as a whole and sustaining the Euro in particular.

The successful conclusion of the European Summit on the 21st July last underlined the reality that, as Angela Merkel put it; a break-up of the Euro is for her and many others “unthinkable”. She has used other words such as “inconceivable” in the past but this constant expression of confidence in the durability of the common currency has not inhibited many familiar critics particularly in the United Kingdom and the US from voicing again their conclusions that the Euro is doomed. Indeed the risk of political accidents is very evident whatever Mrs. Merkel may say. The next period of weeks will be of great importance and potentially dangerous not least because many countries including Germany still have to adopt the legislation necessary to give effect to the agreement of the 21st July increasing the funds of the European Financial Stability Facility to €440 billion. Greece is of course another reason for concern.

If Greece were to default on its obligations, other than through an agreed restructuring programme, the likely effect in my opinion will be contagion not merely to the other “programme” such as Ireland but possibly even to Spain and Italy as well. This would threaten the whole edifice. So also would what Philip Rosler the German Economics Minister and Leader of the Free Democrats has described as an option (which certainly should not be one) namely – “an orderly bankruptcy of Greece”.

We in Ireland have a brief opportunity now to put clear blue water between ourselves and others and perhaps to surprise the markets with the demonstration of our resolve. In fact I agree with Jurgen Starks conclusion that the Government should capitalize on improving market sentiment towards Ireland by front loading cuts outlined in the bail out plan although I recognize how politically difficult this would be. But the prize would be great indeed if we did so because it would indirectly help to open up credit again in the economy through the funding opportunities that would result.

The improvement in the way we are viewed is the result of our economic and political responses to the demands of the EU institutions and the IMF. These have properly been considered exemplary to date and the external perception of our position has stabilized as a result. Part of the reason may be that Ireland’s global companies are better placed to by-pass the difficulties in the banking sector than elsewhere in Europe. The spread between German and Irish bond yields have reduced significantly. They can invest as a result. However, we continue to maintain a substantial and unsustainable budget deficit. In 2010 the deficit was 12% of GDP which is equivalent to €11,164 per head of population. The public debt to GDP ratio was 96.2% (equivalent to €33,121 per person). Two days ago the IMF projected a fiscal deficit for Ireland of 10.3% for 2011 and 8.6% for 2012. (With Greece running at 8.2% for 2011). The bottom line is that our deficit is the highest in the EU (the third programme country Portugal was at 9.1% last year). So the basis for the trust that is developing is fragile and it is the key responsibility of the government to increase this trust if it can. I recognize that this is not an easy task because global growth – and European growth forecasts are being reduced. But there is no avoiding what we must do. We must deliver a budget deficit reduction of €3.6 billion at the very least and preferably more. In this context it is worth noting too that since January of this year our international funders have agreed to release to Ireland €30.5 bn. This is a startling demonstration of the current dependence that we must reduce and deserves to be recognized in internal debate.

I do not want to recite verbatim what Professor Philip Lane amongst others has written recently but his logic is unimpeachable. The bottom line is that taking account of various factors not recognized in our programme we must look again at the €3.6 billion to establish if it is enough. The factors included the following:

Our GDP growth forecast for 2012 will be reduced. On the other hand we have the advantage of improvements in the interest rate on European official funds so our debt servicing costs will be significantly reduced. But the really important conclusion is that the external environment is much worse and the government should seriously consider what additional measures could be taken to bring our spending into line with the revenues it can now expect. The confidence that this will evoke in those who may lend to us (and indeed in those domestic consumers and investors) will be considerable. Lane has correctly concluded, “The next few weeks should be pivotal for Ireland’s economic prospects”.

Let me turn to another point. Some commentators have been particularly critical about the Eurozone Member States response to Ireland’s case. Much of this criticism has been unfair although some aspects of the behaviour of our partners has left much to be desired. However, on the other hand, it should be underscored that the interest payable to the ECB for the €89 billion currently advanced to our banks has been incredibly low at 1.5%. Also the core countries which maintained reasonable discipline over their own finances have their own political problems about what are easily (if inaccurately) described to their electorates as handouts to countries which have lived and still live beyond their means. The question is legitimately asked why countries with large fiscal deficits continue to maintain costs in their economies that are far higher than in the donor countries who are bailing them out? President Van Rompuy said in the London School of Economics last week ‘Without the fiscal irresponsibility of some countries we would have no crisis.’ It is impossible to dispute this and we are one of them.

Some here have also been highly critical of the negative comments made by people like Jurgen Stark. It would be better to answer his points of criticism (if we can) than in railing against them. Most of what he said was fair.

So, assuming the eurozone passes through the next weeks relatively unscathed and the system holds together what is required to sustain the future of the Euro in the medium-term? It is clear that the Maastricht Treaty failed to protect the currency because it did not go far enough. It created, in the Growth and Stability Pact, limits on budget deficits and debt but it did not provide the means to keep under surveillance, and ultimately control national budget policy (or even to really influence it). As a result The Growth and Stability Pact was first breached by Germany and France with apparent impunity and then, we and others breached it much more seriously. The Euro Plus pact has already been effectively agreed. To provide for future discipline correctly its adoption will be necessary to maintain the continued support of Germany and indeed others, such as The Netherlands, for the whole project. It is clear that the European currency requires substantial powers of oversight and influence over, national economies and their budgets to ensure that national policies conform to European obligations. Without this the Euro cannot survive. This should include the power to fine recalcitrant States on the initiative of the European Commission. The final adoption of the so-called “six pack” of measures for the future is, as Commissioner Olli Rehn has put it “a fundamental element” in Europe’s response to the debt crisis. The core countries not merely can but should insist on it. So should we. None of this requires tax harmonisation but it does demand the means to ensure national fiscal prudence. In recent days the Dutch Premier and his Finance Minister have spoken about the need to anchor what has been agreed more firmly and to take tougher action to enforce discipline in the future. This must include gradually increasing sanctions against those who breach agreed obligations and less freedom of action at domestic level to transgress agreed parameters. This may involve requiring of us more tax or less expenditure (But not by defining precisely where or how. That is for national parliaments). I believe too that Member States should be required to include a balanced budget provision in their constitutions or in a superior form of national law that cannot simply be overridden at will. We should be absolutely firm in our support for the increases in integration required by these moves.

So, we have no alternative but to pursue difficult policy options and the commendable resolve of the government should not be undermined by those who apparently fail to recognise how serious our position remains.

This is the text of speech Peter Sutherland delivered to the Institite for International and European Affairs, Dublin on 22nd September 2011