| Dear chairman, dear members of the Institute of International and European Affairs, dear panellists, dear Members of the Irish Parliament, ladies and gentlemen, it is for me an immense pleasure and a great honour to be here today for the third time, first and foremost, to acknowledge the major achievements made in just four and a half years by your country. Ireland returned to market financing well before the end of the programme in end-2013. The stability of the banking system has been largely restored and, most importantly, since 2014 the economy has been recovering at an impressive pace, to the benefit of the Irish people. I’m also here because the crisis Ireland has been through has caused considerable hardship and much about the causes of that crisis still needs to be fully understood and explained. This is very important, not least as we all want to ensure that our economies become less vulnerable and better prepared to weather future adverse shocks. I hope that by offering my thoughts today, listening to your concerns and answering questions, I can play a part in that process. You will be familiar – but we are very familiar I have to say in the rest of Europe – with the story of the tourist in a remote area in Ireland who asks a local for directions to Dublin and the Irishman says, “Well, if I were you, I would not start from here.” When the crisis started in mid-2007 and then exploded with the Lehman failure in 2008, many policy makers had the very same feeling: starting from here it’s terribly difficult. |
1024 |
| From my perspective as President of the ECB, I remember clearly the huge uncertainty about where we were and which direction we should head in. I remain convinced that had central banks across the globe in the advanced economies not come together to chart a course out of the crisis, the outcome could have been a repeat, if not worse, of the ‘30s. To sum up, we had experienced the worst crisis since World War II, could have been the worst crisis since World War I, with a great global depression and not only a global recession. |
1025 |
| For policy makers in Ireland, I am sure there was similar uncertainty as the consequences of the burst of the property bubble flared up around them. The banking system was severely affected and real GDP contracted by 9% between 2008 and 2010, led by a 41% collapse in investment. As a result, the public debt level exploded from around 25% before the crisis to a level of almost 90% of the GDP by 2010. On the other hand, contrary to most other stressed European economies, the price competitiveness of the Irish economy, which had strongly deteriorated in the pre-crisis years, had by 2010 already significantly improved. It is important to remember that this painful adjustment had, to a remarkable extent, happened already before the financial assistance programme that started at the end of 2010 when both fiscal sustainability and the viability of the banking system came simultaneously under question. |
1026 |
| At the same time, in the euro area, the crisis revealed major deficiencies in its governance, ranging from the refusal by some member states to comply with the fiscal rules of the Stability and Growth Pact to a benign neglect of the major divergences in price and cost competitiveness, from the absence of a crisis management and resolution framework, and, finally, to the lack of a banking union. A lot of progress has been made since then in Ireland, in Europe and at the global level. Against this backdrop, my thoughts today will focus on Ireland and the euro area, with main focus on the past, present and future of their governance. |
1027 |
| And if you wish, I will commence by the past: governance failures at the heart of the crisis. Looking back to the years preceding the crisis, the Irish economy experienced the build-up of large imbalances that eventually inflicted serious damage on the economy. This was partly driven by the decade long upswing in the financial cycle, which was, of course, a global phenomenon, but the fact that this cycle was so pronounced in Ireland compared with many other countries suggests that this is not in itself a sufficient explanation. As I will argue, specific failures in domestic macroeconomic and financial governance played also a very important role. Before elaborating on this point, I should stress upfront that weaknesses in European governance and its implementation also contributed to the crisis, though the main reason for the associated high costs lies in my view with national governments and, of course, not only Ireland, many national governments. |
1028 |
| On the European governance and national responsibilities, I would say that the institutional architecture of the euro area, when it was launched in ‘99, was incomplete, mainly as it did not foresee that national policies could have led unsustainable imbalances to build up. It has been observed that this was also the result of the fact that several recommendations to strengthen economic governance beyond the fiscal framework by developing the EMU, economic and monetary union which … this call was made in the Delors report but they were not incorporated in the treaty signed in Maastricht in 1992 because this treaty concentrated on the fiscal governance and not in the economic governance at large. |
1029 |
| Policy makers made one mistake in the period of benign neglect that preceded the crisis: They were wrongly convinced that the normal functioning of the economies in a single currency area would always provide for the “competition channel” to foster appropriate and timely corrections in the national real economy in case relative cost and price competitiveness would deviate from the average. This assumption proved right in a number of cases in Europe, but certainly not for all euro area countries. And if I sum up the weaknesses that I see in the governance framework, I would say that there are three broad areas which are affecting themselves the Irish situation in their own way, even if they were affecting, of course, the euro area as a whole. |
1030 |
| First, the Stability and Growth Pact, SGP, was not properly implemented. The “spirit” of the pact was severely undermined when the large countries, namely, France and Germany, under the Presidency of Italy opposed the full implementation of the SGP in 2003 and 2004. If the SGP had worked as anticipated and debt levels had been lower, the consequences of the financial and sovereign debt crisis would have been less severe. So, I know the point. It is extremely important. In my first speech in front of the European Parliament at the end of 2003 was to defend the Stability and Growth Pact at the time. I would say that if all euro area countries would have lived up to their promises, the crisis would not have begun with such a grave situation in Greece nor spread so dramatically across countries, including, even if it was not the case of Ireland because, as I already said, Ireland started the crisis with a very low level of debt outstanding, but, of course, the level of the crisis and the spreading of the crisis as a whole, it played an important role. |
1031 |
| Second, there was no macroeconomic surveillance mechanism to prevent divergence in competitiveness levels and the build-up of imbalances, particularly external imbalances, as well as domestic imbalances. Such a framework, if effective, could have drawn attention to the excessive wage and unit labour cost developments in several countries, including in Ireland, at a much earlier stage. Already in ‘05, long before the crisis, the ECB considered that on top of the loose implementation of the SGP, the main economic challenge in the euro area was the significant loss of relative competitiveness of a number of euro area countries and the ensuing constantly growing domestic and external imbalances. As there was no established, according to the secondary legislation of the euro area, surveillance of these divergences, I decided to draw the attention of the Ministers of Finance every month, systematically, since 2005 – so a long time before the crisis – by circulating the national evolutions of unit labour costs, the nominal evolution of costs in the private and in the public sectors, and the positions of the various national current accounts. I have to say that these systematic warnings, which were repeated every month, were ignored as long as there was no financial crisis. |
1032 |
| Third, and it is also important, there was no European framework to monitor and correct financial imbalances, nor appropriate crisis management and resolution tools to deal with the bank-sovereign nexus. As a result, capital flowed too easily into countries like Ireland in the upswing, and then, in the downswing, the increasing correlation between the creditworthiness of the banks and the creditworthiness of the sovereign caused capital to flow out extremely quickly, fragmenting the European financial market. This also, seen from the standpoint of the ECB, disrupted the transmission of monetary policy. |
1033 |
| Now let me turn on the role of policies in the case of the Irish crisis. Again, Ireland was not alone, of course, in this dramatic crisis. |
1034 |
| First of all, it should be acknowledged that during the pre-crisis years, fiscal and macro-prudential policies in this country were not up to the standard of a country exposed to financial liberalisation in the environment of monetary union. A consequence of monetary union is that interest rates converge and prevailing rates for the euro area must be attuned to the cycle and the challenges of the area as a whole. Seen from the monetary policy standpoint, namely, seen from the Governing Council of the ECB, what counts is the entire set of countries, the 330 million people around, that had a stake in the area and not this country or that country. It goes without saying, we have a single monetary policy. It is necessarily the same for all and it is designed to deliver price stability, without deflation and without inflation, to the entire euro area. If it was designed for country A or country B, then all the other countries – we were 15 at the moment of the collapse of Lehman Brothers – all the other countries would protest in saying that the area as a whole must be taken into consideration. That was very well known and that was really well understood before the euro was introduced but of course, the responsibility of the national policies is of course very important in such an environment. |
1035 |
| At the moment of the crisis we had a toxic dynamic which was aggravated by a feedback loop, whereby the combination of a rapid increase of unit labour costs and the credit boom contributed to higher inflation in Ireland than in the euro area average before the crisis. This in turn led real interest rates to fall significantly below the euro area average. Of course it was fuelling the incentives to borrow, so credit to the private sector increased by 20% per year between 2002 and 2007, creating major vulnerabilities in the financial sector. Needless to say, the credit boom contributed to wider vulnerabilities. Above all, the economy, but you know that very well of course, became overly reliant on the construction sector as a driver of growth and employment and as a source of Government revenue. |
1036 |
| By 2006 roughly half of fiscal revenues were from capital taxes largely linked to the construction sector, and the expenditure side of the budget was based on the assumption that those revenues would continue to flow forever. A prudent fiscal policy would have realised that the underlying fiscal deficits were much higher than those reported in real time. However, the total expenditure on compensation of employees in the public sector grew by close to 200% between 1998 and 2008, compared to the euro area figure average of around 45%. And we are speaking of the same currency, the euro, with the same international purchasing power but also the same international cost. |
1037 |
| Turning to micro-prudential policies, that is financial supervision, similar failings materialised before the crisis. There are two very important reports analysing the origins of the Irish crisis: the so-called Nyberg report and the Honohan report. These reports document well the deficiencies in national banking regulation and supervision during the boom years, where financial stability risks were underestimated. I have to make a point also there – at the time, as you well know, the European Central Bank had no responsibility at all for banking supervision or for macro-prudential policies in member states. This changed after the crisis as a lesson learned from the crisis. But I would say that the principle-based approach to supervision, which was dominating at the time, assumed implicitly that banks would control their risk-taking as long as they are properly governed. It resulted in a much stronger focus on processes than on real outcomes, and what I would call an inadequate treatment and assessment of the risks taken by financial institutions. |
1038 |
| Burgeoning credit growth and the consequent expansion of banks’ balance sheets should have been causes for concern in themselves, but that this expansion gave rise to highly concentrated exposures to the construction sector and the property sector should have sounded the alarm. We have to recognise – but it’s easy to do that now, it was more difficult to do that in real time – and this is good for Ireland, as well as for the entire financial sector in the advanced economy, we had unsustainable bank funding models. |
1039 |
| Let me go now to a very, very important issue that has been discussed of course, thoroughly, which is the guarantee. It was also because of these unsustainable funding models that when the Lehman shock hit, a further prudential decision was taken. This decision, which would have very momentous consequences, was the introduction in 2008 of the Credit Institutions Financial Support, CIFS, scheme, better known as “the guarantee”. As I said, this was to a significant extent a response to mounting, dramatic funding pressures on the Irish banking sector. And I must admit that, given the very difficult situation at that time, one could understand why such a decision was taken – also taking into account that all the big countries, after the sub-prime crisis and bankruptcy of Lehman Brothers, were about to give at that time some kind of blanket political guarantee to their own systemic banks, to make the private sector aware of the fact that they were behind their systemic financial institutions. But it is also important that the guarantee was introduced by the Irish Government without any co-ordination with the ECB or with any other European partners, and I was the witness of that, or any other international partner. The ECB, shortly after the fact, was critical of some aspects of the guarantee, as can be inferred by reading our legal opinions at the time. As we know, the guarantee triggered later an intense negative spiral between the banking sector on the one hand and the sovereign creditworthiness. |
1040 |
| By late 2010, the imminent expiry of the original two-year guarantee – which in the meantime had been partially superseded by the so-called eligible liabilities guarantee, ELG, had left the Irish authorities in an extremely difficult situation. The so-called CIFS cliff, the wave of debt maturing in September 2010 issued under the guarantee, confirmed Ireland’s loss of access to sovereign markets. Combined with other factors, such as the ever-worsening fiscal situation, the Irish Government was confronted with no alternative but to ask for official support. At the same time, it should not be overlooked that over the period 2009 to 2011 the holders of subordinated debt issued by Irish banks incurred substantial losses, what we now call burden-sharing, in the order of €14 billion. In the same vein, shareholders’ write-downs exceeded €29 billion. As such, the private investors in the Irish banking system endured, of course, considerable losses, as is normal. |
1041 |
| In this context the issue arose, which is being discussed in Ireland as regards the legacy of the crisis, on how to treat the senior bondholders of the banks that were receiving public support. The ECB’s view was at the time, and still is, that a number of factors made this option extremely risky for Ireland. Before recalling the ECB view however, let me stress that the ECB simply gave advice on this issue. The ECB indeed doesn’t have any authority to issue instructions to euro area governments or to ministers. Accordingly, the decisions on the modalities for the resolution of Irish banks were taken, and that goes without saying, by the Irish authorities. |
1042 |
| Now, nevertheless, I would like to expose to you the main arguments that we see in the ECB for your consideration, the main argument that explains the decision of the Government of Ireland at the time. First, it is very simple to read what happened with today’s glasses. One has to remember the situation at the time. There were neither clear rules back then nor precedent in mature economies for how burden-sharing with senior private creditors should take place. The bank recovery and resolution directive, BRRD, was only adopted in April 2014. And this lack of rules on how to deal with heavily distressed financial institutions, coupled with the very high uncertainty at the time, meant that the situation in financial markets was extremely volatile and that is why all the leaders of the major advanced economies had given the blanket political guarantee that I was mentioning. This … especially after the so-called “Deauville declaration” in October 2010, market concerns that possible future bailouts may involve burden-sharing even with senior private investors, caused a dramatic surge in yields in stressed euro area countries, first and foremost in Ireland. I remember well the concerns expressed in those very difficult days by Minister Brian Lenihan, to whom I would like to pay tribute today and with whom I had constantly, in those dramatic circumstances, a very close and confident co-operation. As you know, Brian passed over and he was attacked by a terrible disease precisely in this traumatic period. These concerns were formulated in a letter Brian wrote to me on 4 November 2010. That letter was made public, and I could quote a passage from the letter. And it is Brian Lenihan, the Minister for Finance of Ireland writing: |
1043 |
| …it is very noticeable that over recent days the widening in spreads has accelerated on the basis of speculation on the conditions that may be necessary to apply to the debt of countries accessing the European Financial Stability Facility and reported policy comments of senior political figures. It is the case that many market commentators attribute these comments as being the primary driver of the increased spreads of peripheral countries, including Ireland, in recent days. |
1044 |
| Let me also stress that Ireland, in particular, was very vulnerable to an escalation of market tensions and financial instability at that very juncture. It is no exaggeration to say that the nature of the crisis facing Ireland, and, in particular, its banks in late ‘10 was more acute than in any other country. |
1045 |
| Second, it should not be overlooked that the introduction of the CIFS guarantee scheme had, effectively, limited the potential for any burden-sharing for the two-year period of its validity. This means that, apart from any other consideration, the guarantee had prevented the Irish Government from fully bailing in its senior bondholders in the Anglo Irish Bank well before the start of the programme. And when, by late ‘10, the CIFS was succeeded by the ELG scheme, which relaxed this limitation, the potential scope for burden-sharing had been reduced considerably because the stock of outstanding debt had fallen. |
1046 |
| Third … and I think I have also to mention that by late ‘10, Ireland was facing a trade-off between large financial stability risks whose materialisation could have in the end impacted more dramatically the real economy and the citizens of Ireland even more profoundly than what had been experienced, and the trade-off would be with the potential gains from burning the senior bondholders. The consensus view – and I reiterate it was still a consensus in late ‘10 – was that burden-sharing with senior bank holders at such a critical juncture was too risky to countenance. It was a consensus view, in my own observation, in Europe, it was a consensus view at the global level so it was not the Europeans which were at stake. |
1047 |
| When burden-sharing was discussed later … and I was speaking of ‘10, now I go to spring ‘11, with the new Government, it was made clear by the Irish authorities that they didn’t wish to pursue the issue of burden-sharing with the so-called pillar banks, Allied Irish Bank and Bank of Ireland. These banks had a retail deposit base that had remained relatively stable during the years of turbulence and acted as a stabilising force. And that is important to note, that during this dramatic period, the creditworthiness of these institutions, so-called pillar banks, had been maintaining order. And, of course, it was because appropriate decisions were taken by the successive Governments. These banks … anything that could have undermined confidence or called into question the safety of those deposits and led to outflows would have been, you know, placing additional funding and would have created deleveraging pressure on the system, which was already under significant pressure. And if that had happened, reliance of Central Bank funding would likely have increased further. This would have resulted in greater recourse to emergency liquidity assistance, ELA, which, from an economic perspective, implies a higher level of contingent debt on the sovereign. Above some threshold, this could have further affected confidence in sovereign debt sustainability and, hence, confidence in the deposit guarantee. |
1048 |
| All in all – and I have referred to the consensus in Europe, the consensus in the world – the ECB assessment at the time was, and with the benefit of hindsight still is – that the repercussions from bailing in senior bondholders may have far outweighted the gains, or the potential gains. This is the reason why I think that the Government of Ireland was right to take this difficult decision. More generally, the actions taken by the Irish authorities during the programme laid the foundations for the significant and rapid rebound in confidence in the Irish banking system, in the Irish sovereign and in the Irish economy. And this confidence is a whole … confidence was shared by the three, I would say, constituencies I have just mentioned. And it is that confidence which makes, clearly, Ireland the major success of the very dramatic adjustment through which a number of countries had to go through in the crisis. And, again, in the crisis that did not start here but came here dramatically. |
1049 |
| Now, let me turn to the present: reforms and recovery. Fortunately, much has happened in the euro area, especially in Ireland, since those difficult days in ‘10 and ‘11. At the European level also, considerable work has gone into addressing the governance weaknesses, and some major steps forward have been taken in terms of European integration. Jean Monnet’s observation that “Europe will be forged in crises” has proved true again, which doesn’t mean that we should be happy with the crisis, but it’s clear that a number of decisions were taken in the crisis. In Ireland, the “r” of reforms has been noticeably coupled with the “r” of recovery, with remarkable outcomes and very important lessons for other European countries. And this has to be said very clearly. |
1050 |
| Now, at the European level, we have reinforced the Stability and Growth Pact. We have now the “two-packs” and the “six-packs”, which have given the Commission and the EU Council more tools to ensure sound fiscal policies. As important as the reinforcement of the SGP has been the setting up, in my own vision, for the first time, of a distinct instrument to survey competitiveness developments and macroeconomic imbalances. We call that the macroeconomic imbalances procedure, MIP. Retain this acronym. MIP is as important as SGP. It is, what lacked at the very beginning of the euro area … the absence of surveillance of relative competitiveness. So we have that now. SGP re-enforced, MIP setting up… set up from scratch. And we have the banking union, moreover, which represents a strengthening of the financial framework, moving away from the … what was existing before with the total segmentation between the various nations of the surveillance. The single supervisory mechanism lowers the risk of national forbearance for both micro and macro-prudential supervision. And with the single resolution mechanism, we now have a comprehensive toolkit for dealing with failing banks, including clear procedures and a clear waterfall approach to bail-in liabilities which is known …ex ante. This, together with the, as I said already, SGP and MIP, should help ensure that if banks fail, they don’t bring down their sovereigns with them. |
1051 |
| Well, living through such dramatic events, one does not always appreciate their significance. And I believe that the pace and the scope of institutional reform that the euro area has seen since 2010 will, one day, be considered historical by historical standards. As noted by Herman Van Rompuy, it took only 15 years from the creation of the … of … after the creation of the euro area to create a single European banking supervision. In the United States of America, it took something like 150 years after the creation of the US dollar. It is not to say that we are very happy with what has happened, it is to say that undoubtedly the Europeans have been … tried to be up to the lessons of the crisis. But, I have to say that, of course, we should not be complacence in any respect. I am well aware of the … governance reforms are not solving all our problems. I see that the sole implementation of what has been decided is not easy, in particular, despite all the lessons of the crisis, the SGP. I see also that the MIP is not considered as it should … as a major governance pillar for the Europeans but, again, we have to insist and stress how important it is to apply by the rule. And the rules were just re-enforced after the crisis. |
1052 |
| Now let me concentrate a little bit on progress in Ireland and the contribution from the euro system. Progress in Ireland … many reforms have been implemented in recent years to reverse the macroeconomic vulnerabilities that built up before the crisis – and a lot of headway has been made. These measures have been in large part driven by the Irish people themselves. I have to pay homage to the Ministers, Governor, Prime Minister who have led the country through the programme and post-programme phases until today. They had to cope with huge global, European and … national challenges and they succeeded. A few examples. Fiscal strategy has benefitted from the plans devised by the Irish authorities prior to entering the programme. This ultimately ensured a very high degree of national ownership and underpinned the credibility of the consolidation strategy. The need for fiscal adjustment was enormous at the very beginning of the programme and we had a fiscal deficit-to-GDP ratio, excluding the cost of financial support, which was around 11% of the GDP. Everybody can see that at the end of the programme it had declined down to 5.8%. And recent forecasts point to the conclusion that in ‘15 it will be well below the 3% reference value. So, there you see the progress. |
1053 |
| Structural reforms have also played a role in the turnaround in this country. Ireland already had a fairly flexible economy before the programme, with measures of business conditions consistently ranking amongst the top countries in the world. The programme concentrated mainly on tackling the massive increase in unemployment during the crisis – to around 15%. It is noteworthy that, unlike in some other stressed countries, unemployment levelled off and then began to fall already … already in the first quarter of 2012, thanks to the flexibility of the Irish economy. To the decisions taken in … spontaneously, if I may, in the private sector and with a full understanding by all Irish citizens that what was necessary to do precisely to get competitiveness and, through competitiveness, jobs. The financial sector measures programme had been a cornerstone of the recovery in the Irish financial sector. The liquidity and funding assessment helped produce a more appropriately sized banking sector and improved the sustainability of bank funding models. All those … progress has been confirmed by results of the balance sheet assessment conducted at the end of the programme … by the end of the programme in ‘13 and the ECB’s comprehensive assessment in ‘14. I would say … and, again, we should never be complacent, but the overall restructuring of the Irish banks has resulted in a smaller, stable sector, more… much more focused than before on the domestic economy, as it should. |
1054 |
| Last but not least, the European Central Bank has also played its role in supporting the Irish economy through this difficult period. It helped prevent the financial crisis – starting in ‘08-’09 – from turning into a dramatic great depression – like in the ‘30s. I mention this … ECB, because we are in Europe. I should mention also the other major central banks which took extraordinarily important decisions. On many occasions after the start of the crisis, the ECB intervened to uphold the integrity of the euro area and remove fears of a break-up – an event from which all member states would have suffered … suffered hugely. Let me here just mention, amongst several standard and non-standard measures, the full allotment, at fixed rate, under monetary policy operations, which we started 9 August 2007 – so before Lehman Brothers and at the moment of the … I would say, start of the so called sub-prime crisis. I would mention also the securities market programme introduced in May ‘10 and through which we purchased the treasuries of three countries – including Ireland, in May ‘10 – in order to show that we are caring for … helping to restore a better transmission of monetary policy in Ireland, which was particularly shocked by the crisis … as two other countries. The two other countries were Greece and Portugal at the time. We renewed the SMP purchases in August ‘11, and we purchased again some Irish securities And, of course, the announcement of the outright monetary transactions in summer of 2012, which was an off-balance sheet, if I may, commitment also designed to help restore a better transmission of the monetary policy. |
1055 |
| For Ireland in particular, the Eurosystem has provided unambiguously positive support. The level of liquidity provided by Eurosystem to the Irish economy was simply extraordinary. And I would … only for you to have the order of magnitude in mind and, again, the paradox there exists in criticising the ECB for not having sufficiently supported Ireland. The figures are the following. At a time … in the heat of the crisis, 25% of the total refinancing … total support by the Eurosystem to Ireland … 25% of the total refinancing for the euro area as a whole was for Ireland. When Ireland, of course, has a very small proportion of the GDP of the euro area and 1% of the capital of the ECB – 25%. If the United States of America, would have asked the Fed to do for the United States what we have done for Ireland, then they would ask for 100% of the GDP support. And 100% of the GDP support is not $4 trillion, as is the case in the piling up of the QE, successive QE. It would be something like the GDP of the US, namely, something like $13 trillion not $4 trillion, $13 trillion. So you see what has been done for Ireland for very good reason, I don’t regret that in any respect. We had to do that, we did that and it proved to be a full success, thanks to you. But remember that, this is very, very important to have in mind you had our full support from the ECB, not only at the level of Europe but also full support in taking some kind of global benchmark. That being said, a central bank can only lend to banks that are solvent and have good collateral. When these conditions are no longer met, we have, in the central banking, a legal duty to make that clear, which we did through my letter to Minister Lenihan on 19 November 2010. This letter has been published, the exchange of letter, the four letters, so I don’t go to that, it’s already public. I would only say that this situation, which was extremely grave with a problem of solvency at the level of the banks, was of course due to the underlying weaknesses of the Irish economy, of the financial sector and only, of course, a credible programme and the help of the international, European and international community, could permit Ireland to get out of this dramatic situation. |
1056 |
| If we take stock now, we can see that this combination of measures permitted Ireland to correct its very large unsustainable domestic and external imbalances and paved the way for renewed growth and job creation as I already said. The hard work done, and we have to pay homage to all the Irish citizens that have done this hard work in the fiscal, structural, financial and monetary fields, has paid dividends for Ireland and, as I already said, the strength of Ireland’s return to soundness has been impressive. The ability of the return to market credibility has been impressive with confidence being there and competitiveness has been largely restored. |
1057 |
| Now, in many ways the experience of your country has set an example for other euro area member states. I would draw, in particular, three broad lessons from your experience for the other Europeans in the euro area. First, it has shown the advantage of a flexible economy in a monetary union. While the crisis was particularly severe here, both the real and nominal economic adjustment and the subsequent recovery have been quicker than in other, I would say clearly than in all other countries, and less flexible economies, of course, have experienced much more difficulty. Second, it has shown the advantage of undertaking necessary yet difficult reforms and fiscal adjustment at an early stage when a crisis hits. Throughout the programme, Ireland not only took complete ownership but also managed to comply fully with the memorandum of understanding and it was an impressive demonstration of determination and professionalism in the conduct by the nation of the recovery in this difficult time. I already said that, but the Irish experience has shown the decisive importance of reinforcing confidence. Confidence is an encompassing concept. Ireland gained the confidence of the Irish people in the ultimate success of the programme, the confidence of the European friends, the confidence of the international community and the trust of the external savers and investors coming back on top of that. |
1058 |
| Now, what are the challenges for the future? I will be very rapid on that and I think the questions will be numerous in this domain. I think it is no time for complacency. We have done a lot at the level of Europe, Ireland has done a lot but it is certainly totally out of question to declare victory, time is not for complacency. In Ireland, while you know the domestic priorities much better than I, let me briefly recall, in my own understanding, what are the two main challenges. The first is working through the legacy of the crisis. Despite the progress in recent years with private sector deleveraging, the debt overhang is still very large. The level of youth unemployment also remains very high, at around 22%, perhaps, in the last quarter of 2014 according to statistics. It is below the euro area average, which is a disgrace, and much below the crisis high in Ireland, which was reached in early 2012, but it remains unacceptable. Finally, while the situation in the banking sector is improving, there is some way to go in terms of resolving the still-large stock of non-performing loans. The second challenge is making sure that the right institutions are in place to prevent bubbles from accumulating again. Despite the reforms of recent years, it would be naive to assume that the Irish growth model is no longer susceptible to boom-bust cycles. I will not insist on that, I think that giving a prominent role to the Irish Fiscal Advisory Council is particularly important in order to prevent the return of pro-cyclical budgets. Fully implementing the macro-prudential measures recently introduced by the Central Bank of Ireland on mortgage lending is also certainly of the essence and very good and intimate and confident co-operation between the Irish staff and ECB staff within the joint supervisory teams of the single supervisory mechanism also of the essence. |
1059 |
| If I turn now to the European governance, I have already mentioned three dimensions where we have made a lot of progress, remains to be fully implemented: the SGP, the MIP and banking union. But my intimate conviction is that in the longer term, further progress in Europe, in the euro area, have to be made. First, we could deepen the fiscal dimension of the European Union, more particularly of the euro area, so that the management of the fiscal union would rely not only upon the respect of the SGP rules but also directly on an embryo of federal budget. Several proposals have been made in this direction, including the transfer at the level of the centre of new responsibilities. The main difficulty of course relies on making sure that such transfer of national spendings to the central budget would not augment the overall public spendings across all levels of governance in the Union. Second, we could reinforce the executive branch of the euro area in setting up a minister and ministry of finance of the area. I made this proposal myself in a speech I delivered in 2011 in Aachen in the occasion of the Charlemagne prize. I don’t insist on that but it is a way to reinforce the executive branch, of the equivalent of the executive branch of the euro area. Last but not least, I think that one of the major issue for the present governance of the euro area is that we have improved the governance through SGP, MIP, banking union but the democratic accountability and legitimacy of the decisions taken by the European institutions, when they design the recommendations according to those governance pillars, is not perfect. Nobody can dispute that the Council of Ministers is legitimate. They are members of legitimate governments, nobody can challenge in my opinion the legitimacy of the Commission, which now goes through a process which is also implying the European Parliament. Still, I think that it would be necessary, when we have a conflict between the centre and its recommendation, the open institution at the centre, Commission and Council and a particular country, it would be good in my opinion that the country which disagrees with the recommendation made to it could ask for arbitration, for a final say, which could be made by the European Parliament, deciding in a format composed of the Members of Parliament representing the voters of the euro area. And that final decision should be taken in close, I would say, contact with the national parliament concerned. So in such a case, we would be sure that the governance function on a way which would be effective, namely, decisions are taken which would be democratic, final say representative of the people of Europe, at least the people of the euro area. Of course, it would also respect the subsidiarity principle, because it would be activated only in exceptional cases … absolutely exceptional cases, because it would be a case where there is an open disagreement between the Council and the Commission, on the one hand, and a particular country, on the other hand. That country asking for the final say being taken by the representative of the people. I stand ready of course to respond to questions on that particular point. |
1060 |
| Let me only conclude what is extremely important is that … to recognise that the hardship of the crisis … the global financial crisis which came in Europe … in Ireland because I … immediately through the financial channel … and then was aggravated by the sovereign risk crisis at the end of ‘09, this hardship has caused for many, many citizens real tragedy but it was not an accident. It resulted from a series of failures, both domestic and European, and I would say also global level but it is not the subject of my exposition. What is important today is to be sure that we take all the lessons for the future to fix what needs to be fixed at European-global levels and, of course, at national levels. But I have to say that when I look at what Ireland succeeded in doing over the past years, I am confident that, at the level of individual countries, a lot of very, very good … and I know, better than anybody, very hard work can be done and be successful. I thank you very much for your attention. |
1061 |
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