Address by the Tánaiste, Eamon Gilmore, T.D. at the Brookings Institution
Washington D.C., 8 February 2012
- Ireland making progress in stabilising banking system and public deficit
- Ireland now Europe’s Best Prospect of seeing a programme country returning to the bond market
- Key issue now is for Europe to address Jobs Agenda
Ladies and Gentlemen,
Firstly, may I thank the Brookings Institute, for this opportunity to speak to you this morning.
As both a programme country, and as a party to the new fiscal compact, I hope that an Irish view can offer some useful insights into how the euro crisis may evolve from here.
How the crisis came about in Ireland is, by now, well documented. I want, if I may, therefore, to spend a few moments, focusing on what Ireland has been doing since the new Government of which I am a member was elected 11 months ago, before offering some reflections on the wider Euro crisis.
Our Government came to office at a moment of deep crisis in Ireland. For the Irish people, being forced to seek assistance from the EU and the IMF was a profoundly traumatic event. We were elected with a commanding mandate and a demanding task - to restore financial and economic stability, to reduce unemployment and to restore our economic sovereignty.
We began by making a number of simple reforms to our governance procedures. Firstly, we divided the finance ministry into two parts, each with its own cabinet minister. We then established a cabinet committee called the Economic Management Council, consisting of these two ministers, myself, and the Taoiseach - our Prime Minister. This group which meets every week, is managed by me, and chaired by the Taoiseach. Its primary purpose is to act as a ‘watchtower’ - providing strategic oversight and direction in the management of the crisis.
From the outset, the new Government was clear about the approach we would take with the Troika. We are committed to a dialogue based on trust and confidence. Our approach is to engage constructively and co-operatively with our partners, while being clear about our view of what is in Ireland’s best interests. This approach has been assisted by the fact that Ireland has robust budgetary institutions, clear and reliable systems for expenditure control, and efficient and independent structures for revenue collection.
We began by making it clear that we would implement the 2011 Budget, inherited from the previous administration, which was important in making clear our determination to deal with our fiscal problems. Over time, we have established a strong track record of adhering to our programme commitments – over 90 individual actions to date. This has provided a context within which we have been able to negotiate substantial improvements to the programme, in line with our commitments to the electorate. The reduction in interest rates on the programme loans, for example, reduced our debt burden by €10 billion Euro.
As a country which relies heavily on direct foreign investment, it is not in our interests to engage in public stand-offs with the Troika. Differences when they arise – and they do - are dealt with through negotiation and diplomatic engagement.
Within three weeks of coming into office, the new Government made a key set of decisions about the future shape of the banking system. Two of the six financial institutions have been merged and re-named the Irish Bank Resolution Corporation, which is in long-run wind-down mode. Two institutions have been identified as pillar banks, that will serve the future needs of the real economy, and the whole system was recapitalised. This required us to commit €24 billion or 15% of GDP in capital. However, a series of Liabilities Management Exercises and some use of contingent capital have reduced this cost substantially, and we were also able to attract private capital into Bank of Ireland. Crucially, the stress tests have gained wide acceptance in the financial markets, and confidence is now being restored in our banks.
In December, we passed our first budget, involving €3.8 billion or some 2.5% of GDP in further fiscal measures. This was not, as you can imagine, an easy exercise, particularly when you consider that fiscal measures totalling €20 billion had already been implemented since 2008. Our budget was based on a root and branch re-examination of every Government spending programme, with the object of ensuring that fiscal consolidation is, where possible, linked to our reform agenda.
This brings me to one of the key questions identified for discussion this morning. How can we reconcile necessary austerity with a growth agenda? Given that unemployment has reached 14% in Ireland, this issue is at the top of the Government’s agenda.
The first point to make is that there are clear and obvious implications arising from fiscal consolidation on this scale. There are few, if any precedents for the quantum of consolidation that has already been implemented. The Keynesian effects of this kind of consolidation are obvious. Shrinking our deficit, however, is an unavoidable necessity.
And yet, despite this rate of level of consolidation, the Irish economy returned to growth in 2011. Our latest expectation is that is that GDP grew by 1% in 2011, largely on foot of strong export performance. Our exports grew by 4.4% in the first 9 months of 2011, and we are now recording a balance of payments surplus after several years of deficits.
Here, Ireland is benefiting from our exceptional openness, and our high-tech industrial base. Ireland has often been cited as one of the most globalised economies in the world – our exports, for example, amount to 100% of GDP. While we have suffered an appalling recession, with a cumulative decline in GDP of 12%, our competitiveness has improved on a range of indicators.
To improve on that growth performance, and to make inroads into our unemployment problem, the Government will shortly be publishing an action plan on Jobs which contains a range of supply-side measures to that effect. We are also taking what steps we can to improve confidence among domestic consumers. Restoring domestic confidence, and in particular dealing with families with distressed mortgages is absolutely critical. Equally we have to set the property market on the path to normalisation and we have taken measures in the budget to that effect.
Just as important, however, are our medium term growth objectives. There are real issues to be addressed about how a small open economy such as Ireland positions itself in the global division of labour. One of our great saving graces has been our strength in high tech sectors such as pharmaceuticals, which has weathered the storm better than most. A critical lesson that we must take from this crisis is the need to diversity our industrial base and our trading partners. As Minister for Foreign Affairs and Trade, I am determined to drive greater penetration of markets in emerging economies. Meanwhile, we are making important reforms in our public services and our system of social protection which will enhance our growth potential.
Much, then, has been achieved in the past eleven months. Exports are growing, growth has returned, and bond yields are falling towards more normal levels. Last month, the Government was able to re-finance a substantial quantity of bonds that were due to mature in 2014, extending the maturity to 2015 – our first serious transactions in the bond markets. As we make progress, however, external risks are coming to dominate, particularly in the shape of the Eurozone crisis, and it is to the broader European scene that I now turn.
I want, if I may to make three main points.
Firstly, as Europeans, we have to put our hands up and admit, that we have often been seen as being behind the curve in addressing the crisis. I can understand how that perception has grown up, which I put down to two factors. On the one hand, the European Union has grown up as a unique experience in the pooling of sovereignty among nation states. Despite the changes made in the Lisbon Treaty, the ethos of the Union is still similar in many ways to that which motivated the original signatories to the Treaty of Rome. While Treaty based, and rules driven, the Union largely proceeds on the basis of negotiated consensus. As Ireland prepares to take up our Presidency in 2013, we are acutely aware of how difficult it can sometimes be to make progress in this fashion.
Building consensus can often be a slow process, and one which can be hard to fathom for out-side observers. This ethos is, to all intents and purposes perpendicular to the mindset of financial markets, which have a built-in distaste for uncertainty, and for decision-making processes that do not proceed in straight lines. Financial markets have grown and developed over the past three decades to the point where they function on a 24 hour basis, are highly integrated, and respond rapidly to each new increment of information. This was never going to be a marriage made in heaven.
Secondly, it has to be said that the Union has not been given sufficient credit for what it has achieved. It has been pointed out to me that the Treaty of Maastricht was signed 20 years ago yesterday. It is only ten years since the first Euro notes and coins went into circulation. The Euro was and still is, an ambitious project, which is now confronted by the worst economic crisis since the Great Depression. In that context, we have made important strides in developing crisis management instruments, such as the EFSF and the ESM. The Commission and the ECB, who were never set up for the task, have become managers of assistance programmes in three countries. Major legislative changes have been introduced in the form of the six pack, and more is in the offing in the two pack. And most recently, 25 member states have concluded a new Treaty or fiscal compact in what, by European Union standards, was an extremely tight deadline.
Thirdly, and underlying all of this, is something which has consistently been under-estimated outside of Europe – that is, the deep commitment of the member states to the European project and to the single currency. To paraphrase Mark Twain, reports of the demise of the Euro have been greatly exaggerated, on more than one occasion. We have to remember, the right to issue currency has been a prerogative of sovereign authorities since the earliest times. In committing to the Euro project, we pooled sovereignty in a manner from which no state can, or would, walk back.
In that context, the fiscal compact is simply an elaboration on a set of commitments already entered into. The Stability and Growth Pact required each member state to keep its budget close to balance or in surplus, and to adhere to the Maastricht Criteria. What the compact does, is effectively to flesh out those commitments, and to put in place mechanisms by which member states can assure each other that they will be followed. This re-commitment, then provides member states who are contributing to the firewalls, and indeed, the ECB, that their actions in dealing with the crisis will not undermine future fiscal discipline.
The key question, of course, is what happens next? Having put the compact in place, can the union now make good on its commitment to drive a growth agenda?
To summarise, then: in the last eleven months, Ireland has made important progress in stabilising our banking system and our budget deficit. We have introduced a number of measures to boost growth, and we have seen some success. Ireland is now Europe’s best prospect in terms of seeing a programme country returning to the bond market.
That success, however, has been achieved at a considerable cost to the Irish people. There is no good way of achieving the scale of fiscal consolidation that Ireland has required. The Irish people have, so far, borne the pain stoically. What matters now, is that we make further progress both at European level and in terms of enhancing the programme, on jobs and growth, which is critical to popular acceptance of the necessary measures that are being taken. In Ireland, we are also working with the Troika on further improvements to the programme, focused on further lowering the cost of the bank bailout. Success in that respect would mark another major step towards the goals that we all share.