08 March 2013

IMF/Lagarde: Ireland and the European Union— Shared determination, shared destiny

The government began a root-and-branch reform of the banking system. The reform plan was based on three pillars—deleveraging, recapitalisation and reorganisation. In other words: slim down and shed the fat, get fit with more equity, and behave responsibly in the service of the real economy.

Progress to date has been impressive. The size of the bloated banking sector has been reduced, and recapitalisation is well advanced—with €24 billion in new funds injected into the banks to help them get back on their feet. And here, the burden on taxpayers was limited to €17 billion by mobilising private investment and burden-sharing with subordinated debt holders.

I should also point out that the rigour and transparency of the stress tests underpinning the recapitalisation has served as a model for others. The government also made huge strides on the budget. During the most difficult of times, it introduced deficit-reducing measures amounting to 12 per cent of GDP, with a further 5 per cent of GDP still to go over the next couple of years. This meant taking tough decisions on pay, social services and taxes. Most recently, the government reached agreement with the public sector union leaders on savings worth a billion euros a year by 2015.

This brings me to the third aspect of Irish determination—a sense of solidarity. The government took these decisions while maintaining social cohesion, protecting key public services, and throwing a life-vest around the most vulnerable. Because of this, Ireland was able to avoid a large increase in poverty.

So we see three key priorities ahead—working out private debt, delivering efficient and effective public services, and reducing unemployment.

On private debt: The key here is to work out distressed loans on a case-by-case basis, for both households and enterprises—to find a sustainable way forward for those who cannot afford to pay. It is especially important for viable small and medium-sized enterprises to get the funds they need to expand and hire—after all, this sector accounts for 72 per cent of Irish employment.

On the public sector: Ireland should strive to provide high-quality public services and meet its social justice obligations to all citizens. But given budgetary realities, it will need to focus on meeting core public needs, especially in the most important services like health, education, and social protection.

On unemployment: As an urgent priority, the government must address the scourge of long-term unemployment. The scale tells all: 60 per cent of the unemployed have been without a job for more than a year, and 30 per cent for more than two years. This is a vital issue for economy—people without jobs for long periods tend to lose their skills.

So we need renewed efforts to help these people find jobs. Higher growth is obviously a precondition for jobs to come back. In the short term, accelerating the public-private investment projects—partly funded by the EIB—can help. We also need revitalised employment services, which focus on the right incentives and the right skills for the right jobs. Along with our European partners, we have encouraged the government to redeploy well-trained staff to this critical area.

Europe’s destiny is also Ireland’s destiny. The Taoiseach put it so eloquently when he said that “we dwell best and deepest in the shelter, never in the shadow, of the other". So let me talk about what is required at the European level to restore “stability, growth and jobs” across the continent—which in turn will greatly help Ireland’s efforts.

Certainly, we have come a long way since last summer, and financial anxieties have eased to some extent. This is testament to the progress made by European policymakers on a variety of fronts—including the European Stability Mechanism, the ECB’s Outright Monetary Transactions, and the agreement to reduce Greece’s massive debt burden.

But this improving sentiment is not translating into higher jobs or incomes. It might be helping markets, but it is not yet helping people. The underlying problem is depressingly familiar—lingering high debt of households, banks, corporations and government. As the different sectors struggle to shake off these millstones, growth is bound to suffer. And indeed, we expect a continued recession in the eurozone this year.

The eurozone is now walking the path of deeper integration. We now have a unique window to put national interests aside and push for the finish line. A functioning banking union severs this link and cements stability. It ends fragmentation and makes monetary union that will also have to include sustainable and strong fiscal union more effective. It works against the buildup of concentrated risks. It stops deposit flight. And it makes monetary policy work better.

It is an issue of solidarity. Banking union means that troubled banks become the responsibility of all, not just one. You see this in Ireland. Yes, Irish banks borrowed too much and were poorly supervised, but banks in Europe also lent them too much. It is two sides of the same coin, and we need co-responsibility—starting with common supervision.

Full speech

© International Monetary Fund