12 April 2012

Jörg Asmussen: The Irish case from an ECB perspective

Ireland is not the only country that needs to reform. Fiscal consolidation and growth-enhancing structural reforms are needed everywhere in Europe to remain competitive on a global marketplace. Ireland is, however, one among several countries with more severe adjustment needs.

Our view is that to set the correct course, we must be clear-headed about the reasons why we are where we are. To frame the issue somewhat bluntly, the Irish State and people woke up to a painful new reality when the Irish housing bubble burst at the onset of the international financial crisis in 2007. Extraordinarily high growth in the run up to the crisis had gone hand-in-hand with the build-up of economic and financial imbalances. The path back to full fitness has been enormously difficult and entailed wrenching economic, financial and social change. And the path has not been smooth. Indeed, about one-and-a half years ago the economy was close to cardiac arrest. The patient required life support – kept alive with the substantial assistance from international lenders, as well as the continued levels of extraordinary support from the Eurosystem. But progress since then has been good: the programme is on track. So far, Ireland has delivered. I am confident it can be a “success story”.

I would identify three major milestones of the macro-economic and fiscal adjustment programme:

• First, a return to growth, already in 2011.
• Second, the progressive return to market funding well in advance of the end of the programme in 2013.
• Third, reaching a fiscal deficit of 3 per cent in 2015.

Measured against these milestones, I must admit that I am truly impressed by the way Ireland has handled its tough challenges, especially since the beginning of last year: the economy is well on the way to restoring competitiveness, reducing the fiscal deficit (–10.6 in 2011; –8.6 goal for 2012), overhauling the institutional framework and restructuring the banking sector. It is the only programme country that has managed to close its trade deficit and to return to growth last year, even if at modest rates (0.7 per cent in 2011; projections: 0.5 per cent in 2012; 2.0 per cent in 2013). This turnaround would not have been possible without Ireland’s biggest asset: a talented, well-educated workforce. This strength is maybe most clearly reflected in the fact that the export sector has continued to attract foreign investment in the midst of one of the worst crises to hit the world economy in the last century.

Structural reforms

At the European level, the crisis revealed clear gaps in the framework for fiscal and economic governance in the EU. The reform effort to close these gaps have been substantial with the six pack, the two pack and the fiscal compact, to use Brussel-style acronyms. All initiatives aim at one goal, which is to establish fiscal rules and achieve a degree of fiscal coordination which lives up to the requirements of a monetary union. In our view, the steps taken so far are necessary, but they will not suffice in the long term. Further steps towards a fiscal union are ultimately needed. But enhanced fiscal coordination does not necessarily imply, and must not be confused with, further fiscal centralisation on the European level. There are many ways to organise fiscal coordination in a decentralised manner; Germany, Switzerland, the US, Canada and India are examples of how a fiscal union can be organised in different ways.

From an ECB perspective, a crucial element in overcoming the sovereign debt crisis in Europe is to regain confidence of market participants in the sustainability of public finances. Therefore we believe it to be of utmost importance that all euro area members adopt – and implement – the fiscal compact. For the Irish economy to achieve full fitness it is of course also necessary to heal the wounds that caused so many of today’s problems.

The financial sector and the role of the ECB

Relative to the size of the economy, no other euro area country has received so much support from the Eurosystem. And no other institution has provided more help to Ireland than the ECB. EU/IMF programme finances combined are €67.5 billion in total. Eurosystem liquidity support – to all of Ireland’s eligible banks – has often been more than double that amount. And let me recall that Eurosystem loans currently carry much lower interest rates than the loans from the IMF and EU Member States.

Before the EU/IMF programme was agreed, the total Eurosystem loan support for Ireland (combining monetary policy operations to all eligible banks and emergency liquidity assistance from the Central Bank of Ireland) amounted to about 100 per cent of Irish GDP. Our total loan provision now stands at above €125 billion.

A necessary step for Ireland to emerge from this crisis will be to ensure the long-term viability of the banking system as a pillar of the Irish economy. Doing so will further enhance confidence in the system and limit the burden that the banking system places on the taxpayer. Any proposal to reorganise and strengthen the Irish banking sector, and in this context to replace promissory notes with support from the EFSF, must meet important criteria, including that it should improve the chances of both the State and the banks returning to market-based funding, and of the banks reducing their extraordinary reliance on the Eurosystem. The ECB is ready to work with the Irish authorities on such proposals.

Conclusion

Ireland has received unprecedented support from other European Member States. The Eurosystem has, within the limits of its mandate, been very supportive of the Irish banking sector, and thus of the programme for Ireland. Eurosystem financial support provides a good example about the difficult balancing act which policymakers currently face: wean the patient off the support too quickly and we might set back the recovery. Leave it too long and we risk dependency, undermining efforts for adjustment and impeding the return to full fitness.

The Irish government has the capacity to further consolidate and implement the necessary reforms, so that there will be no lingering doubts about the sustainability of government debt. I am thus confident that Ireland will continue to fully implement the necessary adjustment and reforms.

Full speech

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