Bloomberg, London, Monday, 18 April 2011
Ladies and Gentlemen,
I am delighted to be with you today to discuss the prospects for Ireland’s export-led recovery and how the new Irish Government is acting decisively to help engineer that recovery as quickly as possible.
The purpose of my visit to London today is three-fold. Firstly, earlier this morning, I met with representatives of the Irish community in Britain. I wanted, on my first official visit to London, to recognise the enormous contribution of the Irish to this country. That contribution is perhaps sometimes not recognised as widely as it might be, both here in Britain and at home in Ireland. It was important for me to reflect on that in my first official engagements here this morning.
Secondly, I want to communicate widely, through the media and through this event, with key opinion formers and the broader business community, what the new Government is doing to address Ireland’s very serious economic crisis. I am grateful to Bloomberg for hosting us today, and to all of you for coming along to listen and to participate.
Finally, later this afternoon I will be going to Downing Street to meet with the Prime Minister. We will discuss a range of matters of mutual interest between Ireland and Britain. We met at recent European Council meetings but this afternoon’s agenda will focus primarily on the unique bilateral relationship between Britain and Ireland. It is a relationship that has been transformed in my lifetime. It is one of mutual respect, trust and opportunity. It is one of friendship and support, including financial support in these more difficult times.
As Taoiseach and leader of the Irish people, it is a friendship that I value, that I prioritise and that I intend to develop. This friendship has been achieved through decades of working together towards the goal of peace in Northern Ireland. As we speak, the election campaign is underway for the Northern Ireland Assembly. That Assembly has just completed the first full term of power-sharing government ever, after decades – indeed centuries – of division and violence.
It is a powerful symbol of what democratic politics can achieve when everybody applies their minds to it. It demonstrates to us all that there is no problem – political, economic or social – that cannot be resolved. The historic process of peace and reconciliation will be underscored by the visit next month of Queen Elizabeth to Ireland, the first such visit since independence. It is an event of truly historic importance. It will demonstrate how both nations have come to terms with a difficult past. But it will also be a visit that looks forward and will show how two neighbouring islands intend to cooperate together for an even stronger future.
You will also be aware that the visit of the Queen will be followed, a few days later, with a visit by President Obama. That visit will reflect the unique and historic ties that exist between Ireland and the United States of America. Taken together, I believe these two events – in the space of one week – will provide a springboard for our people to look forward with hope and confidence to a brighter future. I also believe they show that whatever else people say about Ireland and the Irish, we are no ordinary country, and no ordinary people.
We have seen dark days before, very dark days. We have dealt with and overcome adversity in the past. We will do so again, with the creativity and determination of our people allied to the help of our friends and partners in Britain, in Europe and in the wider world. We will emerge from our current challenges stronger than before. To lead that comeback is the challenge before the new Government.
I have no illusions about the scale of the challenge that we face. I know that this audience is very well-informed on these matters and you will have your own views on Ireland’s prospects for economic recovery. So I am not here to promise the unachievable, or to offer quick and easy solutions. Nor am I here to ask the sceptics to change their minds overnight. I am here to talk about how I believe Ireland will recover. All I ask of this audience today is to listen carefully, and to think – maybe to think again - about Ireland’s future.
For the first time in several years, there is a real debate about Ireland’s genuine prospects for export-led recovery. I invite you to engage with us in that debate in the months ahead. As we debate the future, I am reminded of the old joke that equity markets have predicted ten of the last five recessions. And I am told that, according to IMF research, the bond markets have managed to predict 36 of the last 7 defaults.
Unfortunately, I didn’t bring the statistics for politicians predicting a better future! Ultimately, I recognise that the economic outcomes will speak for themselves. I know that we will be judged by our results, not our rhetoric, and it is results, not rhetoric, that interests me.
I lead a Government with an overwhelming mandate from the people to do what is necessary to bring about economic recovery, and to sort out our own problems. That mandate, the largest in the history of our State, gives my Government the authority to make the changes that count. That will enable us to give clear leadership and to take hard decisions. The task set for the new Government which I lead is to carefully formulate and then to decisively implement the policies required to address all of our problems.
After only five weeks in office, we have already made significant progress. We have commenced an intensive engagement with all our international partners. This includes discussions I have had with my fellow members of the European Council, as well as with the Troika of the EU, ECB and IMF.
Among the leaders I have held talks are Chancellor Merkel, President Sarkozy, Prime Minister Cameron, the presidents of the European Council, the European Commission and the European Central Bank, President Obama and US Treasury Secretary Geithner. My ministerial colleagues have also been engaged in intensive contacts with their counterparts in the finance ministries and foreign ministries of Europe.
We have made major decisions on the future of our banking system, in response to the most severe and transparent stress tests, carried out with the assistance of highly reputable international experts. We have committed in our Programme for Government to meet the fiscal consolidation targets agreed in the EU-IMF Programme, and we are on target to do that. In our first five weeks in office, we have initiated a far-reaching Comprehensive Spending Review that will be completed in September and will form a solid basis for deficit reduction in the years ahead.
Last week, we successfully concluded the first review with the EU-ECB-IMF Troika team in Dublin. The Troika agreed that Ireland is fully compliant in respect of the conditionality set out in the EU/IMF Programme to the end of the first quarter. It expressed its strong support for the actions adopted by the new Government in relation to bank restructuring and recapitalization. We agreed to change some aspects of the programme concluded with the previous government to replace them with proposals that we included in the new Programme for Government.
These include changes to the minimum wage, with a compensatory adjustment on employers’ social insurance, and a new fiscally-neutral Jobs Initiative which will be announced in May. There was also an important agreement that transfer of loans with a value of below €20m to the National Management Agency will not proceed. Instead, the banks will manage down their exposure to these loans themselves, in line with the new Government’s policy.
While our problems lie predominantly in the world of banking and economics, I also believe that part of the solution lies in the world of politics and of political reform. The new Government Programme contains the most far-reaching political reforms since independence. These reforms will be vigorously and swiftly implemented.
Already, we have taken clear action to reduce pay and perks for politicians, and to change how we appoint people to key positions on State Boards and in the senior public service. As you will be aware, there have already been significant changes in the leadership of our Central Bank and Financial Regulator, as well as in the management of the banks.
We have re-organised the machinery of government to give the highest priority to public service reform and to job creation, while we are bringing in new methods and new expertise in key areas such as banking policy. We are also planning a series of important national referendums to modernise our constitution.
It is my firm intention that the pace and quality of reform will be maintained and indeed enhanced over the next few months. I believe that just as Ireland has seen the worst of many aspects of the global economic crisis, we can show the way to new ways of doing business that can become a model for other countries for the future. Of course, I fully acknowledge that there is a long and difficult road ahead to get to that destination. There are questions we must answer on that route – about our banking system, about our fiscal sustainability and about our prospects for economic growth.
I would like to offer some observations on those
issues, which are the key dimensions of our economic equation. On banking, a key objective for my Government is to strengthen fiscal sustainability by separating bank risk from that of the Sovereign. Clearly this can be achieved only by returning the banking system to health. The recent capital and liquidity assessment exercises (the so-called PCAR and PLAR exercises) by the Irish Central Bank have received considerable attention. They have been extremely thorough and transparent. The input of respected international consultants, including Blackrock, ensured a high degree of external validation. The process was also subject to close scrutiny by the IMF, European Commission and ECB. It has set the bar very high in respect of the standards now expected of both Irish and foreign banks by Irish regulators.
A radical reorganisation of the banking sector in Ireland is underway. The banks will be required to unwind €77 billion of non-core assets, so they can re-focus on their core business of supporting real economic activity in Ireland and Northern Ireland. There will be major consolidation within the sector – we will move to two ‘pillar’ banks of roughly equal size, along with competition from foreign banks in the market. The analysis suggests that a capital injection of €24 billion is required.
This figure was calculated to absorb shocks of exceptionally high levels to the banking system over the next three years. It should be noted that €5.3 billion of this represents a buffer over and above what was required to meet the requirements of the stress test. Moreover €3 billion of this figure will represent contingent capital. We expect also that the institutions will raise a not insignificant proportion of this capital by themselves.
Accordingly, as losses emerge over the next few years, capital levels will remain high by international standards even under a distressed, highly unlikely, scenario. The reaction to the stress tests from the markets and others has been very encouraging. It reinforces our belief that the tests were extremely credible and robust. The €24 billion required by the banks for capital purposes is within the funding envelope available for this purpose from the EU/IMF Programme.
We will also seek direct contributions by requiring further significant contributions from subordinated debt holders: by the sale of assets to generate capital; and, where possible, by seeking private sector investors. We will make our banks smaller, more focused, better funded and better capitalised. We will transform our banking system to effectively serve our economy and contribute to full recovery.
On the public finances, there are some positive signs in relation to Ireland’s fiscal position – although there are undoubtedly challenges as well, if the economy does not perform as well as we expect. 2010 was a year of stabilisation. The overall Exchequer position was in line with the Department of Finance estimates set in December 2009, with tax revenues finishing the year above target. The underlying General Government deficit – that is the deficit excluding the capital support committed to some of our financial institutions - is also expected to have met the target set in December 2009.
The Exchequer Returns of revenue and spending for the first quarter of 2011 were also broadly consistent with expectations, with tax revenues, despite being a little behind target, up almost 4% on the first quarter of 2010. In the past two weeks there have been a number of announcements from the various credit rating agencies regarding Ireland’s sovereign rating. The news has been mixed, but it is important to state that all of our ratings remain within the investment grade band.
Our external partners have acknowledged that Ireland is making 'good progress' in overcoming the crisis. We reached our budget targets up to the end of March 'by a comfortable margin'. This reflects our seriousness in doing what is necessary. Our balance of payments current account is expected to move into surplus this year. This is an important indicator of the long-term sustainability of the economy. We have recovered from a higher level of debt interest burden in the past, achieving a dramatic turnaround through fiscal discipline and high levels of growth. That can, and will, be achieved again.
As a member of a monetary union, we also rely on the support and solidarity of other members and are grateful for it. We will continue to engage with our European partners to ensure that the Programme delivers the outcome which is in all our interests. I am confident that Ireland will meet our obligations under the Programme. We will also continue to make the strong case for a reduction in the rate of interest payable for funds under the Programme.
It should not be dependent on Ireland making a concession that would threaten the economy’s growth potential. That would be utterly self-defeating. That is why we simply could not accept any adjustment in the Irish Corporation Tax Rate as it would damage the prospects for our recovery.
That is not to say that the new Government will not take tough or unpopular decisions. We fully recognise that confidence and recovery depends on stabilising the public finances. The new Government is determined to continue the programme of fiscal consolidation, including by legislating for an increase in the pension age, a reducing the size of the public sector workforce by 12% from its peak, establishing a new fiscal council and enacting ground-breaking fiscal responsibility legislation.
By 2014, Ireland will have delivered a fiscal consolidation equivalent to 20% of GDP, most of which has already been secured. The Irish people are determined to pick ourselves up, to pay our own way and to contribute to the future progress of the European Union. And I believe our partners will continue to support us, and work with us, to ensure the Programme facilitates an early return to the markets. We require greater not flexibility, not more money, to enable us to do so.
On economic growth, the underlying reason for confidence is the medium-term growth potential of the Irish economy. Ireland is one of the world’s most open economies and our exports are performing very strongly. Right now, we export 80% of what we produce. In 2010, our exports grew by 9.5%. By the end of 2011, we expect our exports to exceed our record, pre-recession level. This shows the economy rebalancing towards exports. We also continue to attract significant levels of inward investment despite the turbulent global economy in which, according to the OECD, foreign direct investment declined by 8%.
Our inward investment agency, IDA Ireland, secured 126 investments in 2010 and its client companies created almost 11,000 new jobs. There has never been a better time to invest in Ireland. Intel, Google, eBay, Facebook, Citigroup and Boston Scientific are just some of the world-class global companies that expanded operations or increased their R&D in Ireland in the last year. These companies know Ireland and they see a bright future. We remain, according to independent international studies: 4th in the world for the availability of skilled labour; 4th for being open to new ideas; 6th for labour productivity; and 7th for the flexibility and adaptability of people.
We will maintain Ireland’s 12.5% rate of Corporation Tax, which is a long-standing and necessary part of our enterprise strategy. One of the positive outcomes of our recent difficulties is that our cost competitiveness has improved significantly. Our Unit Labour costs have fallen significantly: the European Commission forecast an improvement of 14% relative to the euro area by 2012. Consumer price inflation has been below that of the rest of the euro area since the beginning of 2009, delivering substantial reductions in relative costs.
We are implementing structural reforms to put more downward pressure on costs. In other words, we are delivering a real exchange rate devaluation within monetary union. These cost reductions are already translating into substantial trade and employment benefits in an open, business-friendly, economy like Ireland.
While all of the ratings agencies have recognised the recent weaknesses evident in the Irish economy, they have also pointed to the underlying strengths, noting that we have a flexible and open economy and that the ongoing recovery in export growth will drive a rising trade and current account surplus.
The general view contained within these assessments is that the economy is stabilising and that our long-term growth potential remains high. In this regard, the agencies all point to our social stability and strong political commitment to fiscal consolidation as being a key support to Ireland’s credit rating.
The importance of those factors, especially following the recent General Election, should not be underestimated. Last week, the Irish Central Bank projected 0.9% growth in 2011, and most other forecasters expect a modest return to GDP growth this year. The Government will publish our own revised forecasts later this month. A key element of our economic recovery strategy is to develop policies that will allow job growth and sustainable enterprise.
To this end, our Jobs Initiative to be delivered next month will, amongst other things, reduce the lower rate of VAT, halve the lower rate of employer social insurance contributions, enhance our active
labour market policies and accelerate labour intensive capital projects. This Initiative aims to underpin domestic confidence, and therefore help reduce precautionary savings which are currently at elevated levels. Our strategy for growth is to play to our considerable strengths, while taking swift and decisive action to comprehensively address our weaknesses.
We are convinced that growth is the key and that it can be achieved.
So, in conclusion, my key messages to you today are as follows:
- we are meeting our targets under the IMF\EU Programme of Support;
- we are getting on top of our banking crisis;
- we have taken decisive action to restructure and recapitalise our banking system, at costs that are within the envelope provided for in the IMF\EU Programme;
- the costs will also be offset by measures involving subordinated bondholders, asset sales and private finance; we are getting our public finances in order;
- we are working with our EU partners to make sure the Programme operates in a way which facilitates early return to the markets, including the level of interest rate charged;
- we have taken dramatic action to reduce our fiscal deficit, and will continue on this path to make the target of a 3% deficit by 2015; economic growth is the key factor in debt sustainability;
- we are taking early policy decisions to accelerate growth and job creation, and the economy will return to growth this year;
- we have made significant improvements in competitiveness, including an estimated 14% improvement in Unit Labour Costs relative to euro area by 2012;
- our balance of payments current account is due to go positive this year, an important indicator of sustainability;
- we remain a magnet for foreign investment by providing a competitive, business-friendly environment and a skilled, creative workforce;
- we will retain our rate of corporation tax, a long-standing part of our enterprise policy;
- we are also working hard to re-build Ireland’s reputation, inside the EU and beyond, by ensuring the progress we are making is communicated effectively, and by assuring other governments of our seriousness of intent in this matter.
This is a work in progress, with the emphasis on the word “progress”. Ireland has proven how a small, regional economy can grow at a fast rate over a sustained period. We can do so again.
Thank you for listening. I look forward to hearing your views and answering your questions.